real estate industry/economy Archives

Self-Storage Real Estate: Understanding Unit Occupancy, Physical Occupancy, and Economic Occupancy

Posted on March 25, 2024 (March 25, 2024) by Frank Gallinelli

self-storage

In my previous post, I discussed what I believe are some of the most important pros and cons of investing in self-storage real estate.

As with most real estate sectors, self-storage features some terms that are particular to this property type — specifically in how owners describe occupancy: Unit Occupancy, Physical Occupancy, and Economic Occupancy. Let’s review them:

Unit Occupancy

Unit occupancy is the most straightforward of the three. It refers to the number of occupied units at a self-storage property, expressed as a percentage of the total. For example, if a facility has 100 units and 75 of them are filled, then the unit occupancy is 75%. This metric provides a quick snapshot of the facility’s occupancy status but doesn’t account for the varying sizes of units or the revenue that’s generated by each unit.

Physical Occupancy

Physical occupancy, while similar to unit occupancy, takes into account the rentable square footage of each unit. This is the number of occupied, rentable square feet at a facility, also expressed as a percentage of the total. Physical occupancy offers what is probably a better picture of vacant vs. occupied space than unit occupancy because it considers the actual space being utilized.

Economic Occupancy

Economic occupancy compares the actual rental income being generated in relation to the gross potential rent of that property. It takes several factors into account, including turnover periods between tenants, concessions and rent incentives, and late or unpaid rent. You might think of this metric as a sort of inverse cousin to the Vacancy and Credit Allowance that you see on an APOD (Annual Property Operating Data) for a typical income property.

A 100-unit storage facility with 95 units rented has a physical unit occupancy of 95%, but its economic occupancy might be lower (and concerning) due to factors such as short-term discounts, concessions, and delinquent rent.

An Example

Let’s say we have a self-storage facility with 100 units, and we want to calculate the unit occupancy, physical occupancy, and economic occupancy for a given month.

Unit Occupancy:

Unit occupancy refers to the percentage of units that are rented out, regardless of how much of the space is being used.

At the end of the month, we find that 90 of our 100 units are rented out. So we can calculate the unit occupancy as follows:

Unit Occupancy = (Number of rented units / Total number of units) x 100

Unit Occupancy = (90 / 100) x 100

Unit Occupancy = 90%

Physical Occupancy:

Physical occupancy refers to the percentage of total rental space that is being used.

Let’s say that the average unit size in our facility is 100 square feet. That means we have a total of 10,000 square feet of rental space (100 units x 100 square feet).

At the end of the month, we find that our renters are occupying a total of 8,000 square feet of space. So we can calculate the physical occupancy as follows:

Physical Occupancy = (Total rental space in use / Total rental space) x 100

Physical Occupancy = (8,000 / 10,000) x 100

Physical Occupancy = 80%

Economic Occupancy:

Economic occupancy refers to the percentage of total potential rental income that we are actually receiving.

Let’s say that we charge an average of $100 per month for each unit. That means we have a total potential rental income of $10,000 per month (100 units x $100).

At the end of the month, we find that our renters are paying a total of $7,000 in rent (70 rented units x $100). So we can calculate the economic occupancy as follows:

Economic Occupancy = (Total rental income received / Total potential rental income) x 100

Economic Occupancy = ($7,000 / $10,000) x 100

Economic Occupancy = 70%

So in this example, we have a unit occupancy of 90%, a physical occupancy of 80%, and an economic occupancy of 70%.

Conclusion

Understanding these three types of self-storage occupancy—unit, physical, and economic—is important for investors seeking to maximize their profitability. By monitoring and managing these three types of occupancy, you can keep an eye on your business’s financial health and optimize your bottom line with informed decisions about pricing, collections, and possible expansion.

— Frank Gallinelli

**FYI: We think the self-storage sector is important enough that we’ve dedicated an area in our Real Estate Investment Analysis, Pro Edition software specifically to this property type.**




Copyright 2024, Frank Gallinelli and RealData® Inc. All Rights Reserved

Photo by Steve Johnson on Unsplash

Self-Storage Real Estate: Pros and Cons for Investors

Posted on March 18, 2024 (March 21, 2024) by Frank Gallinelli

What is self-storage real estate?

Simply put, self-storage properties are built to contain many, often hundreds of individual storage spaces of varying sizes. It’s a booming market, forecast to be worth over $64 billion by 2026.

Individuals and businesses rent these spaces to store possessions like furniture, clothes, equipment, business records, inventory – just about anything one can imagine. The top five reasons people use self-storage are for moving purposes, lack of space at home, change in household size, downsizing, and business purposes.

These facilities have become increasingly popular among real estate investors for several reasons:

Steady Income

Perhaps the most compelling reason for investors to turn to self-storage is the likelihood of a steady revenue stream. The demand for storage units increased to 14.5 million in 2022, up by 970,000 since 2020, with owners seeing an annual return on investment of almost 17% over a nine-year span.

