Archive for Featured
Commercial short sale opportunities are being presented to investors all around the country. The pressure on business from the high residential foreclosure rates and mortgage woes have put weaker business properties into distressed situations.
Properties that are mis-managed or suffering from previous poor decisions in better times are missing their mortgage payments and approaching foreclosure.
Far from an indication that they are not good properties for investment, it’s related more often to management or expenditures made in better times that are now coming back to haunt their owners.
Basic Short Sale Concepts
Commercial short sales are similar in the basics to residential short sale situations. The owner of an income-producing commercial property is having trouble making their mortgage payments, and the lender is threatening further action.
It isn’t a foreclosure yet, and a buyer may create a great purchase opportunity by stepping in and relieving the bank or lender of the costs and hassles of foreclosure.
A buyer in a residential short sale provides the lender with comparable sale data, current comparable property listings, and other data to support an offer significantly lower than the current mortgage balance.
The homeowner/borrower helps by providing documentation of their distressed financial status and eminent foreclosure or bankruptcy. The goal is to get a deep discount deal from a bank or lender wanting to avoid the foreclosure process.
Commercial Short Sale Specifics
In commercial rental properties, whether office complexes, shopping malls, or other property types, the cash flow is the primary valuation factor and lending decision component. It could be assumed that the property wouldn’t be in a short sale position if the cash flow was as it should be.
This could be the case, but it needn’t be because of factors outside the owners’ control. Poor management or decisions on major expenditures could create drains on otherwise good rental income flows.
There is also the strong possibility that the property in mortgage trouble has been subsidizing other losing investments of the owners. As these other property situations deteriorate, an otherwise very desirable property is unable to stay afloat because its cash flow is being drained to fund other poorly performing investments.
When an investor can uncover an opportunity like this and negotiate a successful short sale with the lender, an excellent investment is the result.
Commercial short sale opportunities do require a high level of due diligence, but it can be very well worth it.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Tagged with: cash flow , commercial properties , commercial short sales , due diligence , Karen Hanover , lenders , rental income
Banks love to make money. But, that love is in the movement of money, lending, and collecting interest. It’s not in owning and managing commercial real estate.
Whether it’s apartment & multifamily property, office rental complexes, or retail centers, banks do not want to own commercial real estate. When an owner loses a property in foreclosure, it’s a terrible event for them, but it’s not all green grass for the bank either.
There is pressure to turn that property back into a profitable loan or get it off the books altogether.
While tens of thousands of residential rental property investors are competing to get the best deals on single family homes or duplex properties, there is much less competition in the commercial bank REO segment of the real estate market.
The sharp commercial real estate investor recognizes that cash flow is the primary focus of lenders in property valuation and lending, and many commercial bank REO properties are not in cash flow trouble. For reasons independent of cash flow, or because of correctable management and spending mistakes, the cash flow of a commercial bank REO property might be excellent or repairable in short order.
The investor who locates a potential deal and recognizes this can often make a bargain purchase well below true market value and negotiate excellent financing as well.
· Owners in trouble in other investments – Sometimes it isn’t the property the bank took back that was the major problem for the owner. Other situations in their business or personal life caused a financial collapse that took down a good property with it.
· Errors in judgment & management – Facing reality, there are people who shouldn’t own commercial real estate, or at least they shouldn’t manage it. They spend money in the wrong areas, invest in unwise improvements, or decimate cash flow in other ways. This creates an opportunity to make inexpensive corrections that can dramatically repair and increase cash flow.
· Make more than a price offer – When approaching the bank to make an offer on the commercial bank REO property, providing options can help to seal a profitable deal. The bank wants to sell, but there are bookkeeping and regulatory considerations. Sometimes a higher price can work better for the buyer if the bank is willing to trade a lower down payment and cut the interest rate on a new loan.
Commercial bank REOs are some of the most lucrative investment opportunities out there, and with less buyer competition. They’re worth serious consideration.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Tagged with: apartment & multifamily , bank , cash flow , commercial bank reo(s) , foreclosure , interest rate , Karen Hanover , lender , negotiations , offer price
Cash flow is king in apartment & multifamily investment. It’s used to determine cap rate, as well as DSCR, Debt Service Coverage Ratio. If the cap rate looks good, and the DSCR is 1.25 or better, lenders come to the table with mortgages.
