All About Income Property

Why buy income property?

The primary reason for investing is the investment's potential to return income above its cost. This income can be in the form of interest, dividends, or rents and profits realized from appreciation in value when the investment is sold.

A vast number of investment opportunities fit this definition. The interest earned can be fixed or
variable, high or low, appealing to investors who want safe and conventional investments, or to those seeking greater returns at higher risks. Investments are acquired for their profit potential, even though some also may have practical, artistic, or other value to the investor. The type of investment, in turn, can affect the amount and type of income earned.

An investment is considered successful only when the investor's goals and objectives are met. A satisfactory level of income or profit to one investor may be unacceptable to another. In general, there are three types of investors: individual (single persons or small businesses), corporate (public or private corporations), and institutional (pension funds, insurance companies or real estate trusts, known as REITS).

Property Type/Asset Class

Analyzing and comparing real estate investments involves identifying the property type. Real estate investments can be categorized according to the property's use, such as retail, office, industrial, or residential.

• Retail properties are used to display and sell goods and services to the public.
  
• Office properties are used to house management and staff operations.
  
• Industrial properties house manufacturing, distribution, or warehousing operations and also may include some office and storage space.
  
• Residential properties house one or more family units.
  
• Other properties include raw land, hotels, hospitals, recreational facilities, restaurants,
  movie theaters, and properties for other special uses.

What has been selling?

Hotels

Even though more than 300 hotels were in foreclosure or default on their loans as of Sept 30, 2009, a prime location can still sell a hotel property at a great price:

Hotel Angeleno (the former Holiday Inn right next to the 405 Fwy, Sunset Blvd exit), is a Joie de Vivre boutique hotel with 209 regular guest rooms and 3 penthouse suites. Sold for approximately $43.5M in September of this year, about $200k per room, with their average rate at $120 per night. You might think that it will take a long time for this to become a positive cash flow property, but depending on how you structure the financing on the purchase and how innovative you can be in improving the revenue of the operation, it could be a winner.

Some of the better deals of the year in hotels:

• W hotel on 3rd Street, San Francisco, 10 years old building with 404 guest rooms, sold for almost $88M in July 2009, about $217k per guest room, I think this was a great deal.
  
• Carmel Valley Ranch owned by Blackstone was sold for $20M for its 400 lush acres and 144 guest rooms at June 2009.
  
• Holiday Inn Laguna Hills, built at 1973, sold for $11.85M for its 147 guest rooms in June of 2009.
  
• The Fairmont Miramar Hotel on Ocean Ave, Santa Monica -- luxury hotel and bungalows -- sold for $210M, almost $700k per guest room. Yes, the price had come down a lot since the day Fairmont Miramar hotel changed hands three years ago. Photos:

Prime location still sells for top dollar and I do think Hotel Angeleno received a great price for its location.

Since I'm a world traveler, all my close friends know that one of my favorite hotels in the world is Villa D'este at Lake Como, Italy. It would be a dream come true to own it one day.

Retail

With many for lease signs posted on empty properties on Montana Ave and in the Palisades village, it's obvious the economic downturn has caused many businesses to close their doors. New business tenants should now sign a longer lease term to lock in a substantially discounted rental rate.

Some notable retail properties sold this year:

Hugo Boss on 414 N. Rodeo Drive, Beverly Hills -- This 11,078 sq. ft. free-standing retail building was sold for $28M at August 2009, costing about $2,527 per sq. ft..

The former Toys R Us on 402 Santa Monica Blvd, in Santa Monica (currently occupied by REI) was sold for $31.7M in September of 2009. The space comprises about 52,250 sq. ft. Photo:




Residential Multiple-Unit properties sold this year

Several prime properties were sold for top prices around Ocean Avenue in Santa Monica, in spite of the market meltdown:

130 San Vicente Blvd. -- This property sold for $12.6M for the lot size of 41,000 sq. ft. Renovation work is being done right now to the property. Photo:




901 Ocean Ave. -- A 28-unit building with a breathtaking ocean view was delivered empty for the new owner to re-build; sold for approximately $10M. Photo:




937 16th Street -- Great owner/user investment with 3 units -- one of which is a three-bedroom -- sold for $1.52M with a GRM of 15.30. GRM is the Sold Price divided by total gross rental amount per year. Santa Monica, Venice and Marina del Rey usually command a much higher GRM, as tenants always desire coastal properties in Southern California, an area with excellent weather, and very high quality of life. Photo:



908 15th Street -- With 6 large units and 9,442 sq ft of living area, this property sold for $2,550,000 or a GRM of 14.3. Photo:




2027 Euclid Street, Santa Monica -- This 8-unit building, with 5,616 sq. ft. of living area, sold for $1,265,000 -- a GRM of 15.3

When is a good time to buy?

