Happy Tuesday! It’s the last week of the first half of 2023. Are you glad it’s over? Did you make the most of it? Interesting to think how quickly time passes once you’re looking at it in the rearview mirror. I won’t have the June financials for a couple more weeks, but based on our Jan-May financials, we held up pretty well amidst the craziness of rate increases, insurance hikes, eviction courts being up to 12 months behind, and real estate tax increases finally catching up from the last 3 years of crazy price runups. The saying in the industry is “survive to 2025,” and it’s caught on because it’s probably very true. Our goal is a little more short-term – “survive to 2024” – because by the time we end this year, we will be cash flow positive, including all of the challenges above that hit us in the first half. Our stress testing is working. We want to be in a position to “thrive in 2025” because I believe opportunities are coming! Bell Partners, a well-known multifamily operator, just closed a $1.3 BILLION fund preparing for value-add opportunities.
Stress Testing and Distributions
Speaking of stress testing, I’ve had a few people ask about distributions not being the same as in past years on recently purchased deals and/or lower than expected. I realized that when we talk about stress testing, I probably need to be a little more clear that stress testing is about protecting capital, not necessarily distributions. While we are in this for cash flow, there are times in the market cycle when those distributions get “stressed” by the market, and that’s when we move more toward a capital preservation mode. During a good market, we can usually exceed our expectations from a distribution standpoint, and during a down market, we will most likely fall short of our expectations. Either way, our goal is always to protect our capital no matter what. It certainly helps to invest in a value-add deal a few years prior to a downturn – but it doesn’t necessarily mean the returns will be worse. Investing during a downturn can hamper distributions in the short run, but it can also provide a great opportunity to pick up additional upside on the back end of the deal.
I believe the deals we closed at the end of last year will look completely different in a year or two, and while our concerns today are absolutely real, as we work through the usual challenges, we’ll see the transformation continue to happen.
Insurance Renewal Update
We’ve been working on our insurance renewal for the past few weeks and are making good progress. Overall I think we’re in a good situation to avoid the 30-50% hikes that many other properties are seeing. That being said, we got hit last year with a significant hike that we’re still working to digest.
One of the changes we made last year was moving to a group plan that is “layered and shared”. It’s essentially a program where multiple carriers take part in various layers of coverage to make up the entire policy. Usually, one carrier acts as the “front man” for the entire policy. There are pros and cons to this structure.
One benefit to this structure is that in a market like we have today, where insurance carriers have less coverage and heightened concern for controlling losses, they can take a smaller piece of a larger group of properties to essentially increase the diversification of their exposure. Similar to investing a smaller amount across a greater number of deals, insurance companies are looking to manage risk and get competitive on rates.
One negative is, that unlike a single carrier who controls the entire process, in our experience, it’s been more challenging to get claims settled. Dealing with multiple carriers to get an answer or provide specific types of backup has taken weeks (and sometimes months) longer than it used to. This is due, in part, to the larger number of decision-makers in the process. Makes sense.
All in all, cost savings are very important, so sometimes you have to give up convenience to get some cost savings. Thankfully in today’s market, we’re also seeing select carriers that are being aggressive on a stand-alone basis. Our minimal losses and diversified locations help to make us an attractive option for certain carriers.
The bulk of our policies renew mid-July, so I’ll keep you posted on how things shake out at the end of the day.
Light Week For Economic News
We don’t have much to look forward to this week in terms of economic news. One thought I did have over the past week – these higher interest rates today are helping to push real estate prices higher in the future. That’s a good thing for those of us who own real estate today. Prices are headed higher – helped in part by higher interest rates.
Furthermore, the longer rates stay elevated, the bigger the drop we’ll see in new construction starts – which means rental rates will be squeezed upward again. Nothing particularly new there – just a good reminder that this current situation won’t last forever.
In past times of high-interest rates, governments often kept construction going by implementing measures like tax rule changes to make rental-apartment development more profitable. This led to a construction boom but also contributed to a property bubble and financial crisis. Today, with federal intervention unlikely due to a divided Congress, the responsibility falls on state and local governments to encourage construction and address housing shortages by lifting zoning restrictions and expediting permitting. Freddie Mac’s Khater suggests this could be achieved through local initiatives. We’ll see how that plays out.
Onsite Focus – Midwest Portfolio
This week, we’re spotlighting a property in our Midwest Portfolio that has seen a huge turnaround thanks to our Midwest RVP, Luke. 5501 @ Norwood (below), was a complete opportunity (i.e. mess) when we bought it. Luke has persevered to clean up the façade, improve the curb appeal, get units back online that were down, deal with an incorrectly installed roof (still dealing with it), and improve the resident demographic by building out a small onsite office to take control of the riff raff.
This beautiful cul-de-sac property in an up-and-coming part of Cincinnati had become the drug dealer hideout of choice. Luke recognized the need and took action. Drug dealers don’t like to be watched or tracked. As far as we’re concerned, it’s a free country, and they can do their deals somewhere else. This is one of 7 properties in the portfolio of properties we purchased a little over a year ago. The first 6-9 month were pretty rough – wrong team, wrong residents – but now we’re seeing the turnaround. There’s still plenty of work to be done – these older properties never stop “giving” – but the first major step has been accomplished! And with solid rent growth in Cincinnati, we expect the next 12-18 months will be very fruitful.
From a financial aspect, this portfolio has increased NOI over $250k in the past few months – taking it from “biggest concern” to “back on track”. We’re still quite a ways from getting our distributions back on track, but priority number one is protecting capital -and that’s been accomplished at this point! Thank you to Luke and the team!
5501@Norwood (BEFORE)
5501@Norwood (AFTER)
That’s all for now! Next week I’m looking forward to digging into all things AI and I’ll update you on where we’re at with our integration.
Thanks for reading and have a great week!