We’ve all heard variations of the famous quote:
- “There are three things that matter in property: location, location, location.”
- “There are three things to remember when valuing a property: 1-Location, 2-Location, and 3-Location.”
- “The top three keys to success in real estate are location, location, location.”
As an aside, in preparation for writing this article I found that the quote is widely attributed to a British real estate tycoon called Lord Harold Samuel. But it was also used in a 1926 classified ad in the Chicago Tribune, when Harold Samuel was just 14 years old, making it likely that the “rule” was in use even prior to Harold Samuel’s “coining” of it. I wouldn’t be surprised if some variation had been used for generations even prior to 1926.
Over the years, while touring properties or preparing investment analysis on behalf of clients, I’ve sometimes found this golden rule of real estate echoing in my thoughts…”location…location…location”. But in today’s apartment markets, I wonder if a more appropriate rule might be… “The three most important factors in apartment investing are TIMING, TIMING, TIMING.”
Of Course, Location Will Always Be Important
Retail Properties: For retail properties, intersections with the highest traffic count are a rare commodity and will likely bring the most exposure, and therefore sales, and therefore rents and therefore higher value, for a given use that requires exposure.
Industrial Properties: For industrial properties, the value of being located near the port can be irreplaceable.
Student Housing: For student housing, the importance of having a location near campus is obvious.
Multifamily Properties: But for multifamily properties, in a market like Los Angeles that is largely built out, where new development opportunities are generally restricted to infill sites, and where transportation corridors and general plans and zoning maps have long been decided, best location wouldn’t seem to always be the most important factor. Apartment markets stretch for miles across the Los Angeles basin – you can often cross city boundaries or enter a new submarket without even realizing it because the quality of location with respect to apartment housing has not changed at all.
I would argue that the value of the best location and the related premium rents to be collected by the investor are already “baked in” to the purchase price via cap rate analysis. Said differently, a higher-quality location generates higher rents, which results in a higher purchase price (or value), but an investor yield that is equal to or worse than the yield generated from a lower-quality location.
There are exceptions to every rule. Higher quality locations can lead to higher-quality tenants, and therefore fewer vacancies or lower turnover costs. Some investors believe higher-quality locations enjoy more rent growth in a good economic environment. But apartment property location doesn’t necessarily drive the yield or the end use of the real estate, as with the other land uses referenced above.
More and more in today’s multifamily investment market, I find myself thinking about… TIMING … TIMING …TIMING.
- When will the Fed raise interest rates? Should my client buy or sell or refinance before that eventuality?
- Will my developer client complete construction before the rains of El Nino arrive? Should we discuss halting construction?
- Will the vacancy get filled before my listing goes to market? Should we lower the asking rent?
- Can we identify a replacement property in 45 days in a market with very little inventory? Should we consider a reverse 1031 exchange?
- Will loan commitment be achieved before expiration of financing contingency? Do I need to push the buyer/borrower or ask to talk to the lender directly?
- Is the multifamily market peaking? Should I encourage my Seller to investigate NNN retail replacement properties?
- Etc, Etc, Etc.
These and many other issues surrounding timing cause me to believe that in today’s multifamily market, investors need to have three priorities… TIMING…TIMING…TIMING. If you’re facing similar challenges or want to discuss your investment goals and optimal ways for achieving them, call me as soon as you read this and let’s discuss TIMING.
Albert Banks has over 25 years experience as a licensed Real Estate Broker. His ability to recognize opportunities in the changing real estate market has benefited many of his clients by increasing their real estate portfolios and net wealth. Because of this commitment, clients continue to seek his professional opinion regarding market trends, property values and future opportunities. His clients always come first and paying attention to details is his mission.
Albert found his niche specializing in the sales and marketing of multi-family and commercial properties. No transaction is too difficult, too small or too large. His years of experience have allowed him to successfully complete difficult transactions, with title issues as well IRS 1031 tax deferred exchanges. For more information, call Albert at (818) 988 – 9200 ext. 125 or email [email protected]