Recession-Resistant Investment

Self-storage real estate has proven to be notably resilient during difficult economic times. For example, census data show that self-storage revenue increased steadily during the pandemic and occupancy averaged 96.5% in the third quarter of 2021 compared to 91.5% in the first quarter of 2020. As people relocated and downsized, or needed to make room for home offices, they needed space to store belongings.

Even during the Great Recession of 2008, while most REITs suffered losses, self-storage showed a positive 5% return.

Lower Operating Costs

Compared to other income-producing property types, operating costs tend to be lower for self-storage units, typically around 35% of revenue. These spaces do not experience use as intensive as apartment, office, or retail properties, and have far fewer amenities. No late-night calls for clogged plumbing. On average, property taxes account for almost one-third of the expenses for this property type.

Stable Cash Flow

With a large number of relatively small units, the loss of an individual tenant does not typically impact cash flow the way it would with the loss of an apartment or commercial tenant. Also, when a unit does go vacant, it can usually be ready for a new tenant immediately, saving both the rollover time and cost usually needed for other types of space.

Advantageous Leases

Month-to-month leases are the norm, so owners can adjust rates quickly if market conditions change. Some owners take payment by automatic credit card or ACH billing, reducing the chances of default. No property owner relishes the prospect of an eviction, but in many states, the process is, at least, less difficult and time-consuming than it would be with an apartment or commercial tenant. And you may be able to recover at least some of your economic loss via a lien that permits you to auction off a unit’s contents.

Of course, anything worth having or doing comes with some challenges. Here are a few:

Market Saturation

One potential risk in the self-storage sector, as in virtually any area of real property, is the risk of oversupply. To be sure, an essential part of your planning is to evaluate whether the market where you plan to invest is becoming saturated. This can occur if there is a spike in the construction of new facilities, if supply is starting to outstrip demand, or if institutional investors are beginning to dominate your market. Your due diligence needs to be focused to be on the lookout for these warning signs as you evaluate your long-term plans.

Management

While you probably will not have a lot of the management duties that are a familiar part of owning properties that are occupied by real people, there are still some hands-on considerations with self-storage real estate. Think of the property as your own retail establishment. You will probably need to have a person on-site during business hours to control access to the facility, deal with walk-in customers wanting to sign up, or make equipment like hand trucks or platform trucks available for use. Self-storage facilities in the U.S. employ, on average, 3.5 employees per facility. https://alansfactoryoutlet.com/blog/self-storage-industry-statistics/

Security

We doubt that you’ll keep the Hope Diamond or your Mickey Mantle rookie baseball card in your self-storage cubicle, but folks often do store valuable stuff. These facilities need to ensure that they have robust access-control systems in place and video surveillance. They also need to maximize security of the storage units themselves. Tenants will usually provide their own locks, but the units should be built with reinforced walls and doors to make them less vulnerable to forced entry.

Conclusion

The self-storage real estate sector, with its potential for high returns, recession-resistant demand, and relatively low operational costs can offer compelling investment opportunities. It’s also important to acknowledge that challenges exist, like hands-on management responsibilities, robust security demands, and the possibility of market saturation. Investors who approach this sector with careful due diligence and a realistic understanding of the pros and cons should find themselves in a position to capitalize on the growing demand for self-storage facilities.

— Frank Gallinelli

**FYI: We think the self-storage sector is important enough that we’ve dedicated an area in our Real Estate Investment Analysis, Pro Edition software specifically to this property type.**




Copyright 2024, Frank Gallinelli and RealData® Inc. All Rights Reserved

Photo by JOSHUA COLEMAN on Unsplash

What Does the Future Hold for Commercial Real Estate?

Posted on May 20, 2023 (May 21, 2023) by Frank Gallinelli

Inflation, interest rates, concerns about recession, pandemic-inspired work-style changes, taxes. There are enough wild cards in the deck to give any economic forecaster vertigo.

Not all real estate markets or all sectors are created equal, so to paraphrase an old TV auto ad, your mileage may vary. Nonetheless, we think it’s possible to make at least some reasonable and general forecasts about the near-term prospects for commercial real estate. Here is some of what we’re hearing, and thinking.

Multifamily

The multifamily sector seems likely to continue showing positive revenue growth. Freddie Mac predicts 3.5% increase in gross income nationally from apartment rentals in 2023, and a 5.1% vacancy rate. The multifamily market was outrageously strong in 2021, has cooled off somewhat since then, but still looks like a propitious place for investor dollars. With mortgage rates at their highest level in years, and the inventory of single-family homes for sale in short supply in many areas, there should be a lot of folks who must opt for apartments — hence, continued strong demand. Globest suggests that “multifamily remains a front-running investment choice.”

Office

The office market seems a bit harder to get a handle on. Many office workers have become very comfortable with working from home and are reluctant to go back into the office. They’ve been saving on commuting costs, especially in a time of high gas prices, on child care, and sometimes even on the cost of business attire. Some employers are demanding that workers return full time, but many are agreeing to a hybrid model, a few days a week in the office and a few at home. For many businesses, this means they need less office space. An in-depth interview on Co-Star with three industry analysts concurs that hybrid work is here for the long term and that demand for space is likely to decrease.

