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Negative cash flow isn’t a worry for investors

Judith Harlan

It’s not penciling out, but buyers are coming in anyway driving over the grade with eager money to plunk down on Reno’s multifamily housing.

It’s the buzz that’s getting them to make the drive, says Danielle Young, a real estate broker with Re/Max Commercial.

Reno’s made the headlines this year as the top city for doing business, as ranked by Inc.Magazine, as 57th on the Forbes 2005 list of best places for businesses and careers, and as third among the country’s best places to live according to Men’s Journal.

Reno looks like the place to be.

And if it is, it’s the place to invest money, or so it would seem to those playing the real estate market, for everything from duplexes to apartment houses.

Reno’s growth is capturing national attention, and meanwhile, apartment vacancy rates sit at 4.75 percent for the first quarter of the year.

The market beckons.

Once buyers get here, they find out some of the new hard realities of the area, says Todd Blonsley, a commercial agent with Marcus & Millichap Real Estate Investment Brokerage Company of Nevada.

One hard reality: it’s a seller’s market.

In fact, it’s a phenomenal time to sell.

For buyers: it’s a premium dollar market.

“Supply and demand are out of whack,” says Blonsley.

In his specialty commercial investments in excess of $1 million or 10 units he’s coming up with many properties listed.

But listed to sell? Not usually.

Many are coming on the market with cash flow negatives.”If it’s priced right, it goes in a heartbeat,” he says.

On the smaller end of the market – five to 20 or 30 units loans are often going out with 35 percent down, says Tom Traficanti, chief credit officer of Reno-based Heritage Bank.

Taking a high down payment is the only way the bank can make sense of many of the multi-family investment loans.

A few years ago, the down payments averaged 20 percent to 25 percent, he adds, but then, investors were looking at investment profit rates double to those they’re seeing in Reno today.

A rate of 8 percent to 9 percent was common, Traficanti says.

Cash flow’s a big deal to banks, who like to see it cover cost with a slush of about 20 percent over that.

Traficanti is seeing investors bidding up the prices without the cash flow to support it, speculating on equity and rent increases, making it all work with those big down payments.

Says Young,”People are buying appreciation, not cash flow.” They’re betting that values will continue to rise, and some are making immediate wins.

For instance, she says, two months ago she sold a duplex in southeast Reno, putting it in escrow at $309,000.After a bit of facelift on the property, the new owner could put it on the market now, she estimates, at about $375,000.

That kind of value add work on properties have always been a part of the market, adds Floyd Rowley, a commercial broker with Colliers International.And buyers continue to do that here, raising the value through physical or tenant improvements, as well as rent increases.

But rents are not rising in step with property values.

The average rent for a one-bedroom stands at $710, up just $11 from six months ago, says Young.

And cash flow is based on rents.

So, some incoming investors are taking on negative cash flow; and in some cases, banks are willing to finance negative cash flow.”We can make exceptions for those who are going in upside down, says Traficanti.

But they have to have other liquid assets before the bank’s comfortable making the loan.

And the buyers? California investors, says Young.

That’s the client.

They come because they’ve heard the buzz.

They come for tax reasons.

They come to invest in three-plexes, keeping one as a getaway, renting the others.

But mostly, they come because the buzz is still that Reno values are going up.

She sees first-time investors in the under-four complexes.

In the five-unit and over housing, 1031 exchanges with more experienced buyers come into play.

Sellers,Young is finding, these days often include people in their 60s and 70s who are taking their equity out of the market.

Underlying many of the investments, adds Traficanti, is the anticipation of rents going up.

But will they? And if they do, he asks, then won’t employers be pressured to pay more for workers?