Real Estate Strategy - Q&A

We encourage our investors to reach out anytime between quarterly updates with questions or comments. Earlier this month, we received an email from one of our investors who wanted to pick our brains on the current state of affairs, as an outcome of the COVID-19 pandemic. He asked whether we were adjusting our real estate investment strategy and what actions we were taking to adapt to the new realities, post-COVID. 

This is a great question because no single event in American history has plunged the U.S. economy into a recession faster than the COVID-19 pandemic, and we wanted to leverage this platform to share our thoughts with our broader audience. 

While the number of new unemployment claims has been declining since April, the weekly total is still far above records from previous downturns, and more than 18MM Americans remain unemployed. A recession will inevitably impact real estate markets and investment returns, which is why strategic positioning, nurturing key relationships (between brokers, property managers, and tenants, etc.), and a little bit of patience can make all the difference in terms of emerging from this storm stronger than before.

BENA Capital’s investment strategy is built to ride out economic turbulence and to successfully weather conditions such as these. Our Funds are unleveraged, which means portfolio risk is inherently low. Furthermore, our properties are purposefully located in growing cities with diversified economies, which support cash flows and asset values. We have been proactively working to limit vacancy, and the majority of our tenants have continued to pay rent on time and in full.  Some have had their health and/or employment impacted by the pandemic, but we have been working close with our property management team to help tenants secure the government unemployment benefits they need.

For the remaining fund capital yet to be deployed, we are being conservative. Our overall strategy remains unchanged: to acquire stable, cash-flowing properties in locations with growing populations and diverse economic bases. However, given the recent spikes in COVID-19 case rates, uncertainty around the potential future impacts of a “second-wave,” or cessation of government economic support/stimulus payments to businesses and individuals, we are being cautious in the near term while also trying to optimize returns to investors. 

We have not yet seen significant drops in multifamily residential asset prices in our target markets, which is balanced by the fact that supply is also very thin, much lower than in Jan/Feb. We will continue to be selective and aggressive on price until we see more clarity come through from the economic front. This means not rushing to buy into a market, but still working to actively identify and pursue properties that present good value.

The number one rule in investing is “Don’t Lose Money.” Our focus at BENA Capital is and has always been on the protection and preservation of our investors’ capital and the trust they have placed in us.

Debt-Free Investing

Many of our investors reach out to us because they are looking for a debt-free investing solution – some are looking to diversify their portfolios, others for passive income with lower risk profiles, still others look for shelter from recession, or choose to invest debt-free because of religious beliefs.

BENA Capital was founded on the principle that it’s possible to invest with peace of mind by being debt-free. Debt obligation wiped out trillions in household wealth during the Great Recession. The ripple effects have been so long-lasting for so many, that even when debt is cheap, a remnant worry lingers that default amidst another financial crisis would put them at risk of going under.

In today’s COVID-19 reality, in an environment of high unemployment, experienced investors are looking to limit risk and preserve their capital. In our specific sector – real estate – the multifamily residential asset class has seen tremendous growth since the last recession. With the US economy officially in a recession again, those who have invested wisely and who have managed their properties efficiently will weather the storm. Those with healthy asset financials and capital reserves who are well-positioned to strike when new opportunities arise will emerge stronger. Conversely, those who have chased high risk scenarios, especially those who are overleveraged will be even more exposed.

In certain markets, especially in cities where the government stimulus has not been enough to help cover rental payments, occupancy and lease rates have seen unprecedented falls. If we look in the California Bay Area, apartment rental site Zumper reports that one-bedroom rents in San Francisco dropped by over 9% YOY this month. In Mountain View, prices for one-bedrooms fell 16%, Menlo Park and Cupertino by 14%, and Palo Alto by almost 11%. Furthermore, emergency ordinances have been put in place where landlords may have limited recourse against renters unable to pay. No one could have foreseen a pandemic, but for direct investors, this means that it’s more difficult to cash flow and cover debt. Overleveraged investors risk losing their properties, and in some cases, their personal assets.

