Millennials As A Target Market In Real Estate Investing

I will be turning 50 in a couple of months and I have been a full time real estate investor for 15 years now. Real Estate investing had become pretty comfortable for me. My villa project, built for the 55+ crowd starting in 2004, had some ups and downs as I maneuvered my way through the 2008 recession, but at least I understood my buyer.

My parents were 40 years older that I was so I have always got along well with those much older than me. I also understood those of my own age group as buyers or renters; what they wanted and needed. Lately though, I have been out of my element as I attempt to build, renovate or rent to the current under 35 crowd. It is different. The old rules no longer apply.

Let me first say that nothing I will say here is a judgement on this group, neither good nor bad. I will talk only about my own personal observations of how they are different than those that went before and how you will have to up your game in the coming years. None of that, “Damn kids, get off of my lawn” here.

As a Boomer or a Gen-Xer our generations have, in general, been fairly successful economically. Over the years we have traded up to larger and larger and nicer and nicer homes. However, again in general, most of us still remember the more humble homes we grew up in. So, while we appreciate the finer things in life we don’t necessarily expect it. Our children, in contrast, have grown up in some fairly nice surroundings and as they move out into their first home or rental property the expectations are higher.

More than once I have been showing a prospective 20 something tenant and heard, “I require more natural lighting in my home,” or “I like the interior but I require a more modern look on the exterior.” Your finishing quality will have to be a little bit better going forward. What was good enough before will not be enough now.

I just finished a condo conversion project, renovating an apartment building built in 1974. We setup a show suite while still conducting work on the rest of the building – including the exterior stucco, parking lot and landscaping. While there was always a segment of the population that wouldn’t buy or rent until a project was completely done; I never really had an issue before selling partially completed projects. No so this time. I really noticed a change in the expectation level of the younger buyer. Everything really had to be perfect and complete.

We are also seeing the younger generation remain in their parent’s home longer before moving out. I moved out nine days after I graduated high school. Not for any bad reason, I was just so excited to begin the next chapter of my life. As investors we need to be aware of this and get used to seeing more mature first time renters or buyers entering the market. Perhaps in their mid to late 20’s as opposed to their early 20’s as we saw before. I have noticed this myself over the past couple of years.

My own kids, aged 17, 18 and 19 have no interest in learning to drive. I had my learner’s permit the day I turned 14 and my driver’s license the day I turned 16. I couldn’t wait and was counting down the days prior to my birthday. My son was nonchalant about the whole thing and finally got his learners at 15 and his drivers at 17. My two daughters have neither their learners nor drivers. They couldn’t care less.

Statistics tell us this is quite common. As a result, the new generation tend to use transit more and will want to live closer to their work. I read a study the other day stating that Millennials are willing to pay more to live closer to their work and avoid the commute that my generation had no problem with. Several observations spring from that: a) I see the demise of the suburb in years to come as we see a move back to the inner city, 2) I see more apartment towers built as opposed to individual homes and, 3) we will see more ‘pods’ where residences, work areas and recreation areas are built all together.

Real estate investors should be looking to deal with properties that are a) closer to mass transit stations (within walking distance preferably), closer to universities, closer to downtown and closer to larger highways / arteries (anything to cut down that commute time).

Parking was always a really big deal with cities whenever I planned developments before. There was always at least a 1:1 or maybe even a 1:1.1 ratio of suites to parking stalls in an apartment or condo building. The new generation has fewer cars. Maybe a single person won’t have a car at all or maybe a couple will only have 1 vehicle. Instead, they use transit or bike or use these small smart cars that rent by the hour. This is different than before when every person seemingly had their own vehicle.

This will lead to developments in the future not needing as many parking stalls. I am already starting to see municipalities back off on the stringent requirements of the past. Inside your apartment buildings you should start to provide storage space for bicycles and use this as part of your marketing.

I will admit, I am old school and the last couple of years I have got caught with my pants down a bit. I have lost some potential renters or sales because I hadn’t given enough thought to this new younger demographic. They say, “It is a brave new world.” We have a couple of choices, either adapt or continue to just target the Gen-X and Boomer generations.

