37th Parallel Properties - January 2018

Inside

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New Acquisitions in the New Year

January 2018

Proven Yield in a Low-Yield Environment Tyler Ankney

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Financial Screening Tools Help Narrow Down Potential Properties Asset Optimization Part 2

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Escape to Nicaragua Upcoming Events and Important Dates

New Acquisitions in the New Year

W ith the holidays behind us and the new year well underway, I wanted to take a moment to discuss acquisitions. For several reasons, all of our acquisitions have commonalities. For example, we tend to target properties that have been built between 1980 and 1999. This allows us to avoid several environmental hazards that come with older properties (like lead and asbestos). It also allows us to serve the largest population of renters. If you look at the bell-shaped curve of who rents, the largest groups are blue-collar and light blue-collar workers. This group largely rents out of economic need. In other words, they cannot afford a house. So, as long as you provide them with a clean place to live in a nice neighborhood with low crime and good schools, these renters will stay with you for a very long time. B-grade properties lend themselves to the Goldilocks scenario of being just right for both cash flow and equity growth. A-grade (newer) properties typically provide equity

growth with little to no cash flow for the first several years after being put into service. In contrast, C-grade properties often will cash flow nicely but lag behind when it comes to appreciation. Well-purchased, well-run B-grade properties can provide the best of both worlds. If you are new to this newsletter, then you need to know that we are long-term holders of cash-flowing multifamily properties. We strongly believe that the key to success in our model is picking the right markets. For example, we don’t buy in low cap rate markets like San Francisco, Los Angeles, and New York City. Cap rates that low won’t support cash flow. People who invest in those markets are looking for appreciation. If they time the market cycle correctly, they can make a very nice profit. If they don’t, they can lose their shirt. We prefer markets that have long-term job and population growth. We also like markets that have a diverse job base that includes government, higher education,

and health care. For us, those markets need to be in states with laws favorable to landlords. Currently, the markets we favor are in Texas, the Carolinas, Atlanta, Nashville, and Louisville. We are constantly evaluating properties in these markets that are sized between 150 to 400 units. For us to bring these deals to you, we must believe that the property will bring a minimum average cash flow of 5–7% and an overall annual return of 11–15% or more. As I write this, we have offers out on properties. We fully expect to have something under contract very soon. So, if you haven’t yet spoken to Don about your next investment dollar allocation into real estate, then there’s no time like the present. Give him a call at 415-302-4138 and he can update you on our acquisitions status as well as log in your intentions for 2018. –Chad Doty

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