2021: Retrospective

How can we even address the past year without first touching on COVID-19? The pandemic magnified an ongoing shift away from expensive “big city” markets and toward smaller, more affordable ones. Though the pandemic has touched every state and city, its impact on US property markets and sectors showed significant and marked differences.

Even with the ongoing pandemic, there were a number of private real estate sectors that made great rebounds, or even thrived, last year. While we saw most retail properties slide – with staffing difficulties, store closings, and higher vacancies – there were a select handful of exceptions, namely grocery-anchored centers, dollar stores, and home improvement retailers, which did remarkably well. While many wrote off the entire sector completely, we were able to capture that growing market and the resulting stable cash flows for our investors, in the BENA Capital Premier Fund.  

The multifamily housing sector barely paused, and we were pleased to distribute cash dividends to our investors every single quarter since the Fund’s inception. We purchase each of our properties with careful analysis of proximity to demand generators, strong tenant demand, and robust investment activity in the immediate vicinity, and we continually monitor each market to capitalize on peak selling opportunities. 

This month, we are pleased to announce the successful sale of one of our Mosaic Fund portfolio properties in Lexington, KY. Despite the challenges with COVID over the past two years, the Lexington market has exhibited several months of historically low inventory, aggressive bidding, strong price appreciation, Based on our analysis and engagements with our local broker network, we determined that it was a prime opportunity to capitalize on the built-in gains. We sold the property for a 20.4% price increase in just over two years.

There is no doubt that real estate investing in 2022 will continue to be impacted by the pandemic, but we will continue to position our funds for both short- and long-term success. We are confident that BENA Capital can continue to deliver stable income and manage risks for our investors, no matter what the year has in store.

High Real Estate Valuations Seen in Select Markets

We continually monitor each of our core markets for historically low inventory, aggressive bidding, and strong price appreciation in order to capitalize on peak selling opportunities. And what we have noticed in the past few months is that, in select locations, real estate valuations are currently at the high end of their range. In these markets, this is a prime opportunity to capitalize on the built-in gains.

We also predict that suburban rent growth will continue to outpace urban, and Class-B properties will outperform Class-A buildings, due to the former’s affordability. Our active funds are focused on Class B core-plus properties, with good cash flow and a strong tenant base. Furthermore, since our investments use no debt, our investors have significantly lower exposure to risk and achieve much more stability in investment returns.

There are still many investors out there looking to invest in multifamily housing. Rent growth – especially in fringe areas close to the urban core – remains strong. Going into next year, we expect rising interest rates to start putting pressure on cap rates, with modest appreciation in 2022 compared to what we’ve seen in 2021. We will continue to employ a tactical approach to enhance the operating income of our current properties, and with disciplined market monitoring and trend tracking, we will make timely exits to maximize investor returns.

In this new market environment, the risk to reward balance shifts in favor of new development. This means that in the near future, BENA Capital will not be pursuing any heavy value-add additions to our portfolio. We have always said that we will not grow for the sake of growing. We will remain selective of the properties we invest in. We are building something special: a reputation as a trusted partner. Over the years, the rigor that we have put in our analysis and the network we have built have helped us be agile in these market shifts, identify future opportunities, and stay ahead of real estate trends. In this respect, 2022 will be no different.

A Word on Realistic Investment Returns

The current yield on government-backed bonds is still very low, and the 10-year Treasury note is currently hovering at around 1.6%, forecasted to drop even lower next year. What does this mean? It’s a signal to the market about investor confidence. Bond prices and yields are inversely related – as investors flee to safety and demand for bonds grows, yields shrink. When bonds become a slightly more attractive investment, stocks become less appealing.

That doesn’t mean stocks will stop rising, though it does indicate slower gains. Historical stock market returns are 8% to 9%, not the 20%-30% we’ve seen the past few years. The same is true of real estate, too. It doesn’t mean stop investing in it, especially since it can offer a more stable, less volatile alternative, but don’t expect 20% returns.

Timing the Real Estate Market: 5 Phases in the Cycle

A majority of real estate observers tend to see markets in one of two states: climbing or falling.  In fact, this is not unique to real estate, but is a common trait seen with investors in stocks and commodities as well.  However this view naturally leads people to invest at market tops and sell at market bottoms (sound familiar?). 

There are actually 5 Phases in the Real Estate Cycle:

1. Cycle Bottom / Early Recovery

2. Expansion

3. Exuberance

4. Contraction / Early Downturn

5. Full Downturn / Recession

Each phase may last a few months to a few years, depending on the market.  What's more, each phase rewards very different investment strategies.  And local markets can be in different phases at the same time.  Every market is different, and requires a knowledge of which phase that market is in and what factors are driving it from one phase to the next.

It is important to note that although each market goes through the five phases, the degree to which prices will swing also varies by market.  To limit downside risk, buy in markets that are currently in Phases 1 and 2, and sell in Phase 3.  If a market is currently in Phase 5, wait it out.

