Thursday, February 11, 2016

Getting Bubbly Yet?

by Osman Parvez
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A couple of months ago, I posted an analysis of pricing and negotiations at Wimbledon. Read Osman, How Much Should I Offer?

If you're not familiar with Wimbledon, it's a small complex of older townhomes located a few blocks from CU on the east side of Campus. The units are a little rundown at Wimbledon, but they have reasonable build quality and HOA fees. Most are occupied by students and owned by investors (often parents). In the past, these have made good investment properties. 

I like to use the model as a teaching tool with new investors in particular because it helps drive discussions about underlying assumptions, distinguish between cash flow and appreciation returns, and stimulates a broader conversation about risk. One of the other advantages of an investment model is that it can help you think through negotiation strategy, including a range of prices you might be willing to pay.

In the post linked above, the modeled purchase price ranged (between Scenario A and B) from $280,000 to $290,000. The analysis showed a very strong upward swing in prices beginning in 2014 (see chart below).


  
In late November, on behalf of one of our clients, I negotiated an end of year deal on an already rented 2 bedroom unit for $292,500. It was a little higher than the most recent sales but not egregiously - 1.8% over the most recent comp. I'm glad my client pulled the trigger rather than waiting to see what the market would bring in 2016. 

Last month TWO units closed at $315,000, setting a new high water mark and crossing the psychological threshold of $300K for the first time. Unit J-207 and Unit O-202 closed at 12.5% over the asking price. 

Did the investor pay too much? If rents hold steady, probably not. Take a look at the table below. 



The projected returns shown above area based on 30% down, a 10 year holding period, and conservative expectations for increases in rent, HOA fees and maintenance costs. Although Year 1 Cash Flow takes a dive, the long run remains promising at the higher price.  

Given the lack of other places to invest capital, and the historic low downturn risk of student rentals in Boulder, the fact that the most recent deals have been all cash is not surprising.   


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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

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