July 13, 2017

JF1045: Know Your Market or Lose Your Money with Pete DiSalvo

Many investors think that if they have property in a strong housing market, they have a great property. Pete is here to tell us why this isn?t true. Listen in to get a better idea of what makes a property valuable. If you enjoyed today?s episode remember to subscribe in iTunes and leave us a review!

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Pete DiSalvo Real Estate Background:
-Founder and President of DiSalvo Development Advisors, a real estate consultancy firm
-Over 20 years experience providing market research and consulting on 1,000+ projects throughout 46 states
-Housing work has been used by bond rating agencies, investment groups, banks, and private developers
-Based in Columbus, Ohio
-Say hi to him at http://ddadvise.com/
-Best Ever Book: Liar's Poker

Click here for a summary of Peter's Best Ever advice: How These Two Market Factors Will Make or Break Your Real Estate Business

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Joe Fairless, and this is the world's longest-running daily real estate investing podcast. We only talk about the best advice ever, we don't get into any fluff.

With us today, Pete DiSalvo. How are you doing, Pete?

Pete DiSalvo: I'm doing well, Joe. How are you?

Joe Fairless: I am doing well, nice to have you on the show. I've known Pete for 4-5 years, and I initially came across Pete through a mutual friend. He helped me (Pete did) on market research on a project that I did not end up purchasing, but I learned a whole lot about business and his insightful mind... Because Pete has over 20 years fo experience doing market research and consulting on 1,000+ projects across all the 46 states. He is the founder of DiSalvo Development Advisors, which is a real estate consulting firm. He is based in Columbus, Ohio.
With that being said, Pete, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Pete DiSalvo: Sure, thank you. I am a former senior market analyst with the [unintelligible 00:03:29.07] which is a national real estate group. I worked there for 14 years and I worked with nearly every tax credit syndicator in the country. In 2010 I left and started my own practice. Among our services, we help clients like yourself and other investors and developers assess the market value of properties, especially acquisitions during an option period.

Most of the work that we do involves mixed-use redevelopment, but it's typically led by multi-family developments. So multi-family is still a core of the services that we offer. Today I wanted to discuss a little bit about how do you assess if your property that you're looking to acquire, your value-added property has the marketable characteristics to have long-term viability.

Today in most of the markets across the country that we go to, every apartment market is strong, so how do you know if your particular property is going to be able to do well when the market is not humming on all cylinders? Just because you have a property in a strong housing market doesn't mean that the property can sustain the high occupancy and rent for a long term.

Strong housing markets can't mask weaknesses or vulnerabilities in inferior properties, so when a market isn't at its highest level, those inferior properties are the ones that have the hiccups. You start having occupancy problems, rent problems... To those Best Ever listeners that fell in love with the "value-added property" in a strong local rental housing market - you have to ask yourself some key questions, and more importantly, answer those for your investors.

So you have a marketable property that has long-term viability based on three market-related items: one is location, two is product, and three is market position. I'm gonna go into a little bit about each of those three items and what things to look out for.

When you're looking at a property, aside from "Financially, does it pencil out today?" what are some of the things you wanna look for as red flags or positives for your property? On the location side, a lot of apartments -- ideally, you have an apartment that has visibility to a lot of traffic. There's a lot of drive-by traffic that sees your apartment. If you're not one of those that are getting 10,000-15,000 cars a day in front of you, that may mean you're gonna have to spend more dollars marketing for people to find your property.

Joe Fairless: Where do you get that data?

Pete DiSalvo: Esri - the demographer - has a lot of that traffic count data, and if it's a state route or a highway, you get that from the Department Of Transportation for each state.

Joe Fairless: Really? I didn't know that.

Pete DiSalvo: You can also touch base with your city. Often times, municipalities will have traffic counts throughout their city. My experience - and I've heard from other groups... Like, management will say "Yeah, we're having problems in a market that doesn't have them, and we have to run out every day and place temporary signs on a major road and then take it down before the end of the day", but that's not the ideal situation. So that's one possibly red flag - am I hidden? Is this the situation I wanna be in?

To the same extent, good ingress, egress, how easy it is to get in and out of your property - that can play into it, too. If it's a right out only, but you know that all the traffic goes left to go to work in the morning, that may be an issue.
The one that I enjoy seeing examples every day is what is located next to your apartment? Not only is it aesthetically pleasing, is it complementary, but I recently saw an apartment development that was built near a strip club. Now, it was a non-descript strip club, but once the apartment opened and there was entrance road next to the two, the strip club would park their billboard sign next to the entrance. [laughter] It was a family project where you had this enormous billboard of the next ladies that would be dancing there that night.