These analysts also noted that the suburban office market has been more resilient than the central business districts, and that suburban vacancies have actually been lower than those in CBDs. Finally, they note that while office leasing appears to be stabilizing, rising interest rates have been putting a damper on sales.

Industrial

If there is one clear winner right now, it would appear to be the industrial sector. In an article on trends in industrial real estate, commercialsearch.com says, “Onshoring efforts, coupled with a continuation of last year’s e-commerce boom, have only added to the already sky-high demand for industrial real estate.” It further quotes an analyst who believes this sector will be “among top performers across the commercial real estate sector in 2023.”

Similarly, NAIOP’s Industrial Space Demand Forecast says, ”Despite rising interest rates and growth in the supply of new space entering the market, the outlook for industrial real estate remains bright as supply chain conditions steadily improve. Low vacancy rates will continue to support growth in rents and property values.”

Retail

Retail, like politics, tends to be hyper-local. A recent article in the Wall Street Journal, The Decline of the Five-Day Commute Is a Boon to Suburban Retail, puts this in the context of the post-pandemic environment. The trend of businesses moving their office out of the central business district has led to fewer people shopping in downtown locations; but on the flip side, the suburbs have generally been the beneficiaries. “In the second half of last year, urban retail availability surpassed suburban availability for the first time since at least 2013, according to real-estate firm CBRE. Asking rent growth in the suburbs also outpaced urban areas last year.”

Overall — Sustainability

One phenomenon that looks like it will cut across all sectors is the growing interest in sustainability. It seems very likely that this will drive demand for green buildings. As we all become more aware of the impact that buildings can have on the environment, there is a growing demand for green buildings that are designed to be energy-efficient and environmentally friendly. This is creating opportunities for developers who can build green buildings. There are also financial incentives to commercial property owners, including reduced operating costs, increased asset value, and higher rents. We’ll be having a follow-up post with more on this soon, so stay tuned.

— Frank Gallinelli



         


Copyright 2022,  Frank Gallinelli and RealData® Inc. All Rights Reserved

The Single-Family Home as a Rental Property Investment — Using Regression to Estimate Value

Posted on December 7, 2021 (December 21, 2022) by Frank Gallinelli

Regression – no, it’s not what your family and friends accuse you of when you want to trade in the mini-van for a two-seater stick-shift convertible (well, maybe it is, but that’s a topic for a different article). If you’re familiar with our RealData software, my online video courses, and my other blog posts here, then you know that I’m usually talking about income-producing property like multi-family, retail, office, or the like — seldom about single-family homes. And when we estimate the value of most income properties, we typically do so by looking at their income stream.

Recently, many investors (both big and small) have been buying up single-family homes to hold as rental properties, and that presents something of a conundrum: We still want to analyze cash flows and returns as any investor should, but when we think about the price we pay to acquire a home or the price we’ll get when we sell, our usual income-capitalization may not be the best approach. Simply put, that’s because most single-family residences are bought and sold based on the price of comparable sales, not on their ability to produce rental income. Often, our comparable sales approach is informal and unscientific. The neighbor got $250k, so I guess this house is worth the same.

Or not.

Linear regression is a statistical technique we can use to approach this with more rigor. To put it into non-technical terms, it lets us look at a situation where we can take some facts that we know (dare we call them real data?) and use them to identify a trend. If a trend really does exist, that trend, in turn, allows us to predict the value of something otherwise unknown. Let’s look at some examples. Five years ago my property taxes were $1,000. Four years ago they were $1,100. Three years ago, $1,200. Two years ago, $1,300 and last year $1,400. Given this trend, what can we reasonably predict we’ll pay this year? Right. $1,500. How did we guess? We probably had a flashback to our junior high school algebra class (talk about regression!). In the graph paper of our mind, we plotted a perfectly straight line. The line was formed by a series of data points and it clearly suggested a trend. Property Taxes by Year

Each data point on this graph represents two pieces of information, or “variables:” an independent variable (time) plotted along the horizontal x-axis and a dependent variable (the tax amount) plotted along the vertical or y-axis. The first data point, therefore, is a dot that appears where “5 yrs ago” and “$1,000” intersect. The second point lands where “4 yrs ago” and “$1,100” intersect and so on. The tax amount is the dependent variable because it changes as a function of time. In other words the tax bill depends on the year, not the other way around. When we play connect-the-dots as in the graphic above (hence the name linear regression), we see that those dots form a perfectly straight line. If we extend that line beyond our known data points a bit, we can see that in the current year, assuming that the trend holds up, we could reasonably expect the taxes to be $1,500. Of course, in real life our ducks don’t always line up so nicely in a row. When they look like the graphic below, we’ll probably need computer software to fit the best possible line to the series of points. Then we can use the resulting straight line to make our predictions. Regression Points There are numerous ways that we can use linear regression in real property analysis. We invite you to download a RealData® model to give the concept a spin. “Real estate value by linear regression” is a Microsoft Excel® workbook designed to help us estimate a property’s worth using the market data, or comparable sales, approach to valuation. This approach assumes that recent sales of properties that are nearby and are comparable to the subject provide the best indicators as to the value of the subject. While we might sometimes use this model with other types of real estate, let’s assume for the sake of example that we want to estimate the value of a single-family residence. Although previously sold homes may be comparable they are unlikely to be identical, either to each other or to the subject being appraised. One may have more land; another may offer more interior space; a third may boast a better layout and so on. As a rule such differences are generally reflected in the selling prices of the homes. Properties that are otherwise similar sell for more or less as a function of their distinguishing features. If we can identify some measure (index) of the appeal or amenities of the properties in a given neighborhood, then we may also be able to discern a pattern between that measure and the value of the properties — our trend line again. We can then use the pattern to predict the values of other properties in the same locale.

