Insights from Lunch with Lucern: Answering Key Real Estate Questions

In the June episode of Lunch with Lucern, Managing Director David Hansel answered questions he received from previous episodes of the webinar series. From selecting the right property manager to the impact of labor shortages, David addressed various topics relevant to both passive and active investors. Let’s dive into the key takeaways from the episode.

Q: If an owner-operator is hiring an outside property manager to oversee the asset, what are the main questions the owner should ask to ensure it is selecting the right partner?

DH: When hiring an outside property manager, it is crucial to ask the right questions to ensure you are choosing the right partner. Consider the manager’s specialization in different asset classes and their experience in managing properties similar to the one you are acquiring. Communication, management structure, and their ability to align with your goals are also important factors to consider. You as the asset owner want to ensure alignment with the property manager so that the asset is managed properly.

Q: Has Lucern experienced labor shortages in the cities it invests? If so, how have you overcome these challenges? Have these labor shortages affected returns?

DH: The market has definitely been interesting. As we came out of last summer and interest rates started to move up, that changed a lot of what was going on in the industry because banks began to pull back pretty heavily on leverage. Labor shortages, however, have been going on since the start of Covid. Our management company, for example, has experienced challenges in hiring and keeping leasing agents and maintenance staff. I’m unsure if this phenomenon can be attributed to the economy or Covid, but it is definitely a challenge. We have had to work closely with our property management company to ensure employee retention and engagement. Regular communication, providing additional resources when needed, and actively managing objectives are essential in managing labor shortages and minimizing their impact on returns.

Q: How much should a real estate investor spend marketing its property to maintain low occupancy levels?

DH: Every deal is unique. A thorough assessment of the business plan, community outreach, and marketing communication are key components to consider when budgeting for property marketing. For example, if you have a beautiful Class A luxury building, you’re buying it as a stabilized asset with occupancy at 98%. The marketing strategy will be focused on maintaining the prestige of the building. However, the marketing strategy will be very different if you acquire a Class B value-add project like we did in Wilmington, NC. We acquired a 200-unit apartment building that was student housing that we converted into market rate housing. We took almost all of the units offline, renovated them, and put them back online to lease. The marketing budget, in this example, was much greater and also focused on incentives and other efforts to lease the properties quickly.

Q: How does Lucern know which value-add projects to implement? Do you survey current and prospective tenants?

DH: Many factors play into a value-add project, but it typically boils down to two data points. First, is there a viable path to drive revenue? Sometimes, this can be as easy as increasing rents on renewals and new leases with minimum improvements. Other times, an operator may need to invest significant dollars in improving the asset, such as upgrading common areas, modernizing apartment finishes, adding amenities, and rebranding. For every asset, it is important to do your due diligence. Evaluate what the competition is offering and drill down to the actual cost for the improvements. Second, are there opportunities to cut expenses to drive revenue growth? When evaluating expenses, conduct a thorough analysis, considering the current staffing, taxes, insurance, material cost, utilities, and metering along with all third-party vendors. Identify areas where cost-savings can be applied creating a healthier balance sheet. Having a standardized process with a thorough checklist will increase your odds of uncovering the right opportunities that provide a true path to value-add.

Q: What are the key components of multifamily underwriting?

DH: This is a whole topic on its own. My colleague Frank Forte discussed this topic a couple of months ago during a Lunch with Lucern episode. Multifamily underwriting involves thorough financial analysis, including reviewing property financials, projecting capital improvements, and analyzing market competition. For example, perhaps improvements to the common area, like a new driveway, repaving the parking lot, or putting a new roof on, will improve the quality of the property. Or, individual projects like renovating specific units might be what is required. The other important thing in underwriting financing is how much equity you need to raise will affect the returns. Financing options, potential upside from improvements, accurate expense projections, and careful consideration of taxes and insurance are critical components of multifamily underwriting. We have a lot of investors that count on us to manage these assets and make good decisions. Everything boils down to the underwriting. If you don’t do a good job up front, you’re setting yourself up for failure.

Q: Does Lucern invest in other asset types besides multifamily? If so, how does the team leverage its experience across different asset types?

DH: In addition to multifamily assets, our team also has experience investing in flex warehouse industrial properties, another segment of commercial real estate that we’re pivoting a little bit more into now as the market dynamics are shifting. We’re currently seeing some unique opportunities in flex warehouses, particularly in the Carolinas. These opportunities are similar to what we saw five years ago in multifamily assets in Carolina MSAs, where there was a lot of old ownership and rents stayed the same. The asset owners were still seeing some really good cash flow, but we believed that if an investment were put into the property to bring the asset and rents to market, there would be greater upside potential. As far as the industrial market segment, we have leveraged our relationships with brokers, managers and leasing agents to understand market dynamics and to identify value-add opportunities.

Q: With the rising cost of loans, labor shortages and inflation, is real estate still a good investment?

DH: So, you’re asking a guy that has dedicated his life to investing in real estate. So, I’m going to tell you yes, as I believe people should have exposure to real estate in their portfolios. Despite challenges such as rising loan costs, labor shortages, and inflation, real estate continues to be a favorable investment. Real estate provides cash flow, tax benefits, and potential for long-term growth. Investing in real estate, whether through direct ownership or partnering with reputable operators, offers diversification and potential double-digit returns.

Q: Besides purchasing my home, I haven’t invested in real estate but want to. How can I effectively interview a real estate operator to ensure I am investing with a reputable person?

DH: If you are going to invest money with anyone, whether it be an advisor that’s handling your retirement accounts or a manager handling your private investment, you want to speak with them to understand their philosophy. Look for alignment with your investment goals, track record, communication and reporting capabilities, and references from other investors. How will you receive your statements? Having access to an investor portal is common today among sophisticated managers. It is something you will want access to so your tax documents, quarterly updates and other performance information is readily available at your fingertips. So, definitely do your homework and ensure the operator you will be investing with aligns with your short and long-term investment goals.

Q: I invest in a few real estate projects with different operators. One reports to me on a semi-annual basis and the other reports annually. There is one more operator that sends me the necessary information my tax accountant requires to complete my annual returns. I’m surprised by the inconsistency with reporting. What is the right cadence of reporting?

DH: Fortunately or unfortunately, every deal and every operator is different. There are likely some commonalities between the operators you invest with, but their reporting cadence can differ. There’s no right or wrong answer. At Lucern, we update investors on a quarterly basis but also provide our investors with monthly touchpoints about topics we’re discussing and through our monthly webinar series.

Thank you to everyone who has been tuning into our monthly Lunch with Lucern series and to those who submitted questions. We believe real estate continues to be an attractive investment option, offering investors cash flow, tax benefits, and potential long-term growth. Conducting thorough due diligence and building relationships with experienced operators are vital for successful real estate investing.

You can access our previous Lunch with Lucern episodes here.