Each development / renovation / conversion is different, with a different target market. Just make sure that if you do want to target this younger generation that you do take the time to research and investigate what their wants and needs are and what makes them different.

The Dangers of Too Much Regulation in Real Estate Investing

Over the past 15 years I have worked on dozens of projects that required dealing with various municipalities in order to get permits and inspections. To be honest, it is getting frustratingly harder and harder every year. Increased regulations, fees and control mean delays and unexpected cost increases. Here are some of the problems I have seen.

When I first started to do land development, condo conversions and larger renovations you used to be able to have pre-application meetings with the municipality, the community and the local Councillor. Each department (i.e. parks, transit, sanitation etc) would meet and review your proposal. They would tell you what they did / didn’t like. You would adjust it and by the time you actually submitted the development permit application you were relatively secure in knowing your proposal had no major objections from the city.

The pre-application meetings still exist, except now, with the last few projects I have done, the municipality has come back months later with requests for more (costly) reports. Often there is no real reason why these reports are needed nor why they couldn’t have been asked for back at the beginning o the process. This costs both sides time and money.

Each project has a “go / no go” moment where you fully commit or not. In years past, you would have a fairly clear idea of city costs and timing before you hit that point. These days you do the pre-application process, make the decision to commit and then, months later, the city keeps asking for more information.

These delays cost the developer in a variety of ways:

  • There will be carrying costs with your building (insurance, mortgage payments, taxes and utilities). The longer the delays in waiting for permits the higher these costs run. How do you properly budget for that in the initial analysis stage of the project?
  • Delays in the municipality processing the permit application (which, for even mid-sized projects, can now be a year or two) can expose the developer to a change in the economy. Budgets based on the market reality at the start of a project can be vastly different two years later when you finally get your permits. This can mean greatly increased construction costs or reduced resale values of the finished product. The trouble is, you already committed long before.
  • Delays in processing can also mean the loss of your contractors as they move on to other jobs because you are not ready for them.
  • These extra requests / reports from the city can lead to real costs. For example, a request for a storm water report on one of my recent projects led to me having to install a huge, water storage tank with a catch basin underground. The costs of the report, city fees, tanks, installation, pipes, digging up and redoing the parking lot etc. ended up adding $100,000 to the project. Not only is that a big number in itself but it only came to light after the “go / no go” point. That greatly affected the profitability of the project. Add to that six extra months of carrying costs and increased costs for other after-the-fact city requests like landscaping and parking and that project went upside down quickly.

Before, most of the work with the municipality was up front. Now it tends to be linear. We complete one step, then new reports get asked for, once that is done even more is required and so on.

I have also noticed that the administrative level in a lot of cities has been broken up into little fiefdoms with each department not working or communicating well with other departments. For example, in the villa project I did I had to have 13 different inspections and approvals (i.e. one for parks, one for overland drainage, one for sidewalks / boulevards etc.). This definitely could have been done much more efficiently with greater departmental cooperation.

In days past your engineering team and the city used to work together to find the best solution for all. Now, municipalities tend to see the developer and the engineering team as the enemy. Common sense solutions aren’t as easily found as before.

Costs to the developer have greatly increased, as well, as the municipalities attempt to pass more and more costs down the chain. When I was growing up the municipality would do the infrastructure work (i.e. put in public roads, sewers etc) and then put a levy on the land which the eventual developer(s) would pay. Now, almost all infrastructure work is the responsibility of the developer.

While the city no longer does a lot of that work it still forces you to have the job done by an authorized contractor. Knowing that they have a captive customer, the city-approved contractor charges a lot more to do the work than if the developer could hire any contractor they wanted. As long as the quality is the same, why should a small list of anointed contractors be allowed to control this work, at a much higher fee?

This increases the developer’s costs which get passed on to the end buyer in higher property sales. At the same time the city can brag about keeping taxes lower. The municipality also typically asks for a lot more from the developer than they used to do back when they did it themselves.

Since I first started doing this work until today, the fee structure has started to change as well. Before, your permit application fee would include a certain number of inspections. The number of inspections allowed before you have to start paying for inspections is now substantially lower and, in certain cases, you now have to pay inspection fees in addition to the application fee.