To learn more about BENA Capital, visit: http://www.bena-capital.com/

The New Normal

In the era of the pandemic, virtual and hybrid work is the new normal. We are seeing record numbers of people quit their jobs, tightening labor supplies, and mobile workforces. In order to keep employees happy and to attract new talent, employers are offering higher salaries and more flexible work arrangements. This trend continues to accelerate migration to lower-cost cities on the edges the urban center, spurring population growth in cities like Lexington, KY; Ft. Worth, TX; and Rio Rancho, NM. 

While Tier I markets slow, it is the smaller, more affordable Tier II and Tier III markets that present select opportunities for cash flow and continued price appreciation.  As an example, there are still niche cities that are poised to benefit from population inflows and job creation.  These select markets are areas BENA Capital will continue to pursue.

Expect prices to continue to slow or fall slightly in Tier I, Class A markets.  Tier II and Tier III markets, especially warmer, lower-cost cities on the fringe of urban centers will continue to expand. 

3 Common Mistakes in Real Estate Investing, and How to Avoid Them

A good private real estate manager should be performing the proper due diligence to protect and grow your investment. Read BENA Capital's quick tips below on how to avoid falling victim to 3 common mistakes in real estate investing.

1. Substituting Technology for Niche Market Knowledge

We have all heard this age old adage when it comes to real estate: “Location, location, location.” In an era where technology rules the world – where you can virtually stroll through the neighborhood using Google street view and where Yelp provides additional transparency on proximity to local amenities – it can be tempting to make real estate decisions based solely on the information available on the internet. But while technology is a useful tool for a preliminary assessment, it is no match for niche market knowledge from those who live and breathe the local real estate market every single day.

That's why it's important to have strong relationships with:

• Brokers – the best brokers will send you hot listings with your criteria in mind prior to them hitting the market. They will know up and coming areas in major transition where you can capitalize on the growth and capture the appreciation.

• Property managers – dependable property managers will understand your tenant base, won't need hand holding, and can come up with innovative solutions that align with your investment strategy, save you money, while keeping tenants happy.

• Contractors – most people forget that good contractors are worth their weight in gold. Bad contractors make false promises and cause you delays (which can waste valuable time and cost you thousands of dollars in lost rental income).

2. Trusting Numbers as Advertised Without Doing the Math

Whether you are trying to figure out the best financing strategy for you, property valuation, or the asset's return on investment (ROI), you should always run the numbers independently of what has been advertised. With listings touting high rental incomes, cap rates, and cash on cash returns, some make the mistake of taking those numbers at face value without understanding the assumptions behind them. For example, does that 11% cap rate include pro forma rental income numbers much higher than what's achievable in the local market? How long will your rental have to sit vacant for to get to the rental income advertised? What routine expenses and maintenance are being included or omitted? When do the current leases end, or are tenants renting month to month? Are the comps provided in the same vicinity of the subject property, or are they too far away to be relevant? While most brokers will not blatantly lie when asked those questions, they will rarely offer such information voluntarily.

3. Letting Emotions Drive Decisions

Investments are like businesses and should be treated as such. You need to determine the short term and long term goals that work for you, your investment criteria, your exit strategy, and the level of risk you are willing to accept. Without this solid foundation, your resolve can waiver during the course of a stressful real estate transaction, and your decisions could come back to haunt you. When you’ve invested time and effort to close a deal, it can be tempting to move forward even in the face of red flags – whether that be in the form of a bad inspection report or not being able to find a trustworthy property manager – knowing your risk threshold and when the pass on a transaction is important. On the other hand, many of the best investments are not turnkey. Knowing how to evaluate cost vs. benefit, risk vs. reward, is crucial. In each case, keep your original set of criteria and goals in mind instead of letting emotions cloud your judgement.

We all have that one friend who boasts about their real estate success in XYZ city every chance they get, or the one that laments buying property in the same XYZ city when everyone else did. Don't jump into investing in real estate without understanding the level of commitment needed to make your investments successful, and don't make hasty decisions based on one case study. One single point of data does not make a trend line. It's not easy, but with the right planning, mindset, and focus, real estate can be a strong component of an investment portfolio.

 

About BENA Capital

BENA Capital manages real estate investment funds, with a central focus on the acquisition and management of residential multifamily assets in growing markets. BENA Capital's funds provide a simple way to invest, reliable quarterly cash flow, and portfolio diversification. The firm's proven strategies emphasize sound investing in carefully researched, quality properties that have steady, long-term capital appreciation potential.

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2Q 2021 Residential Real Estate Trends - Where are People Moving?

Nationwide, U.S. home prices have risen double-digits over the past year. As residential real estate prices have hit records highs, buyers and renters alike are looking for the best bang for their buck. The pandemic has changed how and where many people work. With “work from home” a new reality for many, people are now prioritizing quality of life and affordability when it comes to relocating.

Real estate demand is rising in cities where people can still find good deals – in mid-sized cities that are affordable, yet in close proximity to bigger urban areas with strong economies and job growth.

During the worst of the COVID-19 pandemic, there was a large exodus of people from large, denser-populated cities into more rural areas, but this is becoming a national trend. People are trading Boston for Manchester and Concord, NH – both about a hour’s commute away - for example. San Francisco came in 5th as top metro area for net outbound moves, but nearby counties of Alameda, Contra Costa, Sacramento, and Solano saw influx of new renters and homeowners as people moved in search of more space.

