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REAL ESTATE Volucci says to find apts in weak markets due to overbuilding...

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SteveO

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Re: Volucci says to find apts in weak markets due to overbuilding

This would make Florida and California great places to invest if you only look at this data point. Vollucci is investing in Florida. I think it is too early.

The question for me is what will be the main driver to begin filling units again. As it is, these areas are still selling on very low cap rates and high cost per units.

The perfect storm for me is overbuilding followed by great job growth. I want to buy early in that job growth cycle.
 
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ryanpal

ryanpal

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Re: Volucci says to find apts in weak markets due to overbuilding

Hey SteveO. Just to clarify, I wasn't mentioning looking at this point only, but rather to start "researching" in these markets since this was one of the main point he stressed in the book.

My boss (the one who lent me the book) suggested Iowa. I'm myself haven't researched this area yet, nor do I know the extent of how much he himself has. At any rate, for sake of argument....any comments on Iowa or any possible areas in which you see as candidates for future investments? (if that's private no worries)

Ryan
 

SteveO

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Re: Volucci says to find apts in weak markets due to overbuilding

Can you post any information that you get on expected job gains as a result of grain energy?
 

Diane Kennedy

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Re: Volucci says to find apts in weak markets due to overbuilding

Can you post any information that you get on expected job gains as a result of grain energy?
Whoa! What a great question SteveO. I hadn't even considered what that could do to the grain growing regions.

I'm interested as well.
 

andviv

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Re: Volucci says to find apts in weak markets due to overbuilding

I don't know what grain energy or grain growing regions mean... somebody help please, I'm not familiar with that term.
 

Bilgefisher

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Re: Volucci says to find apts in weak markets due to overbuilding

I don't know what grain energy or grain growing regions mean... somebody help please, I'm not familiar with that term.
New ethanol fuel is produced from corn and wheat. Hence grain energy. The breadbasket in America is seeing the prices of their crops soar as a result.


This thread brings up an interesting point. What sources do you use to research an area? Does area still matter that much is you are doing a valueplay on a complex?
 

JScott

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Re: Volucci says to find apts in weak markets due to overbuilding

Does area still matter that much is you are doing a valueplay on a complex?
[Standard Disclaimer - I'm no expert, and don't have much real-world experience in this, so everything I say may be wrong :)]

The core of the value play is two-fold:

1) Increase property income
2) Decrease property expenses

Do one or both of these things, and you will likely make money.

When it comes to #1, the most obvious ways to increase property income is to raise rental rates and/or decrease vacancy. While it may be possible to do these things purely by making cosmetic changes to the property, a smart investor will leverage economic and demographic changes as well.

Rental rates rise when population increases and when local salaries increase (localized inflation). Vacancy decreases when population increases, which is often the result of a job growth in a local area.

So, while you don't necessarily have to rely on economic and demographic trends to make money on a value play (you can just rely on cosmetic changes to the property), you'll make a lot more money if you *are* able to leverage these trends.

It's also worth noting that you'll make more money on a property if cap rates have dropped in the area in the time you've held it (i.e., you can sell for a lower cap rate than you bought for, disregarding the condition of the building). So, if you can find an area where there will be economic and demographic improvement (which will push down prevailing cap rates), you'll get a higher premium when you sell as well.

So, if you want to make the most money from your efforts, area *does* matter...
 

SteveO

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Re: Volucci says to find apts in weak markets due to overbuilding

My experience has shown that location improvements will typically get better results than the value play. But, I want both.

Every area is going to have up and down cycles with occupancy. These cycles have a lot to do with the ability to land a good value play deal as well.

It will be difficult to land a good deal in an area that has a high demand because there will be competition from other buyers. Apartments will sell for higher "proforma" projections. It is also more difficult to locate the mismanaged properties in locations that have strong occupancy.

This is not the case in an area that has been overbuilt or has had a dip in occupancy due to job losses. A five percent dip in occupancy is generally a lot higher in terms of revenue drop. 10% vacancy can easily lead to a 20% total rent loss. Mismanaged properties with 15% or greater vacancy can be in real trouble as a result. There are usually less buyers in this market and sellers get desperate.

If this location shows a promise in near future job growth, it may be that diamond that you are looking for. Find a poorly managed deal and ride the occupancy wave for maximum wealth building.
 

Bilgefisher

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Re: Volucci says to find apts in weak markets due to overbuilding

Thank you JScott and Steve for the answers. I kinda figured take the best of both worlds, but I wanted your opinions.
 
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ryanpal

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Re: Volucci says to find apts in weak markets due to overbuilding

Can you post any information that you get on expected job gains as a result of grain energy?
this flew over my head :smx4:

....good responses all. some great foundation of knowledge im gaining.

ryan
 

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JScott

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Re: Volucci says to find apts in weak markets due to overbuilding

A five percent dip in occupancy is generally a lot higher in terms of revenue drop. 10% vacancy can easily lead to a 20% total rent loss.
Just wanted to highlight this...

SteveO mentioned this to me a couple weeks ago, and since then I've made the point of asking sellers for both vacancy numbers *and* total loss numbers, and what I've found is that loss not attributed to vacancy (i.e., people just not paying their rent) is rarely offered as part of pro-forma numbers, but definitely has a large impact on price/value of the property.

And as SteveO pointed out, I've found that as vacancy increases, total loss increases faster than linearly.
 

BeingChewsie

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Re: Volucci says to find apts in weak markets due to overbuilding

New ethanol fuel is produced from corn and wheat. Hence grain energy. The breadbasket in America is seeing the prices of their crops soar as a result.


This thread brings up an interesting point. What sources do you use to research an area?

I use most of the resources in the Vollucci book. I use the internet and go to the government site for the MSA and look for the economic development person/people, contact them. I go to their chamber of commerce wesbite and I have found just putting the MSA name followed by forecasted employment growth through 2009 or 2010 brings up a wealth of information. I have found that the local universities usually put out an employment/economic forecast for their MSA. I read the local newspapers and trade papers...you can find them online. I look at the raw numbers put out by groups like Marcus and Millichap, REIS, and Toronto-Wheaton. Sometimes it is something like a headline on yahoo that will lead me to an article that will lead me to another and pretty soon you start to get a picture of an area. I can give you two examples this weekend of articles that I followed..one was on aol about ..what RE markets are set to fail?..it was about the correction needed to bring prices more back to reality in certain areas. This led to me looking at their data which included a 5 year forecast on rent % increases in 54 MSA's. I decided to look into some of these areas and see what was occuring/projected to occur to fuel those increases. The second article was about the most wired cities..an interesting slide show that led to others that highlighted families migrating in droves to certain areas and bringing in business and jobs etc. I hope this is helpful!
 

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