A few of you might be thinking, “Good. It is about time those greedy developers had to pay.” The problem is that most developers aren’t huge corporations. Most are just small mom and pop sized companies. There also isn’t, typically, a lot of profit on these projects so any increase in fees has to be passed on to the end consumer. This is one of the reasons why property resale values have increased so much in the past few years.  Sometimes, however, the economy may not allow the developer / builder to pass on these costs. The end product still has to be priced competitively with other similar buildings in the area.

As a developer / builder / investor try to make sure that you get all of the required reports / costs that the municipality will need before you get to the “go / no go” point. In the pre-application meeting specifically ask each department what things they might ask for. Try to make your budget as firm as possible before you commit.

If you work for a municipality please remember that you are dealing with people’s lives here. I fully understand the need for regulation to protect the public, but the pendulum has swung too far in the other direction. Continued requests and delays will eventually lead to people saying, “It is just too much hassle” and stop doing new projects. That will lead to fewer jobs, fewer new projects and a less vibrant city.

Investment money always goes to the place which promises the highest return for the least amount of risk. Adding regulatory hurdles, costs and time delays increase risk and reduce returns which will make that money seek out other, more easier to deal with, municipalities. The goal should be to make it as easy as possible for real estate investors while still maintaining quality and safety.

Read more about this topic in Cash Management in Real Estate Investing.

Don’t Fall In Love With Your Real Estate Investments

A common problem I see with beginning investors (and some more experienced ones too) is getting too attached to your investment. You don’t live there so don’t let that interfere with how you renovate, landlord or manage your buildings. Far too often we base our decisions as if we were going to be the end user.

Renovating / New Construction

Whether you are renovating an existing property or constructing something from scratch you need to keep your emotions out of your decision making and use materials and quality consistent with your area and future tenant / buyer. Don’t use granite countertops when formica might be more appropriate, for example. Choose the proper flooring for your eventual end buyer whether that means high end hardwood floors and carpet or lower end carpet / laminate or lino.

Keep finishing quality consistent with similar homes in your area. Visit other homes for sale or show homes to get an idea of where you should be.

To Keep or Sell

Sometimes our emotions dictate whether we should keep or sell a building. Don’t keep a building when market conditions, logic and the numbers tell you to sell or vice versa.

In general, fix and flips, new construction and condo conversions are investments that are set up to get in quick, do what you need to do and then sell. Timing is crucial in order to avoid a downturn in the market and keep interest / carrying costs to a minimum. Conversely, rental properties are designed to benefit from long term ownership.

However, sometimes circumstances change, either within our own personal life or with the economy of your area that may require a change in direction against the norm. Keep emotion out of it. Don’t make your decisions based on what has happened in the past or how much money you have already spent. Make decisions on what is the best course of action going forward.

For example, you may have already spent $2m to build a new warehouse. This may be $1m over budget and 6 months over schedule and you are still not done. Do you continue pouring good money after bad or do you cut your losses and sell? A lot of people might continue based on the logic of, “I have already spent so much” or “I really loved the design and I want to see it finished”.

It may well be the best decision to continue on. Just make sure you are making a logical / non-emotional decision based on the best action from today going forward. You can’t do anything about the money already spent and the time already taken. What is the best plan you can make starting today?

If the original plan was to fix and flip a residential building but the economy turned on you or you can’t get the resale value you thought you would (or that you need) move swiftly to see if you are not better off to refinance and keep the property as a rental until things get better.

Similarly, don’t stubbornly refuse to sell a rental that you have had for a long time when logic would dictate a sale simply because you have owned it for so long and grown fond of the building and the people.

Condo Bylaws / Legal Agreements

Emotions can cause problems when legal documents are being drawn up too. Far too often people getting into partnerships or joint ventures don’t even do up agreements because of friendship, family ties or not wanting to insult the other party.

You have a better chance of saving your friendship or family relationships if you both get lawyers to draw up an agreement up front. When the verbal agreement is still fresh in your minds and you are still friends.

