Palo Alto Weekly

Real Estate - October 26, 2012

Slim pickings in the multifamily market

Investors have little to choose from because owners hold on

by Maytal Mark

If you're looking to purchase investment property in Palo Alto, Mountain View or Menlo Park, you may be facing slim pickings and a competitive market. In early September, there were only just over a dozen properties on the market within the three cities. At the lowest, a duplex in Menlo Park was offered at about $300,000 while at the highest end, a 26-unit Mountain View complex was listed at $5.9 million.

Robert Taylor, of Taylor Properties, Palo Alto, chalks it up to the typical owner of residential income property. According to Taylor, many multifamily properties have stable ownership and most buyers are looking for a long-term investment, leading to a competitive but non-volatile market.

"Most of the property coming on the market is estate. Sometimes people are selling for an exchange for a larger property," Taylor said.

The relative stability of this market often makes for dependable and secure investments.

"Rents have increased which means that the number of sellers has dropped. Most people are making very good money and have no incentive to sell," he said. "I have elderly clients, this is their investment strategy; it's their income stream."

Generally there are few transactions in this area, according to Taylor.

The rent from paying tenants living in the various units can also provide a sense of security for an owner looking for support in paying the mortgage.

"There's never a time when you can't rent," Taylor said. "You can raise or lower rents as needed. Even if one tenant isn't paying rent, for whatever reason, you have multiple other paying tenants."

While both traditional homes and multifamily homes are considered investments, he said that the considerations for each are very different.

"People buy homes first as a place to live, and second as an investment, whereas multiplexes are purely investments," he said. "Very few people live in the multiplexes with their tenants." While some duplexes are shared between a tenant and the owner, in larger complexes it's quite rare, according to Taylor.

In addition, he explained that the financial requirements for investment property vary greatly from those of single-family homes, including the down payment as well as the maintenance of the units.

Taylor describes the typical buyer as a pure real-estate investor. Recent regulations have made it difficult for first-time buyers to get a loan and they are often required to make a significantly larger down payment.

"The typical buyers are people with money to invest," he said. "But if you have debt, your returns are significantly cut into."

Leika Kejriwal, of Alain Pinel Realtors, Palo Alto, claimed that many buyers are overseas.

"(They are) taking advantage of the increase in rent, and are hoping for appreciation," she said.

Taylor pointed to Google and their recent construction. The Internet behemoth has invested a large amount of land and money in Mountain View to build multifamily living, according to Taylor.

"They are making great money selling it to employees," he said. "It's a very solid investment."

Smaller complexes are naturally much easier to finance, he added.

"With one to four units, it's easy to get the financing. ... You have to put 25-30 percent down, whereas with larger ones, you have to put more," he said.

The downside to residential income property ownership is the upkeep.

"You have to maintain the property," he said. "You have to clean and update the units to be able to rent them. It's on a timetable that's not really under your control."

In addition, they serve as long-term investments and are not as easily liquidated as stocks or bonds, according to Taylor.

"It requires that you budget for major capital expenses that can be unpredictable," Taylor wrote in an email. "If rents decrease, your total return will decrease."

To potential buyers, Taylor recommends assessing how the property will be managed prior to making the purchase. In addition, Taylor stresses the importance of determining income potential, evaluating ordinary and deferred expenses (for maintenance, repairs and daily operation), determining whether professional property management is necessary and the cost of such a service, and lastly, the capitalization rate (or return rate) on the investment.

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