value add

The Top Three Metrics Every Real Estate Investor Should Know

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This article was also published on Forbes.com by Managing Director Kimberly Yeh: Top Three Metrics

I am often asked what my real estate acquisition team looks for when we obtain investment properties for our funds. It’s a complicated formula that takes into account a dizzying number of variables, including alignment of the specific fund’s strategy and objectives, the real estate cycle and the realities of current market demands. But the common thread that binds all our acquisitions is what I like to call the “Big Three.” These three location metrics inform every single acquisition I make, and are in my view the foundation of a successful real estate investment. So what are they, and why do they matter?

1. Demand Generators

Demand generators are factors that determine the local need for your investment property. It is essentially the presence of businesses, employers, transit, schools and attractions in the area that generate the consumers your property is intended to serve. Identifying demand generators is important — the absence of a thriving commercial center, for example, could indicate job scarcity. Without employment, there’s little to support the local economy. And if the local economy is weak, the population relocates in search of opportunity, and the demand for local real estate falls. Therefore, understanding access and proximity to your demand generators is vital to choosing a location for a successful real estate investment.

To peel back the onion even more, as with any product, it’s critical know your customers. Being familiar with local demand generators can be useful in pinpointing factors that influence prospective tenants and future buyers. Smart investors should not only consider current demand generators in assessing cash flow potential but also what that pool looks like years down the road to estimate appreciation at resale. This data then informs decisions on whether to purchase properties in a specific location and at what price point, as well as how much capital to put into renovations and when those improvements are made.

2. Supply Indicators

As part of every due diligence effort on new markets, identify the direct competition based on the three Ps: price, product and proximity. When considering a specific property type for investment, gauge the existing demand for that property type and then take into account future developments that could over-saturate supply. These attributes impact a market’s current and future vacancy rates, which are key components in forecasting investment performance. For commercial real estate investments, I consider healthy vacancy rates typically less than 5% for multifamily, 8-12% for office and 5-10% for retail. When evaluating a specific location for investment opportunities, make benchmarking comparisons for a specific property type, but look at all three commercial metrics as indicators of a local real estate market’s overall economic health.

Most cities or chambers of commerce will publish useful data points, and various real estate databases will have transaction details that will inform supply and demand metrics. Keep an eye out for articles from local news outlets highlighting economic trends and future developments. Don’t overlook these resources when performing a market study — they are invaluable in analyzing financial feasibility for an investment and can be instrumental in determining whether to pursue the acquisition.

3. Market Comparables

The final metric that makes up the “Big Three” is comps, or the comparable lease rates and sales prices from the past three to six months. Comps are important because they indicate how much revenue you will be able to generate from the investment and whether a certain location is crowded with too much supply. When evaluating real estate comps, it’s essential to recognize that different regions, even sections of a city on a street-by-street level, can have very different lease rates and sales prices. These metrics should be carefully researched to filter for property type and to benchmark the specific location.

While comparing price per square feet can be helpful, the best comparisons for benchmarking and determining investment revenue will also take into account the age of the property, the use and unit mix, and structural and cosmetic upgrades.

The “Big Three” should be a critical part of the initial evaluation in determining where you make your real estate investments. Always make sure that the results are appropriate for your individual investment goals. It is crucial to establish a solid framework to organize what otherwise could be a chaotic, overwhelming process.

 

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 investors with ease of entry, reliable quarterly cash flow, and portfolio diversification.  Our proven strategies emphasize sound investing in carefully researched, quality properties that have steady, long-term capital appreciation potential.

Click for Investor Overview PDF: BENA Capital Overview

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

Where’s Your Financial Parachute?

by Kimberly Yeh, Managing Director - Acquisitions

Who remembers the classic Bond scene from the 1977 movie The Spy Who Loved Me – the ski chase leading to that iconic moment when Bond hurtles off the edge of a snowy cliff into a spiraling free-fall?

That’s what I am reminded of when I think of the rise in interest rates and the looming impact on bonds. After the 2008 Financial Crisis, we’ve had nearly 10 years of historically low rates in the US. But rising interest rates have been steadily creeping up on us – the Federal Funds rate has nearly doubled since this time last year.