Borrower credit scores and other income streams are not the decision criteria, it’s all about cash flows, their stability, and predicted long term performance. So, if cash flow is that important in apartment & multifamily property valuation and lending, it follows that accurate calculation of a project’s cash flow is quite important.
Though ferreting out hidden effects on cash flow can produce a negative result, it’s more likely that there are benefits to the buyer in locating hidden cash flow items that indicate better performance than the surface quick analysis might show.
These cash flow influence items can be on either the income or the expense side of the balance sheet. They consist of items that would increase income or decrease expenses, but they may not be obvious. Or, there are more likely just inefficiencies of operation that can be eliminated.
Another common expense-side situation would include expenses for owner perks that reduce taxes but could be eliminated after the purchase.
Income Side Cash Flow Items
Are the rents at market rates? It’s a revelation to some apartment & multifamily buyers to find that there is a significant portion of the project at lower than market rental rates.
Some owners find it easier or more comfortable to make rent concessions than to make improvements or re-market for new tenants when they lose some to rent increases. Though this can work the other way, with prevailing rates now lower than long term tenants are paying, it’s usually more of the depressed rates.
For a variety of reasons, there are tenants paying significantly less than a new tenant would pay for the same unit. Locating and monetizing these situations can change cash flow, cap rate, value and loan amount.
Expense Side Cash Flow Items
There is a lot of opportunity in this area. The costs of operation encompass a long list of expenses. From everyday management & maintenance, to repairs, re-let costs and more, there can be lucrative cash flow increases by locating and doing away with inefficiencies. The larger the project, the greater the impact.
Changing repair companies, or renegotiating costs of repairs can make a huge difference. There are other examples, but the best statement that can be made is to thoroughly analyze apartment & multifamily rents and expense items to locate cash flow problems that can be corrected.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Tagged with: apartment & multifamily , cash flow , expenses , income , Karen Hanover , rental , rents
The Apartment & Multifamily Exit Strategy
Posted by:A lot of material is on the Web, in books, and taught in seminars and courses about how to value and purchase apartment & multifamily properties. And, it’s important to get that valuation and purchase strategy right.
Few investments can be called successful if they start out with an overpriced purchase. Buying right on the front end is quite important. But, the disposition, the exit strategy, is just as important. Unless the plan is to leave a property to heirs, at some point it will be time to sell.
Exit Strategy Begins at Purchase
An apartment & multifamily investor should be planning an exit strategy as part of the purchase. It’s not too early, as some deals can be negotiated differently on the buy-side due to the plan for the disposition.
An example might be a long term approach to the purchase of an apartment foreclosure property that needs a lot of rehab work. But, the value of the property will be enhanced greatly if this work is done, and far above the costs of the work.
The investor may factor this into the offer, even though cash flow is the primary criteria. The capital gains strategy, or a plan for a 1031 exchange on the exit strategy factors into the purchase.
But, beyond that, if there’s no attention early on to the exit strategy, there could be negative consequences on the other end of the deal. A projection of the local economy, real estate trends, and growth should be done for cash flow reasons, but carried out to the expected disposition as well.
Predicting the future isn’t possible or required, but a reasonable belief that the local conditions will yield a reasonable resale when the time comes is important.
Planning for Advantageous Early Disposition of Apartment & Multifamily Projects
A plan is just that, a plan. It doesn’t have to be set in stone, and variables can be considered a part of the plan. Early in the ownership period, a plan variation could be the early exit strategy if the market so dictates.
In good times, appreciation in facility and land value might make a sale appealing. If a new major employer moves in and rental demand shoots up, rents will as well. The cash flow and resulting cap rate may make a sale the perfect strategy. A 1031 exchange at that point might roll the owner into another larger property with great potential.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Tagged with: 1031 exchange , apartment & multifamily , cash flow , exit strategies , exit strategy , Karen Hanover , planning , purchase , sale
Marketing and advertising for apartment & multifamily properties takes many forms in many media. Promotion is generally accepted to be different in that it is some concession or give-away as opposed to an ad in print or other media.