And not as extreme an example, but in one of the markets I saw a developer build the exact same product - one of them was next to a mini-storage facility, which was in decent shape, but not really contributing to the apartments, and they were getting less rents than another apartment that had better uses.

Those are the kinds of things to keep in mind [unintelligible 00:08:02.26]

Joe Fairless: I missed that point - what was wrong with building next to a mini-storage facility?

Pete DiSalvo: Well, you have to ask yourself when you're looking at these properties - do you wanna live next to a mini-storage facility? Is it truly a complementary use to an apartment? It's not entirely adverse, but when you're stacked up in a competitive environment, less people are gonna wanna choose to live next to a mini-storage than other residential, or retail, or something like that.

It's just understanding where you fit against your competition - are you next to the most complementary uses, or is it kind of a mismatch of uses?

Joe Fairless: Okay.

Pete DiSalvo: They all know schools are important, but I would say more so (renters are having less kids) but I would say if you're looking at a property that has a really heavy mix of three bedrooms, that's when you really need to look into the schools, and if the schools aren't particularly good, what are the private schools like? Sometimes that's enough to negate that issue.

And everyone hears the talk of the millennial - "Hey, we need to get the millennial... It is an enormous generation coming through. How do we attract them?" Well, three of the things as they relate to location - are they close to jobs? Millennials don't commute as much as dummies like me did when I was a kid, and some of that is can you get to a highway quickly? Do you have quick access?

Then the third is how close are retail opportunities? The closer you are to those - as long as it's not a strip club - the better type of site you have. So those are some of those locational issues.

Joe Fairless: For the schools, what resource do you use to determine if it's a good school district or not?

Pete DiSalvo: That's a good question. Every state pretty much has report cards on how their schools are doing. You could look at that, but I've found that the best way to find out is simply to go talk to people and say "Hey, I'm relocating in the area, looking for an apartment... Where would you suggest?" and if they suggest another area, you say "What about this area?" and see if schools pop up.

Just asking of somebody coming into the area - you can get a good flavor; if there's really a problem with the schools, there's gonna be a knee-jerk reaction. "You probably don't wanna be there because of the schools..." So just talking as a newcomer to the area, to several people - that often times will be enough to identify if there's an issue or not.

Joe Fairless: Okay.

Pete DiSalvo: The next item that's often overlooked is product. When I'm talking about product, there are opportunities with this, but looking out for that functional obsolescence... If it's something that can be remedied, there's a big potential for rent increases, and I'll give you some examples. If not, it's a big red flag... That if the markets have those hiccups, as I call them, you may be the first to experience problems.

I'll give you a list of some of those... Galley kitchens, for example. Galley kitchens are tiny kitchens for those - I'll try to do my best to explain them - that are contained in a very tight, small area and really aren't open to other rooms. They're probably what you see a lot in New York City... Joe, would that be fair to say?

Joe Fairless: Yeah... I'm sure my apartment in East Village, when I lived there -- it was just like a sync and a stove and that was basically it. I don't know if that's a galley kitchen... I wish I had a galley kitchen, I think. [laughs]

Pete DiSalvo: Yeah... It may sound nice, but a galley kitchen is essentially a closet with your appliances in it.

Joe Fairless: Oh, okay.

Pete DiSalvo: It's the one you see in a lot of the older products. I've seen some really good examples where those can be opened up, and everybody wants an open floor plan now, and having a kitchen open [unintelligible 00:11:50.24] open to the kitchen... But I've also seen plans where the construction of the unit, especially in high rises, is almost like a bunker, and opening it up isn't financially feasible... So it's one of those things you need to keep an eye out for. Galley kitchens aren't the most marketable kitchen types, so keeping an eye out for that, and if they can be convertible.

On that same theme, that compartmentalized floor plan, the one where there's a hallway everywhere, and your unit feels like a lot of doors and hallways... Renters don't lease spaces based on rent/square foot, as much as we talk about rent/square foot. It's all about perception. A smaller, efficient floor plan in many ways is gonna outdo larger floor plans in a market that has tons of hallways and doors.

To the extent that your floor plan has the ability to be open or is open, that's a good thing. If it's not an efficient floor plan, that's a red flag.

Joe Fairless: Just for my own clarification - the more open it is, the better it is, and the more compartmentalized (doors, walls), the less desirable? Is that correct?

