Advice for Real Estate Investors in IL from Michael Zaransky

Real estate is literally in Michael Zaransky’s blood. His grandfather and father both gravitated to that profession, and in 1979 he did the same.

The founder and managing partner of MZ Capital Partners and co-CEO of Prime Property Investors, both based in Northbrook, Ill., Zaransky -- about whom you can learn more here -- offers guidance in this interview for anyone looking to get involved in the Midwestern market.

What would be the first thing you would tell an investor in the Midwest?

I guess the first thing is, for a multifamily properties, I think it’s a very good, robust market with a lot of demand for rentals, and it’s also a very robust environment for investors seeking to invest. It’s very competitive when properties come out on the market, and I think the key is understanding the specific property or evaluating, looking at the submarket it’s in carefully and looking for opportunities to create additional value in properties and select acquistion targets where there’s the best possible chance for increased cash flow and appreciation of value.

Do you reach out to investors, or do investors reach out to you?

We are actually a company that does investing in real estate for our own account. We invest in larger apartment complexes, and we have a cadre and a following of investors in our company that invest with us for many years, and over a period of time have invested with us very successfully on a number of properties. We don’t specifically outreach or target people to come and invest with us. We just identify opportunities.

It has been said that you want to “integrate novel approaches and explore new territories.” What is that process like?

For example, as the business evolves, things change in markets. We continue to evolve. Ten years ago, I was building a portfolio of properties that focused exclusively on student housing. Did well with that. Built a nice portfolio of student-housing properties. I still like that field, but we’ve also expanded to conventional non-student properties that serve neighborhoods. We largely focus on suburbs. We think there’s a fair amount of growth in suburban areas that needs to be met and of late, we’ve narrowed our focus to middle-tier properties, called Class B properties -- not super, super high end, but still very nice; nice amenities at complexes, but appealing to the middle-tier renter, something that’s more affordable to the average renter than the super high-end stuff that’s being built today.

Why do you think there is a trend toward suburban properties?

I think there’s just a shortage of middle-tier suburban apartments, which tend to be more affordable to reach a growing number of people looking to rent. There’s about 110 million people currently in the U.S. that rent, and that’s growing. Demand for rentals is growing, and the supply of available apartments has just not kept up with that. And the new stuff that’s being built, because of the cost of construction and of land cost, is very, very costly, and as a result it’s being built as an upper-tier product, and the rents are very high. So it’s really creating a shortage for middle-tier stuff, specifically in suburbs.

It has also been mentioned that you’re always reevaluating and recalibrating. That would seem to very much be a case in point, correct?

Extremely. The real estate business, just from the outside initially, seems like it doesn’t change: It’s very simple; apartments are apartments. But the fact of the matter is, real estate investing is very fluid. Markets change, demands change and users change, so you have to keep pace with constantly changing demographic trends.

This fits in with your family history as well. You’re a third-generation real-estate person, so there are certain truths that apply now that didn’t apply when your grandfather was doing it. What other things do you think have changed?

I think geographically things have changed also. Although we have a national platform and a national business, it’s very a local-market-based type of product. Years ago, my grandfather would never think of looking at -- or even myself, 20 years ago -- (a place like) Omaha, Neb. It’s a market that is now at a million people, with extremely low unemployment and good job growth, and population growth. It’s a market where all the multifamily units are occupied -- over 97 percent -- so there’s tremendous demand for it, and it continues to grow, as jobs in Omaha grow. Places like that, those secondary, smaller markets -- which aren’t really so small anymore -- tend to get overshadowed by the headlines of New York, LA and Chicago, but we see those markets as really ripe for tremendous growth, and a great place to invest.

Indianapolis, Columbus and Madison, Wis., are other markets of that size that appear to have great potential.

It’s funny, each one of those cities are on our target list as well. Love to find investment opportunities in those markets.

What’s that process like? How do you cultivate those markets?

We work every day on relationships, both with local brokers in those markets, the national brokerage firms that have national footprints with offices in those areas and as best we can with owners direct in those markets, to let them know we’d like to evaluate opportunities to purchase and make acquisitions.

Are you optimistic?

I am optimistic. Our deal flow has been pretty good, and I think there’s opportunities for our company to continue to grow.

You have mentioned that you would rather renovate a property than rebuild. Why is that?

Buying an existing complex in the right market that’s well-occupied has built-in cash flow from Day One, and the acquisition price is generally below the replacement cost, and the cost to actually build it from the ground up, so that the basis on which we’re in on our investment is a pretty good deal, relative to building it new. And if we can do cosmetic rehab of units -- kitchens and baths -- and upgrade grounds to today’s standard, which are nice clubhouses and nice swimming pools with pool decks, and large fitness centers, and maybe some outdoor barbecue areas and things like that, we can upgrade the property to a much better level than its current level, and our ownership, even with our improvements, would be substantially below what it would cost to recreate it and build it new.

Common areas are becoming increasingly, well, common, correct?

If you think about it, when apartment buildings were built 30 years ago or 20 years ago, nobody thought about fitness centers. They were an afterthought. Today’s standard is a really nice fitness center, so we put those in. A most recent change for us is as little as five years ago, no one thought of a place for package deliveries from Amazon and others. Where do you store all this stuff? So we’re putting in package delivery systems and lockers for tenants in the clubhouse, so that we can accept deliveries from Amazon, so that we can notify them by email that their delivery is in and they can come by with a code and pick up their package. We’re constantly adapting to the needs of the environment today and today’s renter, and making those improvements in the properties.

Amazon would be something else your grandfather couldn’t have dreamed of.

(Laughing) Couldn’t even explain email if I had to, let alone the internet. Who knows, 10 or 20 years from now we might not even need parking lots, because everyone will be taking autonomous vehicles that you just order on an app, right? It seems like the next major sea change.

That would appear to be part of your job -- to anticipate what renters are going to need. How difficult is that?

It is difficult, but you notice trends. You see things. We like to say things change overnight, but they really don’t. You can kind of see things coming, and adapt. We make decisions based on population, job growth and demographics on where to invest, and what the property needs in terms of upgrading. We have a saying we like to use: We try and be where the (hockey) puck is going to be, not where it is right now.

While this doesn’t apply directly to you, are tiny houses the next big thing?

I’m not quite sure. It’s the answer to high prices because of the cost of construction that I was kind of referring to. The way to get the purchase price of a house or the rent of an apartment is to make it smaller. I don’t really see it as a major trend that’s going to change our industry. I think there’s some market for it, but I don’t see it as a sea change. I think Americans are still used to larger apartments and homes, and I don’t see them giving it up any time soon. It is a strategy that seems to be working on a limited basis in the urban core, in some cities where younger people are, and in expensive markets like New York, where you need to get the rent down by having a small studio apartment rather than something larger. But it’s not overtaking the world yet.