BENA Capital’s focus on Tier II and Tier III markets with strong economies present opportunities for cash flow and continued price appreciation, now more than ever.  Finding niche cities that offer the best live-work balance, focusing on these areas of growth with strong renter populations, provide our investors with the right balance between stable cash flow and appreciation potential. That has always been our approach, and it remains the cornerstone of our residential real estate acquisition strategy. 

Net Leases & Proper Due Diligence

BENA Capital announced its first single tenant retail site acquisition last month and branched out from residential multifamily investments into net lease properties. The term “net lease” is defined as a contractual agreement where a lessee pays a portion or all of the property taxes, insurance, and maintenance costs, in addition to rent. As real estate markets and trends evolve and cycles become apparent, BENA Capital continually monitors key indicators in target markets across the US to identify opportunities for investment. While there are some notable differences between multifamily rentals and net lease investments, what does not change is the rigor behind the due diligence we perform prior to an acquisition. Here are just a few of the things we look for —

Tenant Quality - The quality of the tenant is extremely important. We look at business performance, balance sheet, and liquidity - not just at the local level, but how the parent company is doing. Another example of a key indicator is the credit rating of the business, which is a quantified assessment of the creditworthiness of the tenant with respect to financial obligations. Although even the most profitable company is not a guarantee for future success, the credit rating can be a reliable way to gauge the company’s health and is one of many criteria we take under consideration.

Solid Unit Level Economics - Understanding the unit level economics can be a good predictor of how likely the tenant will renew their lease when their term is up. We look at historic revenue, profits, payment history, strength of local demographics, projected supply/demand, and compare performance to other competitors in the neighboring vicinity.

Favorable Lease Terms - Lease terms for net leases are typically 5-30 years. And longer isn’t necessarily better. A 5 year lease with a company that has good unit level economics can be more desirable than one with a longer lease. Take, for example, a 20 year lease tenant with built-in rent increases of 1% annually - while the investor is protected in slow growth or declining markets, if the market’s rent growth is higher than what has been contracted to in the lease terms, you are losing out on that growth. Other terms we review in detail in concert with lease term include the types and frequency of rent increases, property improvements, and the overall condition of the property.

Corporate Backing - Where regional franchises are part of a larger national network, we look for leases where the national parent corporation backs the rent payments on the local lease. Since asset value is directly tied to the income that is produced by the tenant, a rent payment guarantee from a national corporation offers more stability and predictability that rent is paid on time and obligations will be met.

When executed well, with a defined strategy in place, net leases can produce a steady stream of income for investors.

BENA Capital Announces Single Tenant Retail Acquisition in New York

BENA Capital is pleased to announce the Premier Fund’s first acquisition of a 9,014 sq ft stand-alone single tenant retail site tenanted with Dollar General located in Hornell, NY. The property was built in 2005 specifically for Dollar General, which has been a tenant continuously since construction. Dollar General renewed their lease for an additional 5-year term expiring June 2025, with three subsequent 5-year options, showing a strong commitment to the site.

Since Dollar General is an essential business, it has done well during the COVID-19 pandemic and continues to be one of the few retailers to remain open for people to buy groceries and daily supplies during these trying times. Dollar General Corp has announced that they will pay front-line employees to get the COVID-19 vaccine, making it one of the first U.S. companies to incentivize its workers to get immunized.

Dollar General is one of the most sought after tenants for retail sites such as this. It is publicly traded (NYSE: DG), is a growing business, and provides a corporate guarantee to its lease. It just crossed 17,000 stores in operation in November 2020,and in 2019, DG opened 975 new stores, remodeled 1,024 stores and relocated 100 stores. Its business is also strong with same store sales increasing 3.9% and net sales increasing 8.3% to $27.8 billion. Operating profit increased 8.8% to $2.3 billion, net income grew to $1.7 billion, and diluted earnings per share increased 11.2% to $6.64. Cash flows from operations were $2.2 billion, and DG returned $1.5 billion to shareholders through share repurchases and dividends.

Three-quarters of U.S. residents now live within five miles of a Dollar General store. DG also shows strength in weak economic environments, providing downside risk protection during recessions. As such, BENA Capital is excited for this first acquisition for the fund in providing reliable cash flows and long-term price appreciation.

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BENA Capital Premier Fund - Fully Funded with Waitlist

BENA Capital is pleased to announce that the Premier Fund is now fully funded until the next capital call. The waitlist is currently open - please visit The Premier Fund page to learn more about our offering.

The Premier Fund has been formed for the purpose of investing in core-plus and value‐added commercial real estate properties, located throughout the United States. The Fund targets investment in assets that generate cash flows, where value-add opportunities play a role, and where the Fund’s ability to underwrite opportunities and close swiftly will produce pricing advantages. The Fund intends to focus on commercial investments, including compelling opportunities in additional real estate spaces such as Office, Retail, Industrial, Student Housing, Multifamily, Storage, Senior Living, etc.

Contact Us now to be placed on the waiting list and to receive BENA Capital Insights.