Pete DiSalvo: That's correct. And it doesn't function as well, because if you think about hallways and doors, all of that space has no use, aside from passing through it. So aside from maybe putting a little table for a key stand or something, there's very little than you could do with that space. If it's open, not only does it allow you to do more things, the perception is it's a bigger unit than it actually is... As opposed to an apartment where you come in and it's tunnel vision. You may leave thinking "This is small", even though it may be larger.
I'm always a big person on dimensions and bedrooms sizes and closet space; the master bedroom, if you're getting less than 10 feet, unless it's very common in your market, that's something you need to keep an eye out for. If it's less than 10 feet, it really limits what a renter could put in there in terms of bed size, and a lot of things.

And then lack of closet space... Some of the older, older properties have a place to hang up a little bit of clothes, and those types of things can create some higher turnover once they get and say "Well, I don't have enough place to put my clothes..." Without the storage stuff, you're gonna have higher turnover in your property, maybe even difficult to rent.

A couple other ones... The sub-grade units - those apartments that are partially underground, in a basement, those are...

Joe Fairless: Terrible.

Pete DiSalvo: Yeah, those are the ones that you need to keep an eye out for. That's a big red flag. Those are tough, no matter how you look at it. Even in good times those can be difficult to rent.

Joe Fairless: I know why I said terrible... Why did YOU say terrible?

Pete DiSalvo: [laughs] Well, again, thinking from a renter's standpoint, if you're looking for an apartment, do you wanna live in a basement? There's also a perception of security issue as well, as people walk by and they can look into your unit from that ground level. What is your take on that?

Joe Fairless: Floods, water coming in because it's below ground...

Pete DiSalvo: Okay. That's important from a developer's standpoint as well. In terms of obsolete unit types, three-bedroom one-bath units certainly aren't the ideal type of unit that you wanna be getting, unless you can possibly add a bath. As long as there aren't a lot of them, you're okay.

The two-bedroom townhouse with one bath on the top floor is also a very obsolete design, and I've seen that converted an awful lot where you're putting a half-bath under the stairway. It changes the marketability entirely and increases rent. So that's a situation of "one that really doesn't work" to now we've got something that's marketable and we make more rents.

The last item I wanted to discuss was that market position. Understanding where your property is and its potential to increase rents is really a key to that whole value-added property acquisition model. Everybody employs the comps strategy, and I'm not gonna go into that because I know that it's been talked about on other podcasts and people understand that... Finding a comparable property and saying "Here's what we can do compared to that."

Joe Fairless: Yup.

Pete DiSalvo: I like to take it a step further and employ a strategy where I establish a ceiling by looking at properties that are of high quality, that "Hey, I know we can't attain this rent", so I have an understanding of "Where can I expand into?" What's good about that is let's say you have a class B property and you wanna improve it, whether that's amenities, improving the exterior... If the rent is already close to class A rents, you may not be able to push the rent that much higher for the improvement that you wanna make.

On the other hand, if your rents were well below that and you get out of those, there's an opportunity to potentially bump up your rents without encroaching on those class A rental properties. I like that example a lot for value-added, because class A properties - which typically are new properties - don't have a lot of flexibility in terms of what they can do with their rents; they really need to get those high rates... Compared to your value-added, that has a lot more cushion, where if the market was going south a little bit, you could come down a little bit and it would still pencil out.

The other thing I wanted to mention was regarding markets that don't have class A apartments, and have a lot of older inventory... Markets like Cleveland, Ohio...

Joe Fairless: They don't have class A?

Pete DiSalvo: They do now.

Joe Fairless: Okay.

Pete DiSalvo: For a long time, a lot of national/regional developers wouldn't even think of - even investors wouldn't touch or think of Cleveland, because they were concerned about the growth really wasn't there, and the rents weren't very high... There's wasn't this "higher comps", and then somebody finally realized in that market "We've got a lot of high incomes, and there's tons of [unintelligible 00:17:49.13] for good product." So as soon as somebody built that, it was like the floodgates were open, and now we're seeing property after property open... But understanding that in some of those older markets - don't be too scared to get involved if you're not seeing rents that aren't as high as you may want; it may just be a product of what's out there, and if you give them something good, you can really push the rents in that marketplace.

Joe Fairless: Does that complete number three?

Pete DiSalvo: It sure does.

Joe Fairless: Awesome. Well, location, product and market position... I've asked questions along the way, so I'm gonna ask you a high-level question based on your experience... What is your best advice ever for multi-family real estate investors?

Pete DiSalvo: It relates to the whole topic - understanding that just because you have a site in a strong housing market doesn't mean you have a great site. Making sure you have those fundamental market characteristics is important to having a long-term viable project. Depending on the exit strategy, five years out is a long time in terms of market. A lot of investors wanna hold on to it for much longer than that, and you need to look past today... So making sure you're not vulnerable to future fluctuations is important.