In today’s Internet world, some marketers consider a website as a crossover, in that it can be considered advertising, but also promotion, with the ability to offer specials and other incentives to prospective tenants.
Free Rent for Apartment & Multifamily Promotion
There’s not a lot of originality in this approach, but many use it, as rent concessions can fill units. The trick to doing it right is to balance the cash flow negative with the occupancy positive. “Free Rent” promotions abound when markets get soft and there’s more competition for tenants.
One consideration is the balance between how much free rent and the length of the lease. There are apartment & multifamily renters out there that jump from “free rent” deal to the another, as their moving costs are low.
One month free on a six month lease may be acceptable, but two months on a twelve month lease could be better, as the prep costs to get tenant ready for the next one run up the costs of this type of promotion.
That’s a cost some owners forget in free rent promotions. It’s not just the income that’s given away, but also the cost of getting the unit tenant-ready when there’s a move-out. One month free on a six month lease can result in two vacancies next year, and a month or more of rent lost as expense in getting the unit re-occupied.
Prospective tenants who respond well to free rent promotions can be living paycheck-to-paycheck, and like the idea of a break from rent during the lease. A bit like forced savings, adding $30-$50/month to the rent might not deter them, as they’re looking more at the big cash infusion the skipped month brings.
Another use for free rent promotions is tenant retention. A free month for a new lease might be an excellent tactic, as the costs to get a new tenant into the unit are that much or more anyway.
The Internet for Promotion
The Web shouldn’t be overlooked for apartment & multifamily promotion. The vast majority of renters out there are active on the Web, Facebook, Twitter, and other social and business networks. Creating a website, and offering specials and promotions there will be less expensive than other media, and can be more effective.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Tagged with: advertising , apartment & multifamily , apartments , Karen Hanover , marketing , promotion(s) , prospects , rental , rents , tenants , units
It’s all about cash flow in apartment & multifamily investment. From the valuation of the property with cash flow analysis to the determination of the mortgage amount with cash flow and DSCR (Debt Service Coverage Ratio), it’s the cash flow that determines the value of the deal.
Since property management costs, and the costs of other items on the expense side are controlled by management, it’s crucial to have a good management staff and plan. Without that, it’s easy to see where a commercial foreclosure may become a reality.
Legal and Accounting
Good legal counsel should always be available, whether on retainer or just on-call. From planning and selection of forms for applications and tenant interviews to careful preparation for and performance of the deliveries and documents for eviction, legal help is important. One lawsuit for improper eviction can wipe out a year’s profits.
Accounting isn’t just number-crunching. It’s also tax planning and budgeting to maximize that all-important cash flow. The tax planning can help to subsidize other investments as well. Selection of the right accountant contributes to ongoing management profits throughout the holding period.
Cleaning, Landscaping & General Maintenance
The people hired to clean units between tenants, do landscaping work, as well as general minor maintenance tasks, can set the tone for tenant satisfaction. Arriving home from work to a well-maintained project, with inviting common areas, can contribute to tenant retention, and possibly allow higher rents than competitive properties.
Tenant Relations
Tenant relations encompasses a number of important points of interaction between management and the customer…the tenant. With today’s busy lifestyle, there is little patience on the part of tenants in accepting problems with their home.
From making it easy to reach management with problems, to prompt correction and repairs, tenant satisfaction is critical to profitability. Even if a new one is placed quickly, the loss of a tenant due to management problems increases costs of operation in readying the unit for the new tenant.
Word-of-mouth marketing shouldn’t be undervalued. Happy tenants tell others. They also have friends who will at some point be in the moving mood.
Significant savings in marketing and advertising costs can be attributed to tenants bringing others to the project. Some owners offer a small rent offset as a thank you for a tenant referral. Keeping tenants happy contributes to cash flow.
