For today's episode we bring back our returning champion Omar Khan, founder of Boardwalk Wealth, an investment firm focused on Class B acquisitions with value-add potential.
Recently, due to the run up in prices we have seen in 70's/80's vintage multifamily buildings, Omar has begun to contemplate alternate investment strategies, including ground-up development.
Today's episode is centered around this specific topic, as we try to shed some light on the question of "What makes more sense today, acquisitions, or ground-up development?"
The best way to reach Omar is through e-mail at omar@boardwalkwealth.com, as well as at Boardwalk Wealth's website, where you can register for Omar's newsletter.
Below is Omar's newsletter which spurred our conversation:
A great question to ask, when confronted with any claim:
"Compared to what?"
I was thinking of the risk profile of a new development. It's considered risky in general, but what comparisons do we have?
Well, the current market conditions are really frothy.
Let's take assets built in the 80s/90s. They are now trading at (or close to) replacement cost. This means that 30-40 year old assets are roughly selling for the same amount as the cost to build a new development.
These older assets typically have outdated floor plans with high maintenance expense. So they will require a huge investment, and ramp-up period, to make them work as attractive deals.
Compared to THOSE assets, a real estate sponsor can assume a similar level of risk in a new development. Once built, this new asset requires minimal maintenance. The old asset ramp-up period is comparable to the new development build.
But then the new asset is far more efficient on rent per square foot, as well as cost per square foot.
On top of this, residents in new build communities tend to have higher incomes. And they are able to withstand economic downturns (like a pandemic) better than residents in lower income housing communities.
So in that sense, the new development is lower risk.
Food for thought.
Let me know if you have a rebuttal or would like me to elaborate.
Omar Khan
Managing Partner, Boardwalk Wealth