Do you believe sales prices per unit are going up? Is your belief based on market forces, actual rent growth derived or sentiment? At the end of the day we utilize market sales to determine the trend line in price direction. Yet even here its best to butter the loaf of bread a little at a time.
In real property ownership over the last two generations owners could wait on inflation to take them out of precarious circumstances. The mantra being "hand on long enough and inflation will heal all wounds". Post recession, it's hard to wait on inflation to rue the day. Stability is a happy place, or at least it could be for those thinking in terms of long-term ownership. Yet many continue to promote an upward bias based on...something.
American movies are known for delivering a happy ending. Hollywood movies are after all a form of escapism. We generally go to the movies to be entertained and to find a little levity. Drama is fine, action better and comedy best of all. In multifamily acquisitions we need facts. Real facts. A broad brush stroke about sales prices is of little use for individual acquisitions other than to reflect the general trend of a larger cohort of activity.
To determine a quality sales price the best information, as any appraiser will tell you, is to identify comparable properties within close proximity to the subject asset being sold. After proximity we hope to identify similar assets that were built at or about the same time. The more similar the attributes the better the comp. Pitch roof or flat, similar unit sizes and unit mix, etc.
Still, with all these "facts" its hard to get away from sentiment. Consumer sentiment sells cars, refrigerators, houses. Consumer sentiment bleeds over into manufacturing be it industrial and other areas including housing prices. Housing affordability is a direct contributor to multifamily occupancy and rent pricing.
If you hold an "upward bias" this missive is here to remind you to base your conclusions on market specific occurrences first, then consider the broader market as a secondary contributing factor. Coastal communities with job growth seem to always lead price appreciation and this is often the lead story about housing on the national news. As a sound bite this information is of little use when making real world decisions in an unrelated market. Knowing your markets, knowing your assets...there is just no substitute.
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.
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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