Without further delay, here is part two of my interview with Frank Gallinelli . . .
Today’s market is like nothing I’ve ever seen in my 40 or so years in real estate. “Distressed property” is probably a misnomer. In most cases there is nothing wrong with the property; it’s more likely to be the current owner who is in distress. In any event, that means there is still a good deal of inventory available at bargain prices.
In the short term, the apartment building market should provide excellent returns. Whenever people shy away from buying single-family homes, either because mortgage financing is problematic or there is a recession in full bloom, apartment demand tends to spike.
Over the next few years, a lot of commercial property mortgages have balloons that are coming due, where owners will be hard pressed to refinance – so there should be good opportunities there as well.
Many investors start out buying single family rentals and then move in to multi-family. Do you advocate this strategy?
I think the reason so many investors start out this way is because the single-family home is something we’re all familiar with – it’s comfortable, not so threatening. But I’ve never been very enthusiastic about the single-family as a straight-up investment. First, there is the simple issue of economies of scale. You’re going to buy and pay taxes on one parcel of land but get just one rental unit sitting on it. You’ll have to write one monthly mortgage check, re-shingle one roof, re-point one chimney – you could do those things and others one time and get one rent check, or you buy an apartment building, still do them one time and get ten rent checks. And with a single-family, if you lose one tenant, you have 100% vacancy.
There goes the cash flow.
My biggest objection, however, is this: With a true income-property investment, the value is based on the property’s ability to produce cash flow. So, if you can enhance the revenue stream – through better management, for example – you can literally create equity – add value to your property. A single-family home, however, is not bought or sold for its ability to generate income. Its value is based on market activity, so-called comparable sales. So with a single-family property you’re at the mercy of the overall market to determine your ultimate profit, and you’re missing out on one of the most important opportunities you can have as a real estate investor. That’s the ability to influence directly your long-term success, the ability to create value through increased cash flow.
That’s a tough one to answer. Real estate, like politics, is local, so success often pivots on being in the right place as well as doing the smart thing. If I could generalize, however, it would probably be that they have invested for the long term and not tried to time the market. You could say this of course about successful stock investors as well. The other hallmark has probably been that they have focused on optimizing cash flow. These two notions go together, really. If you have a property that maintains a positive cash flow, then you can ride out the peaks and valleys of the general economy, hold for the long term, and cash out when it suits you best.
Do you have any finally thoughts you’d like to share regarding today’s real estate market, building a rental portfolio or anything else?
Perhaps just this, simplistic though it may be: Whether you are in boom times or busts, there are always certain opportunities on which you can capitalize. As I mentioned earlier, apartment buildings are often excellent investments during an economic downturn. When the next boom arrives, apartment may not be as attractive, but locking in long-term leases on commercial property might be good move. Just remember to keep your wits about you. A great move in this market could be a bad move in another.
Lastly, if people want to read more of your work or follow you on social media, what is the best way for them to do that?
I am always delighted to connect with other real estate investors – experienced, new, or just thinking about it – and educators. And I’ve been blogging more frequently of late. I can’t promise that my opinions have any value, but that doesn’t make me any less anxious to share them.
AND if you want to get a copy of Frank’s books, check them out here: