Does Your Real Estate Portfolio Need an IPA?

Karlin Conklin

Most people know that the IPA acronym stands for India Pale Ale in the world of craft beer. If you’re a beer enthusiast, you know that the U.S. is the world’s largest producer of hops, and 99 percent of those are grown in the Pacific Northwest—including my home state of Oregon.

My first foray into real estate investing started in Oregon. Two decades ago, I bought my first duplex for less than $100,000. A few years later, I bought a fourplex. Today, I’m a principal and co-president at a firm that owns/operates a national apartment portfolio valued at more than $1 billion.

Craft beer often begins as a passion, and over time it becomes a profession. In the same way, real estate offers an accessible starting point for investors, who can start small and grow their capital and portfolio over time, often resulting in a full-time income source.

Selecting the right properties is the key ingredient in portfolio growth. The IPA acronym is our tried-and-true guiding philosophy to identifying good apartment investments. Whether you’re looking to buy a duplex or an institutional quality asset with hundreds of units, these three metrics are critical to your success.

What is the Intrinsic Value? (I)

Intrinsic value provides a deeper understanding of a property’s worth more than just focusing on the current market price. To determine the intrinsic value of an asset, you need to explore its inherent features.

An apartment building’s intrinsic value may be found in its quality construction or appealing design, desirable floor plans or attractive community layout. Location, however, is almost more important than the building itself. Components of intrinsic value include:

-Above-average population gains

-Positive job and wage gains

-Balanced housing supply and demand

-Favorable lifestyle factors such as climate, neighborhood amenities and regional recreation

-Accessible education and medical centers

-Demonstrated public commitment to infrastructure including transportation, renewable energy and internet access

Without these fundamental features in place, even a well-managed “A+” property won’t be able to increase earnings and value over time.

What’s the Price Per Pound? (P)

Market value tells us what investors are willing to pay for a property. Multifamily investors often reference “price per pound” as the price per unit, simply calculated as the purchase price divided by the total number of units. This basis is locked in on the day of closing, and it sets the course for your business plan.

Now more than ever, buying at an attractive price per pound relies on subjective valuation and an objective understanding of market and submarket trends. The first step is researching comparable sales and rental data.

For example, last year we purchased a newer apartment building in San Antonio located along the path of a massive highway expansion project. Although the price per pound appeared high to other buyers, we knew it was below market. We had objectively determined that rents were lower than the competitive set due to the temporary construction noise and debris nearby. Looking forward through a subjective lens, we were confident that as the construction project entered its next phase, the increased traffic and demand would fuel rent growth. Today—less than a year later—the property’s market value is up by nearly 15 percent.

Apartments remain a sought-after asset class with relatively low inventory. As a result, properties are trading for a premium. Combine this with the pandemic’s many lingering impacts—from increased construction costs to interest rate volatility—and you can expect returns to compress in the near term. Provided the underwriting remains disciplined, good opportunities are still out there to be found.

What’s the Level of Affordability? (A)

We use the term “affordability” to mean that your rental rates provide good value and should be considered affordable to your renters. Extensive research must be done on your target tenant demographics in order to develop a sustainable business plan.

Our firm only invests in markets with above-average intrinsic value that still offer rental rates at less than 30 percent of household incomes. Raleigh, N.C., and Greenville, S.C. are great examples. Expensive coastal markets have seen rental pricing soften as renters continue to migrate towards cities and housing that offer better value and lower rent/income ratios.

The marketplace we are now in requires investors to adapt quickly to market forces and embrace innovative approaches that benefit renters, communities and neighborhoods. Maintaining an affordable, balanced housing supply is a vital component of economic recovery.

Just as the craft beer surge is seemingly unstoppable, so is the popularity of multifamily investing. Our “IPA” acquisition approach continues to yield favorable results through evolving economic cycles. The next time you enjoy a glass of your favorite cold one, I hope thoughts of building a legacy real estate portfolio will come to mind. Multifamily investing may be a “hoppy” ride, but if you have these three basic factors in place, you’ll come out alright on the other side. Cheers!

Karlin Conklin is principal & co-president of Investors Management Group.