How The Location Of Your Investment Will Affect Your Return
Location, Location, Location!
How The Location Of Your Investment Will Affect Your Return
A Word with Scott Rosenberg, Managing Director of RE/MAX Results Commercial | RCRE. Found online at www.rcre.co.
By: Karen S. Kahen
I recently sat down with Scott Rosenberg to discuss the benefits of “the location of your investment, and how it will affect your return.”
1. Which sub markets in LA do you consider most successful for investment properties?
A year or two ago, I did a survey of seven different markets in the Los Angeles basin. We looked at Brent wood, West Los Angeles, Beverly Hills, Midtown Los Angeles, Inglewood, Long Beach and the South bay. We looked at “a” locations, “b” locations, and “c” locations. We looked at sales over the last twenty years, and where the transactions were trading from a GRM, CAP rate, price per square foot and price per door. We ran it out over 20 years and compared it to where prices were on the above mentioned metrics (GRM, CAP, PPSF and per door) where they are now 20 years later. We extrapolated cash flow and equity based on the CAP rates and GRMs that we saw historically throughout the course the 20-year period. We looked at the sum total of the accumulated cash flows, the capital required to the purchase the property at the time they purchased it, and the exit value and equity that had built up over time for each the area.
We discovered that while there were a few subtle winners and losers, the market is incredibly efficient. Nobody was a clear winner; no one market performed significantly better when totaling cash flow and equity. Generally “A” locations generate less cash flow and more equity, and “C” locations generate more cash flow and less equity but the sum total over time is equal within the greater region. Therefore, I suggest this, pick a high demand region, with a dynamic population and a dynamic economy.
2. What is the difference between these markets?
There are markets that are more cash flow oriented. Overtime, while they generate more cash flow to the investor they generally don’t appreciate as quickly. Having said that, cash flow focused markets tend to have more downside risk. The market has deemed that areas that are more blue collar and have a higher crime rate will have a greater risk of vacancies, collection issues, evictions, and vandalism, etc. These issues can affect an investors return and increase the time required to manage the property. Property managed well in these markets can yield far better returns.
On the flip side, if you go to a “A” location, you will place a significant amount of money in that investment and it will not generate a very significant yield. However, the demand for the units tend to be very high, rents per unit are higher, and the effort to manage is generally much less.
3. What makes them desirable?
The desirability of an area is a supply and demand equation. Quite simply, areas that are perceived to have a low risk of tenant turn over, and a low risk of downside risk through crime, depreciation or upkeep of general area.
4. Why do individuals invest in those markets specifically?
Ultimately, it really boils down to what the investors’ goals are, what tools are at their disposal in order to manage the investment, whether or not they’re using the services of a management company, and what their comfort level is with the neighborhood. Some are comfortable at any location and others are not. Comfort is an important determining factor in who invests where.
5. Where is an area in LA that you think has good potential for the future?
In 2013, it felt like everything between the West Side and Downtown was considered a great area to invest. I would make the case that in Los Angeles, there’s almost no bad area to be in. There is a long-term demand for housing, and there is so much economic housing that is going to occur over the next ten to twenty years, which it makes it very difficult to answer that question. Having said that, I see Inglewood as a really interesting location for investment. There is a lot going on with the redevelopment of the race-track and purchase of the coliseum.
Scott Rosenberg is the Managing Director of RE/MAX Results Commercial | RCRE, a commercial brokerage on the Westside which focuses on multi-family investment properties. For additional information please email to admin@rcre.co.