Investing in a debt-free fund protects your portfolio from downside risk. It is a solution for investors looking to diversify their risk profiles, and it offers a better alternative to low-yield savings accounts and bonds. While returns may be lower than leveraged funds in times of economic expansion, it can provide stable income and a safe haven when the economy contracts unpredictably like it has this year.

Update on COVID-19 & 3 Key Actions

Since we shared our investor letter three weeks ago, unemployment figures have increased, uncertainty remains high, and nearly 75% of the US population is under a form of shelter in place. Our debt-free position has insulated us more than most from these impacts, but we are not immune.

In this post, we wanted to share the 3 key steps we’ve proactively taken to protect and preserve BENA Capital’s real estate investments:

1)     Focus on Reducing Expenses. We are actively working with our property managers to reduce and defer non-emergency expenses in order to keep costs low in the event rental revenues are impacted.

2)     Close Engagement with Property Managers. We have sent our property managers resources to help tenants obtain government assistance in paying rent using various programs such as the Families First Coronavirus Response Act. We are also working with tenants to develop payment plans, where needed and where appropriate.

3)     Concentrated Monitoring of the Market. National real estate transaction volume has declined considerably over the past two weeks due to the impacts from the COVID-19 response. We are actively engaging our network to keep close track of events that transpire.

Open Letter to Investors: COVID-19 Impacts & Outlook

Dear Investors,

With the market volatility in the past week and increased uncertainty surrounding the extent to which the Coronavirus outbreak could affect the global economy, we wanted to take some time to share our thoughts on how we believe this black swan event will impact the Fund’s current holdings and our approach to future acquisitions.  

An economic downturn will inevitably impact real estate markets and investment returns. While no one can predict the future, we want to reiterate that our Funds’ investment strategy is built to ride out economic turbulence and to successfully weather conditions such as these. Historically, multifamily housing has out-performed other sectors – in previous recessions, rents declined less than those of office, retail, and industrial properties and multifamily growth rates were considerably higher post-recession. Our properties are located in growing cities with diversified economies, which support cash flows and asset values. Furthermore, the fund is unleveraged, which means portfolio risk is low - that is the power of equity and a debt-free investment approach.

As the market evolves, we are committed to investing your capital wisely. Our focus is on the long-term view, and as always, our primary commitment is to protect and preserve your wealth. BENA Capital will remain highly discerning in the properties and geographies that we pursue. While we have a number of properties in the late stages of the acquisitions pipeline, we also recognize that asset prices still reflect seller expectations in a more normalized market. With global events like the Coronavirus and the international disputes over oil prices, that market is changing. Through the course of our due diligence, properties will be evaluated rigorously with that shifting backdrop in mind. We will execute on opportunities that will not only withstand volatility but will allow us to emerge from these troubled waters even stronger than before.

As always, if you have questions, concerns or comments, please feel free to reach out to us.

Best Regards and Stay Safe,

Kimberly Yeh

Managing Director – Acquisitions

BENA Capital, LLC

Real Estate Investments

 

In The News

In real estate news this month, housing inventory in the US continues to dry up, and home prices have been trending higher. Notably absent has been mention of how a potential spread of the Coronavirus could impact the residential real estate market.

Last month, China started to lock down cities in an effort to stop a Coronavirus outbreak. Transportation was limited and strict travel restrictions were put in place. Families quarantined at home, with one designated person allowed out every couple days for essential household supplies. Since then, all companies deemed “non-essential” were shut down, and schools were closed.

Today, the Coronavirus is no longer limited to just mainland China. Cases started to crop up not only in neighboring Asian countries, but in large numbers in Italy.  If an event of this scale were to happen in the US, it would most certainly have an impact to our local markets, including real estate.

Real estate has traditionally been more of a slow-moving machine, compared to stocks. If the US were to see similar outbreak and lockdown trends as China and Italy, and if those negative impacts were protracted, there will be severe pressures on tenant ability to pay rent. The residential sector has always maintained its “hardy” reputation in times of market downturns and has historically outperformed other asset classes in terms of stable operating cash flows, but it is not immune.

