[Note: To follow is an excerpt of an interview with Rich Arzaga, Wealth Planning Advisor and Professor of Real Estate at UC Santa Cruz. To listen to, or download the show archive MP3, go to www.IncomePropertyInvestmentTalk.com.]

Mosca: Can you look into your crystal ball, where do you see the real estate market over the next 12 to 24 months?

Arzaga: The first observation I would make is that people are still interested and passionate about this asset class. As real estate moves through its current cycle, people still want to learn about real estate. It's fascinating. There are good real estate investment opportunities today. This is one asset class where whether it is doing extremely well or whether it is having some rough times in some areas, people want to learn more about it. There is always something out there to purchase as long as the fundamentals work for you. The fundamentals include the price of the property, the cash flow, rate of returns, cap rates, and then going beyond that to see how solid those numbers stand up. The commercial real estate market is actually in a much better condition than it was two or three years ago.

Mosca: Is there some kind of a planning process that you go through with a client? Are there steps that you work through like goals, portfolios, etc.?

Arzaga: Planning is a process and the key word is 'process.' The first part of the process is to determine what the need is, what the drive is behind the real estate and frankly, what the suitability is. For some real estate investing may not be suitable, for others it is a matter of figuring out the motivation, the resources, objectives, and their portfolio mix. By engaging the client throughout that process and having them answer these questions and seeing what this looks like you really have an investor making better-informed decisions.

Mosca: We know that most Americans today have their wealth built inside of real estate. There are a lot of numbers out there to support the theory that multifamily and apartment property investments are 'recession proof.' Money being lent to multifamily and apartment investors is still very strong and doing very well. How do you feel about multifamily as an investment right now?

Arzaga: Multifamily is more attractive, a much better investment over the last three years. I own commercial real estate myself. My wife and I are part owners of several commercial property shares in the west side of the United States. Our mortgage is fixed, cash flows are steady, rents are increasing and we're having no issues in today's market and it goes back to the idea that if you buy well, you can have that experience. This business is all about relationships. The big take away for my students is to do it on your own is very difficult because you really don't have the expertise, the insight, or the instinct. For a number of these students the very next step for them is to participate in a group or join CCIM meetings to be able to start building those relationships.

Mosca: I'm concerned that many investors will hear about 'buys' that are available, by many of these might be located in 'shadow markets' where there is unsold houses and condos that are going to be coming on to the rental scene. Can you talk a little bit about location investing and how important that is to someone who is looking to invest in multifamily and apartments?

Arzaga: Feasibility, figuring out what the absorption rate or what the need is, and demand for inventory, is quite often overlooked. To be able to figure out what the local economy is doing, where the demand is going to be and to figure out where people are going to be moving to and living is quite a way to help solidify an investment's position as a very good investment. Conversely, if you see a trend away from an area then there is going to be some issues with supply, oversupply and under demand and the rents might go down and it may not be a great place.

Mosca: What should the real estate investor today expect versus the commercial real estate investor of yesterday?

Arzaga: If someone were to deliberately make a good choice, work with a professional and the fundamentals are better, commercial real estate is about the same if not slightly better. The financing market for both residential and commercial has gotten a little bit tighter, in fact a lot tighter especially on the residential side. It's not as easy as it was before to go out there and get this money to leverage that property. That's where you really need to make sure to qualify first, upfront; with the person you are working with and move forward based on what you can qualify for. Valuations for commercial real estate depend on the cash flow and not the demand. Residential real estate is based on supply and demand.

Mosca: The National Multi-Housing Council recently announced that the financial consequences of the foreclosure crisis is not spilling over into the apartment sector. In fact, Doug Bibby, President, said, “much has been made about the flood of former house owners into apartments but we're not seeing that. Instead the primary effect the housing downturn is having on the apartment sector is a dramatic slowdown in the number of renters leaving to become owners. This in turn is raising the credit quality of rental applicants and helping insulate the apartment sector from the financial woes the single-family sector is currently experiencing.” Good news for investors interested in multifamily and apartments, right?

Arzaga: Not only has it slowed down the number of people leaving and you have higher qualified applicants or tenants, but also the rents have actually gone up quite a bit. A lot of my clients who have multifamily are having great experiences around increased income levels from those tenants. Most people do not realize how much more valuable their rentals have become in terms of an income stream.

Mosca: Can you share a tax tip, a tax strategy that makes sense?

Arzaga: The 1031 exchange is one. There is alos a strategy called at 1031 721 where in some cases investors can actually liquidate in partials and units pieces of their holdings. It is a way to get some liquidity out.

Published: August 7, 2008

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Peter L. Mosca is president and founder of BAK Communications, Inc. He has over 22 years of communications and media consulting experience, serving a variety of nonprofit organizations, including the CCIM Institute and the REALTOR Association on all three levels – national, state and local. He is the Spokesperson Trainer for the CCIM's Jay Levine Academy and trains hundreds of residential REALTORS nationwide to be effective industry spokespeople. He is consistently ranked as "excellent" by about 90% of those who attend his presentations. While his principal consulting focuses are public speaking and media relations development and content delivery and management, Peter is also the host of the Voice America Network's weekly radio program, "Income Property Investment Talk," a one-hour program that brings the powerhouses of commercial and residential real estate to property investors every Wednesday at 11 a.m. EST. Peter is married 17 years to his wife Barbara. They have two children: Ashley, 15 and Kelli, 12. Hence, the name BAK Communications, Inc.