Turton Blog: 4 Reasons to Trade Up Your Property Now – Multifamily

Real estate should represent an important part of everyone’s investment portfolio. Stocks can be very volatile as evidenced of late, and many are feeling the pain. Any property owner knows the tax benefits: writing off expenses and taking a deduction for depreciation. If your property is in the best location and you’re enjoying a healthy return on your investment, why cut a good thing short? But maybe you have special circumstances impacting your personal or financial life. You may be tired of maintaining an old property, perhaps a change in your partnership, or you recently inherited properties that must be valued or sold. Or maybe the grass is truly greener elsewhere. Are you really maximizing the value of your assets?

If you are thinking at all about selling in the next 2-3 years, there are a number of variables that would indicate now is the time to sell and trade up into a higher performing property. I offer 4 reasons to sit up, pay attention to current market conditions, and seriously consider a sale and possibly an exchange.

#1 – Prices are high: strong demand, low supply… for now.

Year over year sales volume is down 50% at a macro-level for commercial properties in general. As a result, we are seeing softening in both demand and pricing in the suburban markets. That said, there are still many investors seeking opportunities to invest in lower risk real estate providing more reliable returns than they can get in the money markets. Midtown and Downtown is perceived to be lower risk in virtually every commercial real estate category, especially multi-family dwellings. As a result, demand for urban core properties is good.

Buyers are prevalent. Local multifamily property owners in Sacramento are looking to acquire more properties for their portfolio. Baby boomers are downsizing from their large mansion into stately duplexes and fourplexes to secure a revenue stream into retirement. Real estate investors from around the country have identified Sacramento as one of the most up-and-coming hot markets. Many buyers are willing to pay higher prices and take lower returns in hopes of capitalizing on rising rent growth and higher appreciation in the next cycle.

Tenants activity is solid as well, especially in the residential properties. It’s no surprise to anyone that renters, especially young working professionals, desire the active urban lifestyle in “the Grid.” But across the Sacramento market, vacancies are at all-time lows. On top of that, new construction is late to the game and it’s not nearly enough for development activity to catch up with demand. But you can bet that builders will keep building until supply surpasses demand. There will be an oversupply at some point and prices will soften, if not fall more dramatically. When the next recession hits, new construction projects will be able to cut rental rates and there will be competition between landlords for tenants, pushing sales prices further down.

#2 – Trade into a turn-key, high-performing property.

Your property needs work: paint is peeling, there’s dry rot in the rafters, the landscaping is a mess, the floors are worn and warped, the appliances are giving out… the list of deferred maintenance goes on and on. Any of these issues are going to take significant amount of money and effort. Is it really worth it? Do you know what you’re doing? Or would it be preferable to invest your resources and make your money with a better property with less hassle. You can trade into a property that’s already been remodeled and generating passive revenue from day one. Maybe that’s a bigger, newer multifamily property that you’ll never have to worry about getting rented. Maybe you want to step into the commercial world and acquire an office building with a return 50% higher. You have many options. A 1031 Exchange allows you to trade into virtually any kind of income-producing property.

#3 – Trade into a value-add project.

You are a handyman extraordinaire, or at least your property manager is. You bought a fixer in the downturn, remodeled and upgrade to modern amenities, brought up the rents to market rate, you’ve paid off (or nearly paid off) your loan, so now what?

Now is the time to look for another project to apply that money-making formula. There are a number of dilapidated properties that could be a flip opportunity or a fix-and-hold, depending on your investment strategy.

#4 – Interest rates are still low.

All of these types of transactions can make sense, because financing is relatively inexpensive. For a buyer of a duplex or fourplex, the average interest rate on a conventional residential loan is approximately 3.7-3.9%; for 5+ units, commercial loans are charging 4.0-4.3%. Some of the lenders I work with are able to get my clients rates even lower, if the variables are in your favor.

The Federal Reserve is not likely to raise rates by much, if at all, until December 2016 at the earliest. The U.S. economy is chugging along, growing steadily, though wage growth is modest. Borrowing money won’t be this cheap for very much longer.

Let’s grab a cup of coffee. I’m happy to answer your questions, give you a valuation of your property, or share with you the latest sales information. And for a unique way to experience Sacramento, I take certain clients on bicycle tours of properties and neighborhoods. Shoot me an email or give me a call at:

Patrick Stelmach
Director

LIC. #01964999
Office: 916.573.3314
Cell: 916.817.9148
Fax: 916.471.0290
patrickstelmach@turton.wpenginepowered.com