Overextended and highly leveraged investments could face serious portfolio risks. Lower-income rental properties not supplemented with rental assistance, located in cities where tenants are more vulnerable to unemployment impacts will be hit hardest by events such as the Coronavirus. That said, volatility in the equities market will further support the case for portfolio diversification into real estate. Supply will continue to play a strong factor in asset price. Those looking to preserve their wealth will find that investing in growing areas supported by a healthy and diverse economy can still provide safe haven in the face of market turbulence. Today, more than ever, we urge everyone to invest their capital wisely.

5 Types of Maintenance - Why & When They Matter

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How long you hold an investment property for determines how much you would invest in maintenance and capital improvements. Typically, the longer you hold a property, the more you spend on enhancements to maintain its value.

Preventative Maintenance. These activities are routinely scheduled, relatively minor in scope, and are quick to complete. Preventative maintenance includes changing filters in AC & Heater units, landscaping, weatherproofing, cleaning the gutters, etc. No matter how long you hold a property for, it is important to avoid being short-sighted. These preventative measures minimize the risk (and the cost) of larger issues that could arise if these activities were not implemented on a regular basis.

Predictive Maintenance. These activities involve larger equipment with sensors, alarms, or alerts that give advance warning to prevent equipment failure. That means that you should have a good idea of when you’ll need to take equipment offline next. For example, pool equipment and access systems should all be maintained according to manufacturer guidelines. This type of maintenance ensures that equipment is functioning appropriately and managed for the long term.

Scheduled Maintenance. Scheduled maintenance refers to activities during which you will be taking a piece of equipment offline or shutting down a facility for an extended period of time (1-3 weeks). An example of this would be maintenance on AC chillers that need to be removed, cleaned, replaced, or rebuilt every 10 years or so. Knowing the standard useful life of equipment and scheduling maintenance around it could reduce chronic operating problems. It’s important to keep an eye on these activities so that you can schedule them at the appropriate times and adequately notify tenants of any down-time.

Pop-up Maintenance. These activities are minor in scope and quick to complete like preventative maintenance, but they are NOT predictable. These include light-bulb changes and clogged sinks. Again, most of these activities will need to be addressed regardless of your investment hold period. If not cared for, it may significantly affect tenant satisfaction & safety, building reputation, and the ability to generate maximum revenue streams.

Emergency Maintenance. These are unexpected, catastrophic issues like burst pipes, electric fires, etc. They are often expensive to remedy, but need to be addressed immediately to ensure the safety of tenants.

Key Takeaways:

Investors who are holding a property for the short-term (up to 3 years) should invest funds primarily to ensure the asset is clean, in working order, and up to code. Typically, you wouldn’t invest in large capital expenditures, because you won’t hold the property for long enough to recoup investments.

Investors holding assets for up to 5 years would do everything the short-term investor does, and if they intend to reposition the asset, should budget 2-3 years upfront to plan and execute the renovations. An additional 1-2 years post-repositioning will help recoup capital investments, generate a stabilized higher cash flow, and increase the overall market value of property.

Long-term investments (5+ years) should be highly valuable assets in good locations. These investments should be extremely profitable. If the intention is to hold these assets indefinitely, they warrant strong maintenance for the long-term and consistent capital investment.

Mosaic Fund - We Are Fully Funded!

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BENA Capital is pleased to announce that the Mosaic Fund is now fully funded. The Mosaic Fund is a premier debt-free real estate fund that will generate stable rental income streams from multifamily assets in growing markets throughout the United States. The Fund was formed for the purpose of investing in core-plus and value‐added real estate properties, targeting cash flow and reliable dividends over the 4-6 year investment hold period.

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

Figuring Out the Zoning for Your Investment Property

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At a networking event last week, I was chatting with an investor from Houston who had purchased a 2-acre parcel of land in Southern California. Her real estate agent had sold her on the prospects of subdividing the plot and developing the site - her dream on a blank canvas. She considered the value of homes in the neighborhood and decided the price of the land was a steal. It wasn’t until after the transaction closed and she had dug into the zoning ordinances that she realized the required setbacks, easements, and environment restrictions would render her original plans completely infeasible. And even if the zoning itself were to be ignored, the proper plan approvals and permits would take her more than three years, in the best case scenario.

