Are interest rates going up, down, or staying the same?

I read the presentation that the new Federal Reserve Chairman, Ben Bernanke, made to Congress on February 16th. I think everyone, including Wall Street, is satisfied that he is going to continue the Alan Greenspan policy of fighting inflation by raising interest rates when necessary. So, look for more increases in Fed Funds this year. Interestingly though, long term rates (the ones that are associated with real estate loans), have not followed suit with similar increases.

Have prices peaked?

If you look at the indicators that we follow, many of them suggest that we have passed the peak in the market. As an example, there are considerably more properties on the market now than in the previous 24 months, recent closings indicate a more realistic level of pricing, and Gross Rent Multipliers and Capitalization Rates are both easing off their mid-2005 high point. As interest rates continue to increase, the higher debt service will cut into cash flow, which will result in lower prices in order to meet buyer expectations.

Should I sell now or wait?

As Yogi Berra said, “This is like deja vu all over again.” In the 1990s, many investors and property owners waited too long to take advantage of a similar market situation. I am not being an alarmist, but if you are thinking about a sale of your property, then take advantage of the still inflated market that we are in. The housing market is already experiencing a cooling shift.

If I sell, is it going to be hard to find a replacement property?

As I indicated above in question # 2, there are more deals now to look at than there were last year or even the year before. There might not necessarily be another Santa Monica property that suits you, but there are certainly other strong markets in Greater Los Angeles. In addition, many Apartment investors are exchanging into other property types leased to strong credit tenants on a long-term basis, or they are finding Tenants In Common (TIC) situations very attractive. Good deals come and go every day; however, these are sold to investors who can react quickly. In this market, you have to be ready with your exchange proceeds already in escrow in order to take advantage of these opportunities. In other words, the cart needs to be before the horse. Now is a good time to have your property evaluated for its market value, and then do a “what if” with the alternatives available in the market. I would be glad to do both for you.

You mentioned Tenants In Common (TIC) investments. What do you think of them?

TIC investments have become a very viable and growing alternative for a 1031 exchange property. Ever since the IRS in 2002 sanctioned group investments to meet very rigid criteria as suitable for a replacement trade property, the TIC industry has grown to a multi-billion dollar business. I think they are worth looking at if your time to identify a trade alternative is running out, but no suitable property has been found. Currently, TIC investments are generally offering a higher return than single asset properties in the local market. That is because most of the offerings are in other states. A major benefit of TICs is that individual investors with a small amount of capital are often able to participate in an institutional grade property. Investors need to do their due diligence on the group sponsor, and they certainly have to be comfortable with the financial aspect of the investment. Remember, TICs are a new aspect of the real estate industry, so the sophistication is evolving. Be mindful of all the pros and cons.

Where is a good local market to invest in?

The answer to this question depends on your appetite and interest in going beyond the Westside. If you are willing to venture outside of Santa Monica, then any of the Westside markets (Brentwood, Westwood, Beverly Hills, Culver City, Pacific Palisades, and the beach cities) are good areas to review. If you want to take your hard-earned equity and go for a higher yield, then I suggest the San Fernando Valley or San Gabriel Valley. Many of these areas have a less strict or no rent control. As Tip O’Neal, the former Speaker of the U.S. House of Representatives once said, “All politics is local.” Well, as Kimberly Roberts says, “All real estate is local.” Sure, there are macro trends that affect the entire market, but each sub-market has a particular set of conditions that makes it good or not so good for investing at a particular time regardless of the trends affecting the greater market. One of the things that we successfully do is assist investors in analyzing properties from various markets in order to help them make an informed decision.

Should I get out of Apartments and into something else?

That is certainly up to you. It is not uncommon for Apartment investors to say, “Enough is enough” when it comes to the management responsibilities associated with Apartments. Yes, there is such a thing as too many calls about the toilets. If a property is not large enough for the services of a property management firm, then investors are stuck with those types of calls. We are constantly assisting sellers in exchanges from Apartments to commercial properties. Retail, Office, and Industrial properties with one or a few tenants are the most attractive to Apartment owners. These types of properties generally do not have rigorous management responsibilities.

Do you have any ideas on how to squeeze more Net Income from my property?

Everyone would all like to get more Net Income and Cash Flow from their properties by merely raising the rents. That is the simple approach, subject, of course, to market and governmental constraints. You can improve the bottom line by having good management, making savvy upgrades, and watching the expenses. Every enterprise, whether it is real estate or a business, has at least 5-10% of fat. Talk about cholesterol! I look at a lot of property Operating Statements, and can quickly tell which ones are on the money, and which ones can be trimmed.

A few suggestions include:

• Maintain the property well. Deferred maintenance winds up costing more in the long run.
• When renovating a unit, install energy efficient appliances and look for repairs that will save on utility costs.
• Spend a little extra money on upgrades, such as hardwood floors, and tile in the kitchen and bath room. The additional expenses of these items results in higher rent when the property is
released.
• Make sure that you take advantage of all the allotted pass-thru expenses to tenants.