01/28/2020 | Investing
What Makes a Good Real Estate Investment?
Ownership of real estate is a tried and true path to accumulating and storing wealth. But what makes a good real estate investment?
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DRGinvest has identified Oklahoma City (“OKC”) as the next market to expand our investment portfolio. The market is in the early stages of a transition, and current low real estate prices provide an attractive entry point to investors and to residents looking to relocate to a lower cost-of-living city. This dynamic combines for solid cash operating returns in a status quo scenario and has the potential for truly outsized investment gains if the rental market reaches the expected inflection point. We are looking for qualified investors interested in learning more about this exceptional investment opportunity.
After the successful close of DRGinvest Fund III LLC with its acquisition of Foothills West Apartments (35 two and three-bedroom units in Colorado Springs), the DRGinvest team has spent considerable time figuring out what comes next. Property prices in Denver and Colorado Springs continue to rise, and our pipeline of local opportunity is thinning out as the market gets ahead of prices we are willing to pay. We will continue to be opportunistic in our backyard markets, but to maintain confidence in meeting our investor’s needs for above average investment returns, we have been looking at other cities. After an exhaustive search across the country, the market that we find most compelling is OKC.
OKC is the 29th largest city in the USA and is experiencing several dynamics we find very attractive. The fundamental appeal of this market is that no meaningful future rent growth is priced into apartment values. This market currently has a ~10% vacancy, rent growth has recently been slow, and until the last few years, the city has lagged the US average in population growth and job creation.
Apartment prices in OKC currently reflect the sentiment that none of this will change. Our research indicates conditions are ripe for a tight rental market in the next couple years – these tight markets are exactly what has driven the outsized price gains in Denver and Colorado Springs. When rental markets are at capacity, rents don’t go up in small increments – they tend to spike up in large step changes, with property values swelling to reflect the increases in cash flow. It is these slow-moving catalysts that investors often neglect to price into asset values, and we have identified this situation here.
We are currently evaluating several large apartment complexes that will likely sell for $35k-$45k per unit – prices at which we believe we can lock in 10-15% cash-on-cash operating returns with current market rental rates and operating cost structure. On top of that, given current population inflows and the limited new construction pipeline, it is highly likely that in the next few years entry-level rental housing becomes in short supply. This is the exact dynamic we want exposure to as it sets the stage for truly outsized returns. Although we of course cannot predict the future, if we are patient and collect our current rental income (itself likely to be an adequate investment return), we very well may get lucky with a tight rental market, large rent increases, and the associated changes in property values.
As a second step into the market, we are looking to build a portfolio of single family homes. Currently you can purchase 3-bedroom houses for $60-$80k, with rental rates and available financing that make this an attractive asset class. This portfolio offers the same exposure to general price increases should the market tighten, but will also stand alone with solid returns if the status quo is what remains.
If you, or any qualified institutional investors you know, are looking to deploy capital and are interested in learning more, please reach out to the DRGinvest team for more information.
At any given moment there are likely multiple factors influencing the price of a particular...