Our model will permit us to determine by regression analysis whether or not a linear relationship exists between selling price and some independent variable that we define. One possible technique is to use the property tax assessment as an index of value. Although assessments seldom reflect true market price, they often provide a good indication of relative value, so they’re worth a try. If the assessments and prices from a number of recent home sales in a neighborhood define a linear relationship, our model can measure the strength of that relationship and use it to estimate the worth of a home not yet sold. After we open this model we can enter the address, an index and an adjusted selling price for as many as fifteen comparable sold properties. (Regarding the term “adjusted:” We may want to correct for price inflation whenever a sale is more than a few months old.) At the bottom (after #15), we’ll enter the address and the index amount of the subject property. The program will fill in the field for the number of comparables used and compute the subject property’s estimated selling price. Comparable Sales List The results appear in a report and graph, in the section below. Market Analysis by Linear Regression Report Scatter Graph Notice that the program will specify a correlation coefficient. This is a new bit of terminology we didn’t see in our simplified explanation above. This number is a statistical measurement of the reliability of the relationship between the index and the adjusted selling price. To put it another way, it’s a numerical way of expressing how straight our dots line up. A correlation of 1.00 is a perfect relationship, while zero indicates that we have completely random data. In most cases, we would like to see a correlation coefficient of at least 0.80 to believe that there is a strong enough relationship between the index and selling price to use that relationship as the basis of a prediction.

As an interesting sidebar, we can see how accurately this regression analysis would have predicted the values of the homes whose actual selling prices we know. That is because the program computes and displays the selling prices that the analysis would have predicted for each of the comparables. We also see the dollar and percentage differences between the projected and actual prices. This section provides a very graphic demonstration of the accuracy — or inaccuracy — of our model’s prediction. We need to keep in mind that, as with most projections, the quality of our output is entirely dependent on the quality of our input. We certainly have to make appropriate choices for our comparables. Otherwise we can’t reasonably expect to achieve meaningful results. In addition, the kind of index we select must relate consistently to value. If we find tax assessments to be unreliable, we may want to try gross living area or experiment with a scoring system (X points for each bedroom, Y points for each bath, etc.). We may also want to consider trying for even greater accuracy in our predictions by advancing to what’s called “multiple linear regression,” a similar technique where we consider two or more independent variables as possible predictors of an outcome (i.e., a dependent variable).

A regression analysis like the one provided in this model can be very useful because of its ability to provide statistical support to what might otherwise be a subjective estimate of value. Property sellers and buyers can use it to support price negotiations; and agents can use it to enhance the effectiveness of their listing presentations. And of course, investors can estimate the initial cost and ultimate reversion value of a single-family home bought and held as a rental property. With a bit of imagination, linear regression can be used in many ways to poke and prod our analyses and projections. Its name notwithstanding, it can take us a big step forward.

POSTSCRIPT: I’ve added a detailed video case study about single-family investments to my course, Mastering Real Estate Investing, and to my mini-course Real Estate Investment Case Studies.

Copyright 2021, Frank Gallinelli and RealData® Inc. All Rights Reserved

The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

Opportunity Zones = Defer or Avoid Capital Gains Tax

Posted on December 12, 2018 (March 14, 2022) by Frank Gallinelli

The end of the year compels many people to think about tax planning, which in turn prompts us to highlight a feature of the new tax law that could provide significant benefit to real estate investors. It has to do with what are called “Opportunity Zones.”

These zones are economically distressed, low-income communities, and according to the Wall Street Journal the zones encompass almost 9,000 census tracts with a population of nearly 35 million. A list of the zones can be downloaded from this IRS page.

In a nutshell, the benefit to investors is that they can defer the capital gains on an existing investment until the end of 2026 by rolling those gains into an Opportunity Zone project. In addition, they can avoid capital gains on the new investments in the zone if they hold them for at least 10 years

Like a number of provisions in the Tax Cut and Jobs Act, not all of the details were in place when the law was passed, but the IRS did in fact release regulations about this on October 19, 2018. Apparently there are still some loose ends and the IRS in their FAQ says they will be “…providing further details, including additional legal guidance, on this new tax benefit” over the next few months.