Over the past 3 years, the Aggregate Bond Index (“AGG”) returned a meager 0.97% annually. If you paid for a financial advisor, your actual 3-year average return is close to 0%. With continuing rate hikes on the horizon, many investors are realizing that they’re stuck with low yielding bonds that are at risk of losing more value.

Equities are also hovering on the brink of a bear market. Goldman Sachs’ Investment Strategy Group published a 5-year outlook on US equities and Municipal Bonds earlier this year. According to their forecasts, a low-risk investor with an 80% fixed income/20% equity portfolio, can expect a 2.68% return over the next 5 years, before adjusting for inflation[1]. Anemic returns like that, combined with the recent turbulence of the market, should prompt savvy investors to seek out alternative assets to re-balance their portfolios.

This is where we stop holding our breaths, wondering what comes next (and I don’t mean Bitcoin, which plunged below $4,225 to a 13-month low this month). In The Spy Who Loved Me, fortunately for Bond, he deploys a Union Jack parachute to the rescue. Fortunately for us, there are alternatives to the traditional investment options of stocks and bonds. Whether you’re chasing dividend yield, higher ROI, or simply seeking shelter from the market volatility, consider allocating a percentage of your investments to alternatives with low market correlation to increase returns and reduce risks. There’s no safety net at the bottom, so don’t be left without a parachute.

Click here to learn about Real Estate as an alternative investment.

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 investors with ease of entry, reliable quarterly cash flow, and portfolio diversification.  Our proven strategies emphasize sound investing in carefully researched, quality properties that have steady, long-term capital appreciation potential.

Click for Investor Overview PDF: BENA Capital Overview

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

[1] Goldman Sachs, Investment Strategy Group, Jan 2018, 5-year nominal return for US equities at 3%, 5-year nominal return for Municipal Bonds at 2.6%

Five Reasons Why Your Real Estate Investments Aren't Earning You Money

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This article was also published on Forbes.com: Five Reasons

I recently spoke with an investor who told me that he has $500,000 in cash and is looking for the right investment property to acquire. As usual, I asked my standard set of questions: What are your goals, time horizon, risk tolerance and experience level? His responses were stable cash flow with some potential for appreciation, long-term time horizon of 5 to 10 years, not tolerant of high-risk investments and his real estate experience was limited to the purchase of his single-family residence. These are fairly common answers for new investors who are looking to steadily grow their wealth. So far, so good.

Then, I asked how long he had been looking for a property. What he said next shocked me: five years. This investor had been searching for the “right” property to deploy his money for five years. This means that he lost out on the last five years of cash flow and appreciation, and his money suffered from five years of creeping inflation — a poor outcome.

Although shocking, this type of story is not uncommon. In fact, I hear it frequently. Plenty of people desire to be in real estate, but consistently fail to invest successfully. Here are the typical reasons why:

1. No Clear Objectives

The primary reason investors I meet do not make any money in real estate is because they have not taken the time to establish specific, clear objectives. Most investors have answers for the questions I asked our representative investor above and believe that is sufficient for moving forward. But the objectives need to be "SMART":

Specific: What type of property? Which neighborhood?  What price range? What condition?

Measurable: What annual percent cash flow is your threshold? What percent appreciation do you expect to see in five years?

Actionable: What specific steps are required to get to a successful outcome? What are you doing this week to progress?

Relevant: Why are you doing this — to retire, pay for your child’s college education, replace your current income? What will get you out of bed to make this investment successful?

Time-bound: What is the date you plan to have acquired the property?

Without taking time to establish these, like many things in life, failing to plan is planning to fail. No investment is made, or worse, the wrong investments are made and for the wrong reasons.

2. Lack Of Time

A real estate investment must be viewed as a business. As with any business you have clients (tenants), vendors (property managers, contractors, utility providers) and possibly employees. You have cash flow, accounting and capital allocation decisions to make. You must have a marketing and sales strategy in place. And you must be able to generate a return on investment.

All of this can take a significant amount of time to learn and master. There are hundreds of professional investors who do this full-time and are competing with you for the same properties, vendors and financing. It takes real commitment to do properly. You are buying a house — will you dedicate the time and nurturing it requires to thrive, or will you neglect it and drive it into the ground?

