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- Jul 24, 2007
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Like I mentioned, I have heard this and pondered it many times. Obviously, it is not a hard rule but more of a generalization.
The first buyer is usually paying replacement cost or retail for the initial building. The problem is that these do not usually cash flow with high leverage. The buyers may be REIT's or people that have a lot of money and want trophy properties. They put a lot of money down and sit on them for a few years.
While there is always development going on, the majority is usually happening at the top of the market. This is the time that it makes the most economic sense to the banks and builders. When too many units come online, the market begins to suffer. Over-supply will hit the class "A" or newer apartments first.
Somewhere along the way, these owners may wish to leave this market for a better one. REIT's like to focus on citys that are doing well and will tend to unload their under-performers.
The next buyer is still getting a high-end property with all the latest and greatest floor plans and amenities. The prices are still high though. Maybe they got a decent deal but rents for the high end properties are not climbing rapidly.
The next time this property comes up for sale, there are much newer and better equipped units out there with the latest and greatest appliances and floor plans. Now the market is soft and they can't sell to a trophy buyer.
The next buyer that purchases at the "near bottom" of the market and rides it up is the one that will reap the rewards.
There are all kinds of reasons that market cycles fluctuate. The properties with some age on them are the ones that really swing with the values during the ups and downs. I have seen incredibly nice properties with only 15-20% more income than some of the older counter-parts, selling at more than twice the cost per unit.
Newer properties may not need as many repairs but the expectations from the tenants are much higher. The costs will associated from insurance, taxes, higher expectations, etc. will keep the expenses high. Maintenance such as painting, roofs, parking, etc will still need to be in the budget for the future as you will need to build a reserve.
Purchase well below replacement cost. As vacancies tighten up and rents climb, monitor for a time to sell. Once the builders start going at it again, your older propety should be close to the top of the market. Sell as it approaches replacement cost in value.
The first buyer is usually paying replacement cost or retail for the initial building. The problem is that these do not usually cash flow with high leverage. The buyers may be REIT's or people that have a lot of money and want trophy properties. They put a lot of money down and sit on them for a few years.
While there is always development going on, the majority is usually happening at the top of the market. This is the time that it makes the most economic sense to the banks and builders. When too many units come online, the market begins to suffer. Over-supply will hit the class "A" or newer apartments first.
Somewhere along the way, these owners may wish to leave this market for a better one. REIT's like to focus on citys that are doing well and will tend to unload their under-performers.
The next buyer is still getting a high-end property with all the latest and greatest floor plans and amenities. The prices are still high though. Maybe they got a decent deal but rents for the high end properties are not climbing rapidly.
The next time this property comes up for sale, there are much newer and better equipped units out there with the latest and greatest appliances and floor plans. Now the market is soft and they can't sell to a trophy buyer.
The next buyer that purchases at the "near bottom" of the market and rides it up is the one that will reap the rewards.
There are all kinds of reasons that market cycles fluctuate. The properties with some age on them are the ones that really swing with the values during the ups and downs. I have seen incredibly nice properties with only 15-20% more income than some of the older counter-parts, selling at more than twice the cost per unit.
Newer properties may not need as many repairs but the expectations from the tenants are much higher. The costs will associated from insurance, taxes, higher expectations, etc. will keep the expenses high. Maintenance such as painting, roofs, parking, etc will still need to be in the budget for the future as you will need to build a reserve.
Purchase well below replacement cost. As vacancies tighten up and rents climb, monitor for a time to sell. Once the builders start going at it again, your older propety should be close to the top of the market. Sell as it approaches replacement cost in value.
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