Joe Fairless: I noticed that you were talking about the particular property and the location next to it, the product, and the market positioning in terms of what is your ceiling... What I didn't hear you talk about - I know it's a factor, so that's why I wanna bring it up, and I know you take this into account... It would be jobs and the diversification of employment. Can you talk a little bit about what you look for?

Pete DiSalvo: Sure. In fact, I'll say jobs are key for apartment development, and a lot of the clients I'm looking for when we're looking for sites - that's one of the key issues, because again, millennials wanna be close to jobs. If you have the jobs, there are opportunities for that housing. If you don't have jobs nearby your area and you're asking people to drive a longer way, it's gonna be a little more vulnerable.

Joe Fairless: What's longer?

Pete DiSalvo: It depends on the market. Obviously, if you're in Los Angeles, compared to Columbus, Ohio, it's a lot different. But if you understand your market area or your trade area and you see that it will take you a lot longer... If everybody else can get to employment quicker than you can, that's the issue. It's all relative to each market, so I can't give you a time. The more accessible and the quicker you can get to it, the better.

Joe Fairless: Okay.

Pete DiSalvo: And if you start to have more unemployment in an area, that's where you wanna have that flexibility with rents. If you're starting to lose jobs, it's going to impact your market. It just depends on how many jobs you're losing; if it's a major employer, everybody's gonna feel it.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Pete DiSalvo: Yes.

Joe Fairless: Alright, let's do it. First, a quick word from our Best Ever partners.

Break: [00:21:01.10] to [00:22:04.14]

Joe Fairless: Pete, what's the best ever book you've read?

Pete DiSalvo: Well, I don't have one best. I'm a big fan of Michael Lewis, so I would say that any Best Ever listeners that have not read his books, maybe try Liar's Poker.

Joe Fairless: Best ever project you've worked on?

Pete DiSalvo: I had a chance to work on a lake-front development for the Cleveland Browns, the former ownership. That was fun.

Joe Fairless: What did they hire you for?

Pete DiSalvo: I worked with an international sports group and they were looking at all of the housing and retail opportunities around the stadium.

Joe Fairless: What's a mistake you've made on a transaction or just in business in general that you can think of?

Pete DiSalvo: Probably the mistake that I had the most is letting others talk you out of a position, when you know in your gut it's one way and you've done your homework, whether it's a former boss or a partner that doesn't agree with you. You've gotta argue enough to get your point across.

Keeping an open mind, but sticking to that opinion lest somebody has a compelling reason for you to move. That's a mistake, I made those mistakes, and that's something that I've learned - just to keep an open mind.

Joe Fairless: Best ever way you like to give back?

Pete DiSalvo: I like to do some pro bono work with some of the nonprofits, consulting work, and also helping out some startup companies.

Joe Fairless: Pete, who's your ideal client, and how can the Best Ever listeners get in touch with you?

Pete DiSalvo: Our ideal clients are municipalities, developers, CDCs and investors. You can either get in touch with us through our website, DDAdvise.com. My phone number is there as well. DDAdvise.com is the best way to get a hold of us.

Joe Fairless: Excellent. Best Ever listeners, there's a link in the show notes page with that URL. Pete, I am clapping silently right now, because I so much enjoyed learning from you during this conversation, and this is one of the reasons why I do the podcast. We were able to get a college class in 28 minutes or however long we've been talking, and it's free for the Best Ever listeners and myself, and I suspect you're gonna get some business out of it as well, but if not, you've given a lot of value to the world, that's for sure.

The question is how do we know if our multifamily property is positioned well in the long-term, and the answer is we've gotta look at location, product and market position. Looking within each of those, you mentioned some surprising things that I hadn't thought of... One of them is going to and from the apartment - do most of the people turn left, and is that left a tough left turn to make? Because that could have an influence on your turnover being high.

On the product, again, the master bedroom being ten feet or more - that's something I'm gonna pay particular attention to from here on out, as well as the open floor plan, which I kind of already knew, but it wasn't a conscious thing for me. And then the marketing position, and lots of other insights in between.

Best Ever listeners, if you need some notes from this, then go to BestEverShow.com and we've got a transcription of this episode and the previous episodes, so you can go read this conversation as well, if you weren't able to take notes like I'm taking notes right now.

Thanks for being on the show, Pete. I hope you have a best ever day, and we'll talk to you soon.

Pete DiSalvo: Thank you, Joe. I appreciate it.



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