Those who enjoy parsing the tax code can peruse the current version of the regulations. You can find more readable summaries at National Real Estate Investor or here if you have an online subscription to the Wall Street Journal.

A key takeaway from the Journal article is that this tax break appears to have been designed to give investors reasonable flexibility. For example, it cites that “…as long as 70% of a business’s tangible property is in a zone, the business doesn’t lose its ability to qualify for the tax break.” The regulations so far don’t seem to have a lot of hidden trap doors or “gotchas.”

It would appear that this tax break provides an opportunity for investors to free up capital that is sitting dormant in properties they’re reluctant to sell because of what would otherwise be a capital gains tax burden. Now investors should be able to benefit from at least one if not two tax breaks, and at the same time do something positive for their communities.

What do you think? Are you likely to pursue a project in an Opportunity Zone?

— Frank Gallinelli

View a sample lesson from my video course,
“Introduction to Real Estate Investment Analysis”

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Sharpening Your Pencil – Create Better Analyses With Published Real Estate Data

Posted on July 24, 2017 (November 6, 2023) by chris

It’s tempting to rush through a property analysis by simply reviewing the broker’s sell sheet, plugging the data into your favorite software program and printing the results. You’re done, right?

Think again.

We’re not saying the seller isn’t providing accurate income and expense data, but is he or she giving you a complete picture of all the issues? Consider such questions as:

What is an appropriate cap rate for the market in which the property is located; and more specifically, what’s the prevailing cap rate for the particular sector, such as multi-family or self-storage?
What seems like a realistic assumption for revenue and expense growth over time?
How have vacancy rates been trending for the area, and what might those trends say about future leases, renewals, and demand for space?

You’ll probably need to look beyond the owner’s statement to build your best property analysis and thus create your best chance at a successful investment. Thankfully, you can find a number of sources online to help you achieve accuracy, and along with it, some peace of mind. You can find data on:

Metropolitan and submarket area cap rates
Average rents by market sector
Vacancy rates
Number of units available and sold
Sales and rental comps
Custom reports based on your subject property

The following are some of the best-known sources of data:

Zillow

https://www.zillow.com/research/data/

You’re probably already familiar with this site, at least in regard to its home value estimates. The focus here is residential but investors can benefit from their extensive rental information, which is provided by county, metro area, city, zip code, and even neighborhood. You download data in Excel format. We found their series of 5 to 7 years of data particularly useful for evaluating rental trends.

You can also learn about their methodology here.

Moody’s Analytics (formerly Reis)

https://cre.moodysanalytics.com/

Reis has been a source of commercial real estate data for nearly four decades, and say they are a “…source for property and market intelligence, including vacancy rates, rent levels, cap rates, new construction, rent comparables, sales comparables, valuation estimates, and capital market trends across eight major commercial real estate sectors.

You can get more info about their data products at https://cre.moodysanalytics.com/products/

Costar

http://www.costar.com

Really big data commercial real estate here, for owners, brokers, appraisers, lenders, even institutional investors

They say you can search up to 1 million sales records, across all property types at https://www.costar.com/products/costar-comps or access property-level data, including vacancy, rents, sales comps for multifamily, office, industrial, or retail property at https://www.costar.com/products/analytics.

Compstak

https://compstak.com/enterprise

Compstak serves up office, retail and industrial lease data for “leading institutional investors, lenders, and owners across the US and UK.” Subscribe to their entire database or, if you are broker, appraiser or researcher, trade your own data for theirs and gain access to Compstak data for free.

Real Capital Analytics

https://www.rcanalytics.com/solutions-for/investors-owners/

From macro trends to extensive data on individual properties, Real Capital Analytics offers data on “$18 trillion of sales, recapitalizations and financings.” Contact them for pricing.

Redfin

https://www.redfin.com/blog/data-center

Redfin is a residential brokerage firm but offers a wide variety of property sales and trend data. Of particular note is their annual report of the “Hottest Neighborhoods in the US.”

While you may not be an investor in single family homes, consider that the market for your commercial property is linked to the health of the local residential market.

LoopNet

~~http://www.loopnet.com/salescomps/~~
Gain access to their database of 1.6 million sales listings. Cost is $175 per month. They also offer, at no charge, sales and lease trends for hundreds of localities across the US. See ~~http://www.loopnet.com/markettrends/~~

What data sources do you use? Share your thoughts by commenting below.

New Edition of Frank Gallinelli’s “What Every Real Estate Investor Needs to Know..”

Posted on November 9, 2015 (September 6, 2022) by chris

Frank Gallinelli’s popular book, “What Every Real Estate Investor Needs to Know about Cash Flow…” is now available in a new third edition. Frank has added detailed case studies while maintaining the essentials that have made his book a staple among investors. The new cases show how to evaluate an apartment building, a mixed-use, and a triple-net leased property — not just running the numbers, but also looking beyond the surface data to see how you might discern what’s really going on with a potential investment.

See the new edition at Amazon here.

McGraw-Hill first published Frank’s book in 2003 and has since sold over 100,000 copies. For more than a decade it has been a top title in the real estate section at Amazon.

