32%+ cap rates in N Dakota...too good to be true?

Question

When its too good to be true....it usually is! There is always a catch or something you don't think to ask until its too late.

Im trying to find the catch with this one: buy dormitories in ND to service the oil workers. Collect 32%+ cap rates forever with no work to do.....or take a guaranteed 25% from the developer

This is the project: Great American Lodge, Watford City, North Dakota

Anyone done anything similar....what am i missing? They say there is 60 years of oil there and the lot is well located for travelling to work.

any help would be great

thanks

Paul

Paul Choate · Answer

I have grown up my whole life in Oklahoma. My town rises and falls with the price of oil. We have had half a dozen of these cycles since the 70s. These areas are completely dependent on the oil. You do not want to know what these areas are like in an oil bust. I generally shoot for a cap rate in my town in the low 20s but I also know that I am investing purely for cash flow. I don't expect my properties to appreciate. When oil goes down, so does everything else.

Oil field workers tend to be very transitory and have fairly hard lives. They can be hard on property. Specific areas can get played out or overdeveloped so be careful about your capital investment. If it is on wheels you might feel better!

James Mitchell · Answer

I have been in the Bakken for almost 2 years now and like a lot of people came out seeking new opportunities. It took a couple months to start figuring out the flow and meeting the right people who are actually developing projects. The energy in Williston is buzzing 24/7, yes it's cold but anyone with some desire to succeed can do it here. The range of opportunities start with A and ends with Z, there is no limit on what you can do here. There are 1000 articles that knock ND and another 1000 that say it's the best thing since sliced bread, but like Chuck said if you haven't been up here to see it then you just don't get it.

The housing market is changing every spring and summer and everyone gears up for next spring as soon as it gets late in the building season. I have focused on outlying areas of the bigger towns due to lower costs on real estate and the fact that they aren't drilling for oil in town. I own 175 rooms and get 30 calls a day 7 days a week for temporary housing, there is a lot of turnover but there is always another guy getting off the train looking for a place to live and a job. Maintenance costs are a little higher but renting a 200 sq ft room for 1500.00 per month works in my favor. Family housing is in high demand as well so "Man Camps" are out there but one of our housing projects doesn't allow work force housing in the sub division, it is all families and we have pre-sold everything coming in. Our price range is 190,000 to 230,000 for 1620 sq ft, 3 bedroom 2 bath home.

My advice is to come see the Bakken for yourself.....

http://www.foxnews.com/us/2013/12/24/christmas-in-bakken-formation-north-dakota-city-sees-growth-from-fracking/

http://seekingalpha.com/article/1831102-goldman-sachs-report-is-there-no-end-to-the-bakken-trend

Chuck Catchings · Answer

Paul what do you mean call when they have a tenant? Are you still referring to the Great American Lodge? I am direct to one of the developers on this project. Out of over 600 units built there are only around 32 left. So someone is buying into this.

Does anyone remember what the term INVESTMENT means? Geez, there are risk involved in any investment. There is no such thing as a 100% guaranteed investment that I know of, of course they are advertised by the sellers, imagine that. But it is what it is in N. Dakota and it's like no other place anywhere else. Just like any other location the early bird gets the worm so to speak and the greater pay off. This is and always will be the case no matter where you invest.

I didn't see anyone mention the the fact that this developer has a buy back option included at 115% after the second year and 120% after 5 years of the original purchase price. Are the big oil companies renting up blocks or buying into this? I can not answer this because I do not know. Is there a shortage of rental units in this area and that answer is yes. In fact the oil companies tell anyone looking to work here if you don't have a place to stay DO NOT COME, especially in the winter.

Numbers, anyone can spit out numbers all day long and what does this all mean to anyone. Every deal no matter where has to be checked out and verified. Sure on the surface this whole deal looks to good to be true, is it? Do your homework people. This is not your normal situation and you must cover all the exit strategies here or anywhere for that matter.

We can do what ifs all day long and never get anything done. I love the people that have comments and make judgments but yet have no clue about the area or what is really going on much less never even been there to look for themselves. Oh, that's in the brochure also, come look first, wow what a concept.

I've been in and around construction and real estate for over 30 years and have seen it all. I've made a ton of $$ and lost it as well. Construction and real estate in it's self is speculative at best but yet 1000s of people do it every day.

