Why does an investor decide to buy a certain apartment project over another that may have been very similar in terms of number of units, location and overall square footage?
First, it’s important that the investor hasn’t reached this decision point in a vacuum. There should have been some general situational due diligence, as well as area and market statistics analysis. What should already have been done?
· The investor should have a firm plan for their personal investment needs and risk tolerance. They should have formulated a plan that takes into account their profit requirements and a time line to reach a well-defined goal.
· Financing capability should be fairly well-defined at this point. The investor should have gathered information about available funding options, and assessed them in relation to the investor’s goals and financial abilities. In other words, what can they afford to buy?
· A thorough market survey and analysis should already be in hand. What are prevailing cap rates and rents? Which areas appreciate better, and which attract tenants?
· Working with Realtors or alone, the investor has accumulated a list of properties that appear to be good candidates for the plan and this market.
Once an investor is at this point in their process, it’s time to dig deeper with more thorough and focused due diligence. While the market has been studied, and certain areas are targeted, it’s now time to compare the properties in those areas.
Which properties are best suited for the plan and goals, and which will yield the greatest balance of short term and long term return on investment? It’s in this phase that two very similar properties can be compared and a decision made on which is the better buy.
Let’s say that two properties in the same area have precisely the same number of units, almost the same square footage, and the units are all just alike, with the same bedroom/bath configurations. Both properties are for sale for the same price, $1,000,000. Project A has an annual income of $225,000, while Project B realizes an annual income of $310,000.
Because the real estate itself is of secondary importance to cash flow, Project B is the choice. How, if they’re so similar, can Project B do 37% better in cash flow? Obviously, vacancy rates must be lower, expenses lower, rents higher, or a combination. The lender is basing decisions on cash flow, and the investor should as well.
Now that a decision has been made, it’s time to do more due diligence, verify the numbers, and make the purchase and financing arrangements.
The key is to have a plan that meets the investor’s needs and abilities, analyze the market carefully, compare investments based on cash flow, then get the deal done.
I’ll share more with you soon…
Fondly,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Tagged with: Apartment Buying Process , apartment project , due diligence , funding options , Karen Hanover , market survey