For those seeking reviews from readers, look to the 100+ reviews, which collectively rate the book at 4.7 out of 5 stars.

And finally, a visual clue: Second edition has a blue cover, new third edition has a green cover.

Crowdfunding Real Estate Investments

Posted on April 23, 2014 (November 6, 2023) by Frank Gallinelli

Pooling of resources, passing the hat — call it what you will, but collaborative underwriting has probably been around for a couple of centuries. Never one to leave well enough alone, the internet has again risen to the role of game-changer, extending a global reach to individuals and companies looking for backers.

You have probably heard of the crowdfunder Kickstarter, which is a popular donation-based site, aimed primarily at creative projects. Backers who donate to such projects don’t become shareholders or expect any financial return. They may be more akin to patrons than to investors.

But investment-based crowdfunding sites have also emerged. I can’t say that I knew much about them, but I recently attended the annual Yale Alumni Real Estate Association’s National Conference where one of the sessions was devoted to this subject, with presentations by two of the top players in this field: Daniel Miller of Fundrise and Rodrigo Nino of Prodigy Network.

Although this method of funding real estate projects may be just a blip on the radar at present, it does appear that more and more real estate crowdfunding sites like these are cropping up and deals actually are getting funded. So just what is this all about and how is it supposed to work? I’ve tried to take what I learned at the Yale conference and have expanded on it a bit; and so, the following are a few observations from an interested outsider.

For the Project Developer Seeking Financing

Among the top arguments for crowdfunding a real estate project are these:

It offers an opportunity to get a project financed more quickly and easily than it would through more conventional channels.
By eliminating some of the middlemen usually involved, it can lower transaction costs.

The arguments seem credible, since most bank and institutional financing has become a test of endurance. Some crowdfunding sites offer both debt and equity investments, and most are quite specific as to the types of properties with which they deal. The process may not be entirely a walk in the park, because the typical site screens developers by taking them through a rigorous application and evaluation process.

For the Investor

One attraction for investors is that they typically don’t have to pony up a huge commitment to participate in a single project. Hence, they could spread smaller chunks of cash among several properties or even several developers, thus spreading their risk.

There would appear to be a few murky areas, however. Successful commercial real estate investors generally apply a laser focus on their due diligence. In a crowdfunded scenario one should expect that the developer will be doing that, carefully vetting the property and supplying detailed financial information and projections to the potential investor; but how much detail will they provide and can the investor independently verify that information? With the proliferation of crowdfunding sites, will there be consistency among them in the amount and quality of data they provide? A prudent investor must be certain at least to take a very careful look at the track record of the developer.

Investing through crowdfunding may have particular appeal to inexperienced investors. They should be particularly cautious, understanding that there is not likely to be any liquidity, that their cash could be tied up for a considerable time, and of course that there is no guarantee of an acceptable return or of recovering the initial investment. Sometimes deals simply fail.

How is Crowdfunding Even Possible?

It should come as no surprise that there are plenty of regulations that govern these investment offerings. It appears that most of the crowdfunding sites have been operating under SEC Regulation D, which limits general solicitation and restricts participation to “accredited investors.” These generally include investors with a net worth of at least $1 million (not including the value of their home) and income of $200,000 for the past two years, or $300,000 together with spouse.

One site, which at present seems to be unique, is Fundrise. They have been able to use an obscure SEC Regulation A that allows non-accredited investors to participate in community-based deals with investments as little as $100. There is apparently plenty of hoop-jumping for them to deal with, since this regulation also involves state approvals as well as a limit on capital that can be raised in a 12-month period.

In 2012, Congress passed the JOBS Act (Jumpstart Our Business Startups) and in September 2013, Title II of that act became effective. Title II allows general solicitation, but only to accredited investors.

Title III of the JOBS Act is called the “Crowdfunding Exemption.” Expected to work its way through the SEC rule-making process sometime later this year, it would allow non-accredited investors to participate in equity offerings. The proponents of investment crowdfunding see this as the real game-changer.

Conclusion

Crowdfunding could revolutionize how real estate investments are financed, but not everyone is convinced that it is the Next Big Thing. A recent BusinessWire article cites a number of concerns, including one that this writer has seen elsewhere: “Will crowdfunding expose innocent, small-time investors to fraudsters and scam artists?”

Both real estate crowdfunding itself and the regulatory environment that will govern it are in their infancy, so how this will all play out must be a matter of conjecture for now. On the one hand, the real estate industry — to put it as politely as possible — has a long history of being resistant to change. On the other, technology in the 21st century has had a habit of sweeping away things that we confidently viewed as permanent cultural fixtures. To be convinced, I need only to rummage in my basement to dig out my old rotary-dial wall phone and my case of incandescent lightbulbs.

Time will tell the story.

