New Strategies for
September 22, 2017
Uncertain Market Conditions
I founded Division Street Capital, LLC ('DSC') to capitalize on the unique opportunity in the residential real estate market in 2012. The Chicago market was hitting its low point. Housing prices were at a cyclical low (near 2000 pricing levels), rents were at an all-time high (and rising) and mortgage rates were at an all-time low.
These factors were a once-in-a-lifetime signal to invest...and invest DSC did, purchasing seven multifamily buildings for a total of 38 units, diligently rehabbing them and leasing them to well-screened tenants. The DSC portfolio is currently valued at over $300,000 per unit, almost double the average purchase price of $155,000 per unit. Thanks to the investors that have stuck with me through the risks and rewards, DSC has raised $3 million of equity, 91% of which from repeat investors.
During this period a hypothetical investor in all seven DSC properties would have received annualized cash-on-cash returns of 17.4%1 plus investment appreciation of 66%2.
However, this bright "historic opportunity" has faded as the apartment real estate cycle nears (or passes) the peak. Anecdotally, competition for buildings has increased and good deals are getting harder and harder to come by. Rents are setting all-time highs and investors have driven cap rates down to all-time lows resulting in all-time high asset prices. Vacancy has begun to creep up, primarily in the Chicago downtown luxury apartment market. There is profound uncertainty as to where market values, rents and vacancy will go next.
DSC still sees opportunity in the market:
- Chicago benefits from a slower recovery of home prices (stuck near the bottom of the Case Shiller 20-City Index) which, if you believe in the region like I do, gives us more runway for continued price growth.
- The rapid increase of new "part time" investors in the market has driven demand for single-family and small multifamily properties, primarily two- and three-flats.
- Occasionally, a good deal is found through prospecting potential sellers, is presented "off market", meaning it has not been listed on the MLS or any other listing sites, or is posted for sale by owner (FSBO).
- Condos are underpriced compared with apartments and demand is expected to grow as Millennial preferences and lifestyles change toward increased homeownership.
- The price premium for new homes vs used homes skyrocketed after the 2007 crash and has only recently begun to revert to the long term average.
- Office, retail and industrial have experienced much less development and investor interest. These property types are in earlier phases of the growth cycle and are not correlated with the apartment market.
DSC has studied and modeled strategies to profit from these emerging trends. We are actively looking for opportunities to invest that take advantage of the uncertainty and to continue our strong track record of high risk-adjusted returns.
Over the long term property values have risen above the rate of inflation due to scarcity of land. As the saying goes, "they aren't making any more of it". Additionally, rising inflation is expected to become a factor in investment allocations toward real estate. As a driver of inflation, rising household incomes will allow people to pay more for goods and services, including rent. Due to these facts, investment in real estate has always been a hedge against inflation.
Investing in specific real estate assets is inherently risky, but as part of a balanced investment strategy, it can be an effective way to increase returns, hedge against inflation and diversify a portfolio.
Drawing upon my 20 years of experience in real estate, I understand the principles of entrepreneurship, economics, finance, marketing and construction. I am particularly focused on the Chicago Metro market for multi-family and commercial properties. Knowledge of market fluctuations, economic cycles, monetary policy and geopolitics ensure that DSC will react intelligently when conditions change.
Division Street Capital, LLC is a smart choice for investors to capitalize on emerging market trends. You may contact me directly if you would like the latest information on these topics.
Brian E. Moore
Managing Member & Founder
Division Street Capital, LLC
PS. I occasionally post updates on the housing market on LinkedIn. Check out the News tab for my latest posts. If you are not already LinkedIn with me, I encourage you to do so at my LinkedIn Profile.
- Calculated as weighted average of all cash distributions over cash investments divided by the months since purchase multiplied by twelve (annualized).
- Unrealized appreciation in the properties calculated as the total equity (estimated Market Value less outstanding debt) less equity invested divided by equity invested. Market Value for a property is calculated taking current rental income multiplied by the Gross Income Multiplier (GIM) from the most recent appraisal for the property.