Here is a roundup of recent news on Commercial Real Estate:

"Overall transaction activity for all commercial property types in the first half of 2009 slumped to $16 billion, down a whopping 80 percent from $79.8 billion in the first half of 2008, and down 93 percent from $231.4 billion in the first half of 2007, when the market was at its peak, according to Jones Lang LaSalle's U.S. Mid-Year Capital Markets bulletin." -- MultiHousingNews.com

"The distress is still in its early stages, analysts said. 'We are between the first and second inning,' said Richard Parkus, who directs research on commercial mortgage-backed securities for Deutsche Bank. 'We're going to have to get through a very difficult period.' ... Building values have declined by as much as 50 percent around the country, and even more in Manhattan, where prices soared the highest. As many as 65 percent of commercial mortgages maturing over the next few years are unlikely to qualify for refinancing because of the drop in values and new stricter underwriting standards, he said." -- NewYorkTimes.com

To prevent more commercial loans going into default, government assistance and loan modification will be necessary. But as investors, this could be a once-in-a lifetime opportunity to own prime investment at a deep discounted price.

I urge all my friends and clients to wait for deals to come around and act on them when they do.

What can we buy right now?

For me, as an investor, location is the most important factor in choosing property. After that, the numbers have to make sense--meaning the return on my money invested should yield a much better return compared to other investment choices currently presented to me.

Here are some other questions, among many others, I have to answer:

• If I am hiring a property management company to maintain the building and collect the rent -- paying between 7-10% of my rental income -- would the return be diminished too much? Would the potential cash-on-cash return be enough for me to take the risk?
  
• Would the property need major renovation in the coming years, like a new roof?
  
• If there is no appreciation in property value in the very near future, would I be okay with it?

For income properties, potential buyers aren't usually allowed to examine the units until there is an accepted offer. So for the first round of selection, a decision largely depends on the location and the rental income information provided by the sellers.

Some of the better deals in Residential Multiple-Unit properties available right now:

908 4th Street -- This is a prime location in Santa Monica, four blocks from the ocean, North of Wilshire, and a few blocks from the 3rd Street Promenade. Total gross rent for this 18-unit building is $226,836 per year, with a GRM of 14.48, if you were to buy it at the listing price of $3,285,000.



The biggest pluses for owning the building: it is not a rent-controlled property, and the building was renovated in 1993. For a great location like this, vacancy will be quite low as long as the building is well maintained. The living space is very small, with the 18 small studio apartments totaling 7,497 sq. ft., so if a unit is vacant, it will only cost $1,000 per month in negative rental income. Note that a cash-on-cash return can be calculated, but a building's expenses are generally not disclosed until escrow, often making it difficult to do the calculation for now.

133 N. Almont Drive, Beverly Hills -- This is in a prime Beverly Hills area, between Santa Monica and Wilshire Blvd., next to the Golden Triangle. It has 19 units with a total of 11,522 sq. ft. The majority of the units have also been renovated, and the total gross rent is $433,680--a GRM of 14.90 after paying the asking price of $6,495,000. This building is substantially larger, with a lot size of about 26,000 sq. ft., and the units are mainly 2 bedrooms.

How do you choose?

Finding the right properties to invest in is obviously most crucial for long-term and sustained guaranteed success in real estate investing.

Summary of Investor Preferences

Each investor is unique in their preference of asset class, geographic location and risk tolerance. Some might prefer an apartment building in Santa Monica with 30 tenants so the risk of losing large sums of monthly rental income is quite low. Some might prefer a shopping center in Playa del Rey with one major tenant like Target. If all but one of the following financial components of the investment are the same, most investors will follow some common preferences when evaluating investment alternatives.

Assuming all other investment characteristics are the same, investors prefer:

• Larger periodic cash flows -- Fixed monthly rental income and rent based on a percentage of tenants' monthly revenues.
  
• Larger sales proceeds -- After appreciation of the property over time, this is what what investors hope to pocket after paying off mortgage balances, the cost of sale and taxes.
  
• Lower initial investment -- This depends how much loan the investor is approved for. The more leverage, the higher the rate of return.
  
• Earlier periodic cash flows -- As investors, we want to be paid sooner and not later. Up-front rental payments, even if discounted, can create a capital fund the investor can channel to new investments.
  
• Easy renovation -- to add value and improve cash flow.
  

When purchasing income property, there are so many options between asset classes and location. What makes sense to one investor can be dramatically different from what seems logical to another. Financial analysis is always one of the most important steps in making the commitment. The most important added value I provide to my investors truly is the experience I have gained in purchasing my own properties, and -- after accurate financial information is provided -- my ability to calculate and project the rate of return among all their options.

Buyers I work with can make an educated and well-informed decision that fits their expectations. Much new wealth was created during the last economic downturn. I think big opportunities for acquiring quality income properties at a discount price are here now.

Contact me if you are interested in learning about investing in income property, or if you would like me to provide a financial analysis of your portfolio holdings.