—- Frank Gallinelli

Read more in the recent press about real estate crowdfunding:

Crowdfunding’s Latest Invasion: Real Estate

How Crowdfunding Could Reshape Real Estate Investing

~~The Big Five in Real Estate Crowdfunding~~

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Your time and your investment capital are too valuable to risk on a do-it-yourself investment spreadsheet. For more than 30 years, RealData has provided the best and most reliable real estate investment software to help you make intelligent investment decisions and to create presentations you can confidently show to lenders, clients, and equity partners. Learn more at www.realdata.com.

The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

Results of our first real estate investor survey

Posted on March 24, 2014 by Frank Gallinelli

We would like to thank all those who took a few minutes to respond to the first of our investor surveys; and we’d like to share the results:

Q1: What type of real estate investment property do you buy, or plan to buy? Check all that apply.

Multifamily, 2-5 units	52%
Apartment Building, >5 units	54%
Mixed-Use	20%
Retail Strip Center	26%
Retail, Larger Shopping Center	9%
Free-Standing NNN	4%
Office Building	30%
Self-Storage	24%
Industrial	7%
Hotel	9%
Other (please specify)
Single-family	22%
Land	2%

Keep in mind that we asked respondents to “check all that apply,” so that is why these don’t–and shouldn’t– add up to 100%. The results show that many investors buy more than one type of property.

Clearly, residential property was more popular than commercial, and what may have been a bit surprising to us was the number of “write-in” votes for single-family. Combining these with the 2-5 unit multifamilies, it would appear that many investors are currently leaning toward smaller residential–at least among our pool of survey-takers. This may be a reflection of the inventory of homes that ended up in foreclosure, and could perhaps be purchased at prices that woulf make them attractive to investors.

Q2: Thinking about your cash flow projections for your potential investment, why do you make those projections? Check all that apply.

To decide if I believe the property is worth considering.	87%
To help me to decide on an appropriate offer price (or selling price).	78%
To show to a lender in support of my request for financing.	61%
To show to a potential equity partner.	48%
I don’t make cash flow projections.	7%

We’re certainly not surprised to see that the great majority of investors want to vet their deals and scrutinize the pricing by performing a cash flow analysis; and also that a good pro forma can bring you some credibility when dealing with a lender.

We find it very interesting that almost half of our respondents said they use a cash flow projection to show to a potential equity partner. That would certainly seem to suggest that a lot of investors are pooling their resources in order to do deals. Just anecdotally, we believe we’ve seen a lot more investment partnerships since the 2008 meltdown, probably because of the difficulty that many have encountered finding financing.

One general note: Before the statisticians in the audience take us to task, we should impose a caution in regard to interpreting these survey results. A truly scientific study would have avoided what is called “self-selection,” where responses come strictly from those who are willing to volunteer their point of view.

Nonetheless, we believe this simple and informal survey offers a fairly good window into investor thinking.

We would be very interested in hearing your take on these survey results. We hope you’ll send us your comments.

And finally, we didn’t forget about that bonus: We promised to give away three signed copies of What Every Real Estate Investor Needs to Know About Cash Flow… , and that’s up next. This week we’ll pick three email addresses from among those who opted-in to the drawing and contact them so we can send them their copies. If you participated, please keep an eye out for that email from us.

Real Estate Investing: Time to Remember the Lessons of History

Posted on September 11, 2013 (September 6, 2022) by Frank Gallinelli

As the summer 2013 begins to cool off, many real estate markets are finally starting to heat up. For a lot of folks, who have slogged through five of the worst economic years in memory, it feels a bit like we’ve just been released from the locked trunk of a car.

The temptation now is to celebrate our release from investing confinement by jumping back into the market with both feet. Before we do so, however, it would be wise to reflect on a few of the lessons of recent history.

There were many reasons for the financial meltdown, but one of the biggest surely was the belief that real estate inexorably increases in value over time. To many people, that looked like a law of nature. The reality turned out to be different, and now, as property values start to rise, we have to resist the temptation to start believing this all over again. If not, we will simply create another bubble and repeat the cycle.

Another cause of that meltdown was the tendency to dismiss or completely ignore investment fundamentals. Real estate simply couldn’t fail to do well (after all, they’re not making any more of it), and we didn’t really need to think too hard about our investments because, surely, they would work out happily in the end.

Savvy investors always knew that this wasn’t necessarily true; they knew that income-producing real estate could go up, down, or sideways. Time, all by itself, does not create value; the ability of a property to produce income is what creates value, and so the prudent investor would take nothing for granted and always carefully weigh a property’s prospects for generating income today and in the future.

The beginnings of a general economic recovery—and, in particular, a real estate recovery— may signal that we can and should get back into the game, but it doesn’t mean that we can return to pre-2008 thinking and disregard the fundamentals that ought to guide our investment decisions: For example:

Due Diligence: This is just as important in good times as in bad. We need to examine thoroughly and critically all of the financial data we can get our hands on about a potential investment property. Are the rents really as represented? Are the operating expenses as portrayed by the seller reasonable and complete? Have we done a thorough assessment of the property’s physical condition?