3. Poor Management Skills

Whether you self-manage your property (and I highly recommend that you don't) or utilize the services of a professional property manager, you will need to have effective management skills. Interacting with tenants is part art and science as it involves the attraction and retention of quality tenants, balanced by the legal requirements involved with being a landlord. Managing the property manager is a different skill set altogether, as you need to be able to establish an alignment of interests, motivate the property manager to perform and then monitor that performance against expectations.

We constantly acquire properties for our investment funds, and a key gating factor when deciding whether to pursue a property is if we have a quality property management firm in place to run it. We have, on multiple occasions, walked away from deals that were otherwise great investments because we could not find a reputable, aligned property management firm to work with. This is critical: Buying the property is getting to the starting line, not the finish. Once acquired, the real work begins in making improvements and bringing the property into a stable run-state.

4. Inability To See The Big Picture

When buying properties across the U.S. and in many different markets, there are two critical factors we look for before considering an investment: net population increase and diverse economic base. Whether through a high birth rate, people moving into the area or both, the population should see an uptrend. This does not require breakneck population growth, but the population needs to be increasing, which serves as a tailwind to demand.

Secondly, jobs support buyers and renters, which is critical for all real estate asset classes, especially multifamily. Metro areas with two or more major (and growing) industries are ideal. The big picture matters and must be closely aligned with your SMART objectives.

5. Buying The Wrong Property

Even if you've done all of the above, you can still go wrong if you buy the wrong property for your given strategy. Want high cash flow in a tier-one coastal city? Good luck. Are you buying a high-vacancy value-add property 1,000 miles away with no team on the ground? The cards are already stacked against you.

How can you tell if you are buying the right property? Again, it comes down to knowing your overall strategy, talking to experts and local investors and being honest with yourself about your strengths and weaknesses. Finally, if you are new to investing, start smaller and give yourself a decent cash cushion. Repairs will come up, you will experience vacancies and there will be surprises.

Real estate can be a fantastic investment, or it can be the exact opposite. It all depends on how seriously you approach the business aspects of it.

 

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 investors with ease of entry, reliable quarterly cash flow, and portfolio diversification.  Our proven strategies emphasize sound investing in carefully researched, quality properties that have steady, long-term capital appreciation potential.

Click for Investor Overview PDF: BENA Capital Overview

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

BENA Capital Announces Sale of Merced Investment

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BENA Capital LLC, a real estate investment fund manager, has completed the sale of its multifamily residential property in Merced, CA.  “This was a home run for our investors as we delivered returns that significantly exceeded projections,” said Managing Director Yousif Abudra.

 

Value-Add Approach

BENA Capital took a value-add approach and implemented a phased renovation strategy to increase the occupancy rate of the property from 20% to 100% within 8 weeks of purchase.  Once fully occupied, the property produced cash flow returns to investors that were 38% higher than originally projected.

Managing Director of Acquisitions, Kimberly Yeh selected the Merced asset based upon its location and value-add potential, saying “We identified the Merced asset in January 2016 as an attractive acquisition opportunity due to the property’s strong value-add potential and the region’s notable growth trends.  Located within 15 minutes of the UC Merced campus, and less than a mile from the new $46MM UC Merced Downtown Center, the property was poised to benefit from the prime location coupled with a value-add approach.”

 

Strong Investment Return

Yousif Abudra said, “The team came together to produce a strong result for our investors.  Our contractor began work immediately after acquisition, and delivered the project on time and on budget.  Meanwhile, our property management team hit the ground running to bring the occupancy up to capacity.  Due to both of their efforts, we were able to not only achieve 100% occupancy, but do so at above-market rents.”

The property sold to a local investor looking for a turn-key, stabilized investment. 

“We were able to sell at a premium because we delivered what the market was looking for – a stable, cash-flowing asset.  The Merced property shows the true power of implementing our value-add strategy.  Our investors achieved a stunning IRR (Internal Rate of Return) in 20 months – without utilizing any debt,” Abudra concluded.

 

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 investors with ease of entry, reliable quarterly cash flow, and portfolio diversification.  Our proven strategies emphasize sound investing in carefully researched, quality properties that have steady, long-term capital appreciation potential.

Click for Investor Overview PDF: BENA Capital Overview

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