If you are constructing a new condominium or doing a condo conversion and doing up the original bylaws I would also recommend just using a plain Jane, vanilla set of bylaws. Do not design the bylaws based on you living there. Over tinkering with bylaws will get you into trouble eventually. Even if you will eventually live in one of the units treat the drawing up of the bylaws as if you will sell all of the units.

I have done several of these and learned this the hard way. I spent a ton of time and money on lawyers the first time fine tuning the rules as I would like to see them. After the units were sold and the new buyers set up their new condo / home owners association the first thing they did was hire a condo management company. The first thing the management company did was bring in their tried and true bylaws. All that time and energy wasted.

Sometimes a new development needs some specific changes. Fine. Put those in. But in general you don’t want to give too much power to the individual owners vs. the condo board. Remember you won’t be living there. Let the owners self determine their own future. If a majority wants to repaint the complex black and purple who are you to say no? If they want to allow large dogs who are you to stop that when you draw up the original bylaws.

You are not going to lose potential sales by having generic bylaws.

Summary

Treat your investments as a business and keep your emotions out of it. I am not saying you shouldn’t be polite to your tenants. Just remember they are not your friends. If tenants aren’t paying their rent, then move swiftly to remedy the situation. This is a business relationship.

Read more about this topic in Cash Management in Real Estate Investing.

How To Find Deals In Real Estate Investing (Part 2)

Last time we looked a few traditional, tried and true methods for finding investment grade real estate. Today we will investigate how to use the internet to your advantage.

What The Internet Can Do For You

Even as you make contacts within your local community of real estate investors, lawyers and lenders you still need to actively look for property on your own.  Obviously, the internet is a great place to find product.  You just have to know how to cut through the endless supply of information to get at the specific stuff that you want. We will go through some smart search parameters below.

I spend an hour or two each Sunday morning going through various websites looking for product.  It shouldn’t take too much time, nor should you be spending too much time each week looking for product. You should do your searches on a regular basis. Over time this really helps you to see what average prices are for your particular type of property in your area.

Knowing this will allow you to spot deals easier and also will alert you to whether prices are moving up, down or remaining the same. Most weeks I don’t find anything that interests me but every once in a while you find a real deal.  When that happens, act fast.

Over time, mixed in amongst the dozens of ads, you will start to see a few of the same properties come up again and again.  These are properties that are having a hard time finding a new owner.

Maybe an offer favourable to you would be in order.  You only start to notice these trends if you search on a routine basis.  For example, there has been an apartment building for sale by owner on kijiji, continuously, for the past two years.

The price has not been reduced in all of that time.  Every few weeks I give the guy a call and we talk.  He has not moved off his price yet but one day he might and when he does I will be in a position to make a move.  He has my number.

Multiple Listing Service (MLS)

Every major city or area will have an MLS website sponsored by the local realtors. A lot of people dismiss the MLS system, saying that all of the good properties get bought before they wind up on MLS. That is true to a degree (and you want to be on the contact list of the realtors / lawyers that get those types of deals) but not entirely true. You just have to know what to look for:

  • I look for stuff that has been on the market for a long, long time (i.e. Days On Market (DOM) over 180 days)
  • I want properties that are larger than 1,100 sq ft (I find smaller than that and the potential profit isn’t high enough)
  • I prefer properties with 3 or more bedrooms; these are easier to rent or sell when you are done renovating
  • If you are looking to rent instead of flip, search for properties that have a detached garage vs. no garage or an attached garage; this allows you to get extra income from the garage rental
  • I tend to look for properties that are well below market; In the geographical area that you are searching in, you will see what the average price is for the particular type of property you want; set the maximum price value in the search criteria to $20,000 to $50,000 less than that average; this will eliminate most of the properties in the area and leave those that are less expensive for some reason; your job is to then find out why those other properties are less money
  • I also look for code words within the script. If I am looking for something to renovate I look for words like “handyman’s special”, “TLC”, “fixer upper”, “needs maintenance”, “needs work”, “needs love”, “lots of potential”, “as is where is”.
  • If I am looking for a foreclosure I look for words like “foreclosure” (duh), “must be accompanied by Schedule A”, “not open to employees of X bank” (substitute the name of a bank), “as is where is”, “court ordered sale”, “judicial sale”
  • If fixing up grow ops is your thing look for “former grow op”, “unable to gain access”, “needs remediation”, “health services”, “condemned” or some of the same code words as we saw in the ‘foreclosure’ section above
  • When older property owners pass away their kids will typically just put the family home up for sale. These homes can be good to renovate because typically the person that passed lived in the home for decades and probably didn’t do a major renovation.  Look for “estate sale”, “Power of Attorney” or “probate”; also look for “well kept” or “lovingly maintained” or “character home” which is realtor speak for “this thing hasn’t ever been renovated and still has that funky orange 70’s shag carpet”
  • Remember that when a realtor writes the script for a listing they will try to spin the verbage and show things in the best light. Get familiar with common realtor speak and use that to find properties
  • A realtor who works well with computers can actually do an advanced search looking for these specific things. Specific searches can be hooked up to the internet now, through your realtor, so you can have a website available only to you that already has a preset search set up.