You want rentals with 20%+ ROIs? I can get those for you all day long. Are they going to be in your town or state? Probably not but they are out there.

Anyone here remember the term (Risk-Reward)? Without risk there is no reward. Or the ole cup half empty or half full saying, which are you?

I'll move on now and hopefully I made my point and no doubt someone will have something negative to write and they have that right. I wish all the best in whatever they do here but remember nothing worthwhile is ever easy.

Chuck

Paul Birkett · Answer

Great replies everybody....Eric....you need another award for digging out that article. They don't have any commitment from a tenant...so the rates are highly speculative...Matt, Nathan...thanks for your thoughts too....

ive told them to give me a call when they have a tenant.

thanks again everybody

Trent Currie · Answer

Expect to replace carpet/vinyl in your entry ways nearly annually.

There is a lot of activity in ND at this time. However in several areas where there was a shortage of housing you can call up and get a hotel room with much less notice.

An interesting article with some solid facts on the development of oil in ND.

http://bismarcktribune.com/bakken/treasure-map-reveals-extent-of-bakken-drilling-activity/article_b8214bf8-c6ec-11e1-a100-001a4bcf887a.html

The "Directors Cut" outlines production and expected drilling. Along with number of rigs and where new permits are. It is a good indicator of future trends in drilling and migrant workers.

https://www.dmr.nd.gov/oilgas/directorscut/directorscut-2013-09-13.pdf

This presentation from the DMR also outlines the number of long term jobs projected and new permits issued.

https://www.dmr.nd.gov/oilgas/presentations/NDOGCPC091013.pdf

Eric M. · Answer

http://invezz.com/analysis/real-estate/111-north-dakota-oil-worker-digs-black-goldmine-or-pending-dime-a-dozen

Eric M. · Answer

I have been told that the oil these guys come home with does extensive damage to a house over time.   Not only carpets and furniture, but in pipes, ac systems, etc.

The houses simply don't last as long as most and have to be replaced.

Vacancy is low but that doesn't mean turnover is low.  It is very high.  Lots of costs involved in turnover.

Short term cash flow looks great but longer term costs catch up and it is no better than most other areas.

David Krulac · Answer

@Paul Birkett

Don't compare apples to oranges.  This is a business, like a rooming house, not a passive investment like an apartment.  There probably are no leases and its sort of like a motel.  The turn over will be greater and the employee costs will be higher.  Do you need on site desk clerk or security 24/7?

You can probably expect more drinking, drugging and fighting also, and accompanying police calls and damage.

Matt C. · Answer

I agree with the other posts.  But that doesn't mean there isn't money to made.  I would be sure to really understand the market.  It is only the Bakken Shale up there.  When it is played out, the party is over, the boom town becomes a ghost town.  Just like Paul in Oklahoma, I've seen it plenty in South and West Texas.  The oil & gas industry is always moving from one boom to another.  For me that begs two questions:

1. How long are the staying?  If they can move in over night, they can move out overnight.  Remember, just about everything in oil & gas exploration is designed to be put on the back of a truck.  It looks like the Bakken will go on for quite some time.  But I would have an exit strategy in place from day one.  You don't want to be the last one at the party.

2. Who is your competition?  Oil field workers have always needed places to stay.  You won't be the first to address the need in N. Dakota.  It won't just be other homes and multi-families.  There will be companies running temporary lodging.  Google "man camps" for info.  As mentioned above, there are always RV parks that are quick and cheap to build.  You see them quite a bit in south Texas.  Although, I suspect an RV park, in N. Dakota, in January, might not be very pleasant.  The point is know who you are competing against.  Make sure your product fills a need.

Nathan F. · Answer

North Dakota is kind the wild west right now. The company I work for has been out doing work out there for a couple of years. Lodging for our crews was a definite issue. We ended up working out a deal with real estate investor to lease 4 townhomes for our guys. We also had a friend of mine, develop a RV "park" on his property for campers. Both deals were very expensive, and I'm sure the investors made some good money on our lodging.  I'm not sure what cap rates are out there, but just be prepared for the boom and bust cycle. Right now it's hard to see the bust, in either competition or oil field slowing down.

32%+ cap rates in N Dakota...too good to be true?

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