Most cities have zoning regulations and permitting processes that govern land uses and regulate the form, design, compatibility of development on certain tracts of land (Houston is a rare exception and does not have zoning laws that regulate land use). Whether you are buying vacant land or an existing property, not thoroughly educating yourself on these regulations before a purchase can cripple the viability of your investment and lead to severe “investor’s remorse.”

Getting Started:

Different areas in the city are designated to have different development uses, commonly referred to as “as of right uses” – allowing for schools, manufacturing, offices, apartment buildings, etc. Physical development standards are applied that establish the building’s relationship to property lines, called “setbacks” and “yards,” building height can be limited, as well as the size and total amount of buildable area. Some cities even require developers to reserve special open spaces.

Zoning is typically enforced by City Planning or the city’s Building Department, and you can usually find your site’s zoning designation online on these city websites. Search for the city’s zoning maps, and locate your specific site on the map. Match the pattern/color coded overlay to the map legend, which will give you a zoning code. Then, check this code against the city’s zoning regulations chart for permitted uses and building restrictions.

Do’s & Don’ts

  • Do make sure that you work with a real estate agent familiar with local zoning laws, who can help double check your work. Don’t assume that different cities have the same types of zoning restrictions.

  • Don’t rely solely on the zoning designation on the MLS listing. Mistakes happen, so always verify the zoning yourself.

  • Do understand that you may have to pay for additional environmental tests, depending on your project, and factor this into your timeline.

  • Do take utility access into account. (Don’t wait until after the fact to find out that the lot you purchased has no access to city sewer and won’t pass septic inspection.)

  • Don’t assume you can have your property easily rezoned. While citizen design review processes can allow for public input regarding zoning, these are typically triggered by larger developments.

Zoning can present key advantages and disadvantages as they relate to the investor's objectives. While you may not have control over all these items, you should always factor zoning and permitting into your analysis and timeline, and develop strategies to address any potential issues. Do your homework and invest wisely.

BENA Capital Announces Multifamily Acquisition in Lexington, KY

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The BENA Capital Mosaic Fund is pleased to announce the acquisition of a new multi-family apartment asset in Lexington, KY.

Lexington has one of the nation's most stable economies, benefiting from a diverse and balanced business base. Named one of the best cities for "Businesses and Careers" by Forbes and ranked 10th in a list of America's most educated cities, Lexington has seen rapid economic growth the past few years, especially in the high-tech and life sciences sectors. The city is home to industry leaders such as IBM, OpenText, and the world headquarters of Lexmark. The county is a major health care hub in Kentucky, with the second-most health care establishments and employees in the state, earning the fourth-highest wages. U.S. News & World Report named UK (University of Kentucky) HealthCare as the #1 hospital in Kentucky for the fourth year in a row, and the Markey Cancer Center in Lexington is ranked among the best cancer centers in the nation.

The property is centrally located in downtown Lexington, next to the brand new $250MM City Center, a mixed use development featuring a 12-story office tower, two hotels, and retail. Less than 5 minutes away from the apartment sits the University of Kentucky and the $300MM Lexington Convention Center redevelopment that is scheduled to complete in Spring 2022. All units are currently 100% occupied. We are very excited about the prospects of this property due to its desirable proximity to demand generators, strong cash-flowing history, and the robust investment activity in the immediate vicinity.

The acquisition is the third of BENA Capital’s Mosaic Fund - a Stable Income Fund focused on generating strong rental income streams from core-plus and value-add assets in growing markets throughout the United States.

The Mosaic Fund is currently open to new investors through December 2019. If you are interested in earning stable quarterly dividends, feel free to reach out directly via email or call us at 408-421-8608.

Warm Regards,

Kimberly Yeh
Managing Director - Real Estate Acquisitions

 

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.

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