It is essential to remember that a property doesn’t live in a vaccum, so our due diligence needs to extend beyond the individual property and include the local market as well. What is the prevailing capitalization rate for properties of this type in this market? What kind of rents are similar buildings actually getting, and what are the asking rents in properties that may be in competition with us for tenants? What is the current vacancy rate in this market, and has it been rising or falling? What is the general business climate, and in what direction is it headed?

Cash Flow: We always need to make hard-headed projections about the prospects for current and future cash flow. Too often we see investors, motivated to make a purchase and get on the presumed gravy train, put together the numbers they want to see. They ignore the potential for vacancy and credit loss. They ignore setting some of their potential cash flow aside each year as a reserve to pay for that new roof or new HVAC system a few years down the road. We should make best-case, worst-case, and in-between projections to give ourselves a sense of the range of possible outcomes.

It is important to be realistic about cash flow projections. Excessive leverage may seem like a great advantage on the day you close the purchase, but the high debt service may also result in very weak or even negative cash flow. Are you really prepared to support your property out of your own pocket, to absorb unexpected expenses or loss of revenue?

The Long View: We seldom buy an income property with the expectation of flipping it for short-term profit. Rather, our plan is probably to buy and hold so we can derive an annual cash flow plus a long-term gain when we sell. If that is indeed our plan, then we need to forecast the property’s performance not just for one year, but for a likely holding period—perhaps five, seven or ten years—and to compute an Internal Rate of Return for that holding period. Doing so can be especially valuable when we are looking at more than one property that we might purchase. Which one appears likely to give us the best overall return within our investment horizon?

The Last Word: Investing in real estate can be a profitable move in just about any economic climate if we proceed wisely, so to answer our initial question: Yes—if we’ve been on the sidelines, then this is a fine time to get back in. But as with any other kind of investment, we can just as easily lose money as make it if we charge ahead without doing our homework and without going through the kind of fundamental analysis and projection that is essential to smart investing. Success in real estate investing, as in most endeavors, doesn’t just happen by good luck or chance. We have to work at it and have our head in the game. The luck will follow.

— Frank Gallinelli

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The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of RealData® Inc. The material contained in articles that appear on realdata.com is not intended to provide legal, tax or other professional advice or to substitute for proper professional advice and/or due diligence. We urge you to consult an attorney, CPA or other appropriate professional before taking any action in regard to matters discussed in any article or posting. The posting of any article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

Category: real estate industry/economy

Self-Storage Real Estate: Understanding Unit Occupancy, Physical Occupancy, and Economic Occupancy

Unit Occupancy

Physical Occupancy

Economic Occupancy

An Example

Conclusion

**FYI: We think the self-storage sector is important enough that we’ve dedicated an area in our Real Estate Investment Analysis, Pro Edition software specifically to this property type.**

Self-Storage Real Estate: Pros and Cons for Investors

What is self-storage real estate?

Steady Income

Recession-Resistant Investment

Lower Operating Costs

Stable Cash Flow

Advantageous Leases

Market Saturation

Management

Security

Conclusion

**FYI: We think the self-storage sector is important enough that we’ve dedicated an area in our Real Estate Investment Analysis, Pro Edition software specifically to this property type.**

What Does the Future Hold for Commercial Real Estate?

The Single-Family Home as a Rental Property Investment — Using Regression to Estimate Value

Copyright 2021, Frank Gallinelli and RealData® Inc. All Rights Reserved

Opportunity Zones = Defer or Avoid Capital Gains Tax

Sharpening Your Pencil – Create Better Analyses With Published Real Estate Data

Zillow

Moody’s Analytics (formerly Reis)

Costar

Compstak

Real Capital Analytics

Redfin

LoopNet

New Edition of Frank Gallinelli’s “What Every Real Estate Investor Needs to Know..”

Crowdfunding Real Estate Investments

Results of our first real estate investor survey

Real Estate Investing: Time to Remember the Lessons of History

Start Evaluating Investment Properties Today

Real Estate Investment Analysis

Other Software

Video Courses

Unit Occupancy

Physical Occupancy

Economic Occupancy

An Example

Conclusion

FYI: We think the self-storage sector is important enough that we’ve dedicated an area in our Real Estate Investment Analysis, Pro Edition software specifically to this property type.

What is self-storage real estate?

Steady Income

Recession-Resistant Investment

Lower Operating Costs

Stable Cash Flow

Advantageous Leases

Market Saturation

Management

Security

Conclusion

FYI: We think the self-storage sector is important enough that we’ve dedicated an area in our Real Estate Investment Analysis, Pro Edition software specifically to this property type.

Copyright 2021, Frank Gallinelli and RealData® Inc. All Rights Reserved

Zillow

Moody’s Analytics (formerly Reis)

Costar

Compstak

Real Capital Analytics

Redfin

LoopNet

Start Evaluating Investment Properties Today

**FYI: We think the self-storage sector is important enough that we’ve dedicated an area in our Real Estate Investment Analysis, Pro Edition software specifically to this property type.**

**FYI: We think the self-storage sector is important enough that we’ve dedicated an area in our Real Estate Investment Analysis, Pro Edition software specifically to this property type.**