Apartment & multifamily project management is a significant component on the cost side, but also an important piece of the income side when done properly.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Tagged with: advertising , apartment & multifamily , apartments , cash flow , Karen Hanover , maintenance , marketing , multifamily , project management , tenants
Due Diligence in Apartment Lease Analysis
Posted by:Due diligence in the valuation of a prospective apartment project purchase includes a financial breakdown of leases and rent payments.
Far from merely a flat spreadsheet of the monthly rents collected, there are a number of important financial revelations that come from careful analysis of timing of expiration of leases, comparison of rents within the project for similar units, and comparison of project rents to the local market competition.
These three major considerations do not stand alone, as all three influence the others. Whether to purchase the apartment project, and a schedule of actions to take after the purchase, are determined by these three analysis items.
Comparison of Internal Rents
Just because there are multiple identical 2 bedroom units in a project being considered for purchase doesn’t mean that they’re all generating the same rent.
Not only is this determined by when leases were originated, but can reflect the negotiation between tenants and management. Knowing which units should be at higher rents is important to valuation and income analysis.
Local Market Due Diligence
Markets are fluid, and no apartment project purchase should be made without thorough local market rent due diligence. Not only should there be a comparison of rents for comparable units, but the buyer should do a careful analysis of population movement and local commercial activity and job stability.
This analysis could show that a project-wide adjustment of rents is on the horizon, upward or downward.
Lease Expiration Analysis
Charting a time line of lease expiration dates, including the rents for each unit, yields a lot of information important to the decision to purchase, but also a schedule of the actions to take after purchase.
If a spreadsheet is set up to show current rents along a time line, as well as proposed rents at lease expiration dates, a projection of first year ownership revenues can be created. Especially when there is opportunity to increase rents, this process can show increases in return on investment from rent adjustments that can change the valuation of the project as a whole.
Likewise, if there is a softening of rents in the market area, there may need to be extra marketing costs for incentives, and possibly even lower rents as leases expire. This could rule out the project for purchase, or change the purchase price to reflect a lower value due to lower future rents or cash flow.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Tagged with: apartment leases , apartment rents , apartments , due diligence , Karen Hanover , purchase , rents
Apartments and multifamily investment can be one of the most profitable niches in real estate investment. With tax advantages, large cash flows, economies of scale, and a steady demand for rental units, apartments and multifamily investments make great portfolio additions.
One of these benefits, large cash flows, is the draw for astute investors. With 100 units cash flowing $250 each per month after expenses, it’s easy to see how that $25,000/month would be enticing.
Of course, there are unexpected expenses that can crimp our cash flow. There are repairs and unexpected maintenance items. We should be budgeting for those, but it isn’t always possible to foresee a broken pipe and flooded unit.
But, even with these unexpected problems, huge cash flow from apartments and multifamily investment keep the interest in this niche quite active.
Of greater concern are the two profit-killers, credit losses and vacancy rates. It’s one thing to have a negative expense, but quite another to have the income disappear on the front end.
The good news is that 100 units makes three or four vacancies or non-paying renters much less of a problem. But, any cessation of income on the front end must be addressed quickly and the rental income stream repaired.
Credit Losses Require Fast Action
When tenants stop paying rent, it could be a protest for some perceived wrong or a problem you can address. Doing so quickly can get that income stream going again with minimal damage. But, when the rent stops without any reason, it’s important to know the legal aspects of collections and possible eviction.
Take the appropriate actions on the very first day you can legally. Don’t wait, as every day is a lost day of income. Deliver all required notices on time, and take all legal action at the first opportunity. Sometimes just the first notice delivery will get the tenant back into compliance, but take the action.
Vacancy – Keeping It to a Minimum
A vacant unit generates no income. As soon as notice of move-out is given, marketing for a new tenant should begin. A waiting list would be the best solution, but fast action can create a waiting list of one, and that’s all that’s needed to re-occupy that unit. Get the cleanup and refurbish maintenance done as soon as the previous tenant moves out.
Vacancy and credit losses are part of the business of apartments and multifamily investment. But, taking the right action quickly will minimize the damage.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Tagged with: apartments & multifamily investment , cash flow , credit losses , Karen Hanover , vacancy
