The year 2013 could be the first year on record when the U.S. inflation rate is registered at zero. The closest we have come to the goose egg in recent times was 2009 when the official inflation rate was 0.1%. According to U.S. Inflation Calculator, since 2010 inflation has ranged from 1.2% - 3.0%. The year end number will likely fall within this range.
There are five basic ways to make money in real estate; one way is with appreciation. Read on these in my post "Five Ways Investors Make Money in Real Estate.”
The primary driver of appreciation is inflation. As the costs of individual inputs increases so does the price of the final output. A simple example is that if both lumber and drywall costs increase then so also will the cost of newly constructed homes as both of these items represent a large part of the cost of materials in a new home.
Let's stretch our thinking beyond the basics. When appreciation is only regional do you chase it? The U.S. coastal markets have seen some significant upside this year. Well, what if you live somewhere else? Do you re-direct your real estate investment to the "hot" markets? Probably not. The herd mentality always shows up late. Like the lineage of people who purchased Apple stock at $700 and followed it down to $450 without a stop-loss anywhere in sight (the cycle never ends).
Most people who invest in real estate assets under $5M place their money into deals near their own zip code. This is seldom a good investment strategy, particularly since it negates geographic diversity.
What happens if we stop chasing appreciation?
With appreciation removed from the overall yield enhancing equation we are required to focus on financing and operations. Phoenix Arizona has seen real appreciation post recession with residential prices moving up 20%+...yet even with this move prices are severely below pre-recession levels.
What happens if we stop chasing appreciation? What happens if inflation never rises to save us from our operational malaise? We are forced to focus on long-term operational stability and rent growth.
Back to Basics. Back to G.R.A.C.E.
Growing revenue and controlling expenses requires us to focus on present day operations and away from potential appreciation as an operational "savior". It makes us realize that appreciation is a gift and not a right.
Regarding appreciation from inflationary occurrences; it is a wonderful thing for property owners. The thing is we can't control it or make it occur. The proactive mode is to work on those things we can control. Review each asset in your portfolio and ask the following five questions.
Are we recording incoming phone calls to check for quality assurance?
Is each apartment home we are marketing being offered at current market rents?
Are we exploring added means of income from existing assets (Ancillary Income)?
Have we recently re-bid contracts that seem un-competitive?
Can we buy certain items in bulk with good tracking to assure capturing real savings?
These methods do not require asset appreciation to create value. Yet create value they do every day.
Will inflation return? It always does. But like stocks, since we can't time the market, let's direct our professional efforts to creating value during any market condition utilizing our expertise, common sense and knowledge of the business.
Mr. Wilhoit is the author of two books: How To Read A Rent Roll: A Guide to Understanding Rental Income and Multifamily Insight Vol 1 - How to Acquire Wealth Through Buying the Right Multifamily Assets in the Right Markets.
For information on property management audio courses, books and our live weekly leadership academy, visit the PowerHour Books and Courses Website.
About This Blog: Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily property management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. www.MultifamilyInsight.com