Just the Peaks

This newsletter, at a glance

  • Commercial RE experts say the ‘IPA strategy’ can protect your investment
  • IPA stands for: Intrinsic Value. Price Per Pound. Affordability.
  • Everest breaks down the concept with Kiplinger contributor Karlin Conklin

The ‘IPA’ method of investment is picking up CRE steam
Here’s how to pick the right multifamily

Just a simple acronym: IPA. For those of us in the world of commercial real estate, those three letters signify an increasingly effective means of achieving investment success.

The IPA method of investment suggests that by following a few universal principles, choosing the perfect multifamily property for your project is a relatively clear-cut process. Let’s take a look at the acronym:

 

 

Abbreviate to evaluate

Karlin Conklin is an investments contributor at Kiplinger, a publisher of business forecasts and financial advice based in Washington, D.C. She explains the ‘IPA philosophy’ is best applied to acquisitions you are looking to rehabilitate to some degree (as opposed to other types of property investment).

‘I’ = Intrinsic value
‘P’ = Price per pound
‘A’ = Affordability

When assessing a purchase based on these points, Conklin promises surefire success—even through tumultuous market conditions. Whether you’re second-guessing an upcoming project or looking to build up your portfolio in the future, adopting the IPA model could be beneficial.

 

 

Start with intrinsic value

While real estate is subject to numerous variables, Conklin calls on the inherent qualities of a property that make it valuable. These ‘fundamentally permanent’ factors should drive your decision to buy and include:

  • High quality construction, attractive design, popular floor plans
  • Growing neighborhood with stable supply and demand
  • Easy access to transportation, good schools and healthcare
  • Current and projected economic/job climate above average

Even if the property rates as an ‘A’ property today, long-term success is not guaranteed without the mentioned factors. So, it’s best to prioritize intrinsic value over temporary advantages like new appliances or fancy onsite amenities that may become outdated.
 

 

Next up is price

As an investor, this step is the most daunting. Once you sign, there’s no going back.

For this reason, Conklin says you should always follow the rule of ‘price per pound,’ a calculation that requires a bit of research: “[Price per pound] relies on subjective valuation and an objective understanding of market trends. Comprehending the facts reflected in comparable sales and rental data is the first step.”

Instead of dwelling on neighborhood comps alone, factor in nearby multifamily stats on rent prices and growth, local economics, and issues of management and tenant satisfaction. By investing $1.5 million in improvements, Conklin was able to command $193k per unit in a building initially valued at $99k per unit.

It all goes back to the initial purchase. When you cut through distraction and focus on the important data, you can invest confidently knowing the numbers work out.
 

 

Finally: can tenants afford it?

The last piece of the ‘IPA’ puzzle points to future residents of your multifamily. Conklin explains that even when the price seems right, your commercial project is not truly ‘affordable’ unless rental rates offer ‘good value.’

All too often, investors get caught up in the business side of things and fail to consider the demands of the demographic they’re targeting. Conklin says, “As a real estate investor focused on multifamily, I am only active in submarkets with dynamic economic upside that still offer rental rates at less than 30% of resident incomes.”

If your rates are deemed affordable, you attract quality renters and leave open the possibility for lucrative rent growth, which ultimately adds value to your investment. Still, experts warn that in areas where rent has increased substantially (like Boston and DC), owners have been forced to drop their rates to prevent mass exodus.

The only way to ensure success is to closely monitor average population incomes, compare those numbers to your rent, do the math, and keep your percentage in check. Renters spending over a third of their pay on housing will inevitably move.

Ultimately, the IPA method touts some timeless principles worthy of consideration. For more interesting insights from the professed master herself, visit Kiplinger.com.

Everest says: let’s find your pot of gold