o   For example, you can be anywhere in the world, go on a special website and see all of the estate sales in a specific part of your home city, on the market for more than x days, within a certain price range and larger than a minimum square footage

  • Look for property incorrectly put in the wrong section of MLS; for example quite often properties that are really old get put in the ‘land’ section of the commercial MLS; the realtor thinks the building is a knock down and worth land value only.

o   I found a 95 year old boarding house in the land section which turned out to be one of my best fix and flips ever.

o   I also found a fourplex in the commercial section when it should have been in the residential section; the realtor had never sold a fourplex before and thought that anything over a duplex was commercial property; the trouble with that was that people looking for fourplexes wouldn’t be looking in the commercial section and people looking for apartment buildings would flip past a fourplex; the property sat for months before I found it.

Kijiji

Websites like Kijiji (or other for sale by owner sites) are also a good place to look but, again, you have to know how to dig down and pick out what you want.  Kijiji asks you for 3 things when you search: the search word, the category and the area:

  • I use ‘real estate’ as the category. Enter the city, town, county or other geographical area that makes sense.
  • To further slim down the search I will also put a minimum / maximum price range
  • Then for the search word I will put ‘sale’ and then add a second word. If you don’t put ‘sale’ then you will get the ads showing property for rent as well.  You want to find just the stuff for sale.  For example:
  • If you are looking for duplexes, tri-plexes or four plexes then put ‘sale plex’.
  • You can also combine ‘sale’ with any of the words listed above in the MLS section
  • If you are trying to find apartment buildings put ‘sale apartment’ (you will get all of the individual condos and apartments for sale too but you need to sift through and find those instances where the entire building is for sale) or put ‘sale building’ (same thing here, you will see a lot of ads for people who are selling land to build on but find those ads that have a building for sale) or put ‘sale multi’ for multi family property or ‘sale rentals’
  • A lot of investors try to buy with great terms; search for “sale ‘no qualifying’” or ‘sale assumable’ or “sale ‘seller financed’”
  • You can try ‘sale commercial’ or ‘sale industrial’ or ‘sale invest’ if you are more commercially oriented
  • Single out the for sale by owners by entering ‘sale owner’ or ‘sale FSBO’ in the search space

Commercial Brokers

If you are looking for commercial or industrial buildings, raw land or multi-family apartments then you should look at the specific websites for the larger commercial real estate companies.

When a regular realtor gets a listing for a single family home or duplex they will try to sell it quickly to people they know.  If that is unsuccessful then they will put it on MLS.  For commercial properties, commercial realtors are less apt to stick the property on MLS, instead they will market it privately through their own individual, corporate website.

Your Own Website

Finally, if you are good at driving traffic to a website then set up your own site advertising the type of property you are looking for and how you go about purchasing your deals.

Summary

The information today and last week is a quick run down of how I have been able to locate property for sale. I hope it helps you. I have owned almost 80 properties with 240 doors in the past 15 years and these tricks have allowed me to find some gems that others overlooked.

 

Read more about this in Comparing Real Estate Strategies.