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

There can be a great deal of cash flow improvement to be uncovered if one or more of these rent factors are out of line.

Are Rents at Market Values?

This is a multi-faceted question. First, a thorough market study should be conducted, with a careful look at what type of tenants are in place versus the available pool of tenants in the market.

In other words, is this project full of employees of the local canning plant, while there’s a new tech center that could provide tenants at higher wage scales able to pay higher rents? And, are the rents being charged in line with competitors for the tenants currently in place?

Sometimes a seller is selling because they are tired of the business, and one result could be that they found it easier to just leave rents alone, rather than raising them to market and having to replace some tenants.

Another thing to look for are units that show one amount in the lease, but another on the checks. This happens with negotiated decreases in rent for any reason, as well as “sweetheart” deals for relatives or vendors/tenants trading services for rent. It’s important to identify units that are not generating the revenue they should in order to make an informed decision on tenant retention.

Can Rents be Increased at Nominal Expense?

There’s a market analysis piece here, as well as a marketing and advertising study. Is management marketing for the “highest and best use” of their units? In other words, could the simple and inexpensive addition of free tenant Wifi Internet access allow an increase in rents far above the cost?

This could be especially true if there is a new high tech employer in the area, and even better if they allow tele-commuting, or working from home, as many do.

But, even just looking at the mundane things in our tenants’ lives, like appliances and common area amenities, are there improvements that will result in increased rents and better cash flow?

What if a fitness center can be constructed and financed at a monthly payment one-tenth of the rent increases we could charge for its use?

When you start looking outside the box of life style improvements that
your competitors don’t offer, 2 things happen.

1. You can offer amenities that your competitors don’t, resulting in a lower vacancy rate (assuming what you’re offering is in demand)…

2. By having a complex with amenities that are in demand, you can raise the rents, thus increasing the value of the property.

Start compiling a list of all the amenities offered by apartment complexes. Do your due diligence to determine which ones might make sense financially to add to your property.

Start getting excited when you find financially responsible ways to make more money with commercial real estate!

I hope these creative ideas help you to fill apartments, raise rents, and increase property values!

I’ll share more with you soon…

Fondly,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President

P.S. If you still haven’t signed up to attend one of my few
remaining Live Academy Events of this year, there
are only a handful of seats available.

CLICK HERE to reserve your spot now!

Appreciation and other financial benefits of ownership are desired as well, but cash flow is king. And, investors successfully operating a number of residential home rentals are generally enjoying great cash flow. What they should consider is raising their expectations and the return on their investments from apartment & multifamily properties.

Economy of scale – It’s easy to dismiss apartment & multifamily properties as being just another rental unit with the same income that a home would get for the same square footage. But, even if their rents are exactly the same, the apartment & multifamily properties owner will realize much better cash flow due to economy of scale in operations.

With a large number of units concentrated at one location, often under one roof, costs per unit drop dramatically. Maintenance, repairs, management, marketing and other expense items all will take less of the revenue per unit in an apartment & multifamily investment.

Mortgages are Not Difficult – Another incorrect assumption that keeps some investors away from apartment & multifamily investment is the large amount to purchase, and the large mortgage. They are accustomed to the residential mortgage process, verifying income, credit history and getting an individual loan for each property.

Even if the lender takes the cash flow into account, it’s a loan on one property, so any vacancy or credit loss will impact performance greatly. The economy of scale of apartment & multifamily investment jumps in here as well. A couple of vacancies or non-paying renters in a 100 unit complex aren’t nearly as damaging to cash flow.

For these reasons, lenders originate mortgages based mostly on cash flow, not the credit score or other income of the buyer. In determining whether they’ll make a loan and for how much, two ratios are used frequently.

DSCR – Debt Service Coverage Ratio: to arrive at this number, the expected mortgage payment is divided into the cash flow, using monthly numbers is best. So, if the mortgage payment is estimated to be $8,000/month, and income is $10,000/month, the DSCR would be 1.25, generally considered to be the bottom line for lenders.

Break-even: to get this number, the operating expenses are added to the mortgage payments or debt service for the year, and divided by the income for the year. So, $275,000 in expenses & debt service, and $350,000 in income would result in a break-even of about 79%.

Knowing how lenders look at apartment & multifamily investments and cash flow will help you to identify amazing potential in the market.

I’ll share more with you soon…

Fondly,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President

There’s a lot to investigate, from a market analysis perspective through valuation, cash flow analysis and return on investment, short and long term.  What is sometimes overlooked is the value of the added financial information available in an apartment foreclosure.

Banks have apartment foreclosure data:

Generally, the bank or lender holding the property has a big file of data on the property, from the initial loan application and financial analysis, to the situation at the time of the foreclosure.  The goal of the bank is to get out of the apartment management business and back into the loan business. 

A prospective buyer can usually get a look at some or all of this data, a great help in the due diligence process.  Once an investor has demonstrated credibility, the bank can see it in their best interest to share financial and apartment foreclosure property data that will aid the investor in making a purchase decision.

Normal market analysis is still important:

All of the normal items to consider in a local and regional rental property market analysis are still a part of an apartment foreclosure due diligence process. 

What are population demographics, and are people moving in or out?  What does the competition look like?  What’s the physical and structural condition situation?  What are prevailing rents, and how do they relate to the expected rents for the subject apartment property?  Are there any recent or known pending changes in local employment, commercial or industrial activity?  Are current rents at market rates?  How long are leases?  Are infrastructure or transportation improvements in the works that might increase property value or rentability?

Special considerations for the apartment foreclosure property:

Obviously, the major question in the apartment foreclosure due diligence process is to ascertain why the previous owner defaulted.  If high vacancy rates were a factor, then will the situation that created them still be in play? 

If credit losses contributed, was it due to employment issues, or was it temporary or something that isn’t expected to continue in the future.  Is the property occupied, and how are rents being paid?  If vacant, condition issues will be quite important.

So, the potential apartment foreclosure investor should expect to complete extensive due diligence.  But, some of the information that may have been difficult to get from an owner/seller may be easier to come by in the due diligence process for an apartment foreclosure.

I’ll share more with you soon…

Fondly,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President

According to the Congressional Oversight Panel for TARP
(the government’s rescue program for big banks and financial firms):

Over the next few years, a wave of commercial real estate loan failures could threaten America‘s already-weakened financial system.

The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation‘s mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy.

Recently on CNBC, Elizabeth Warren, the chair of the Congressional
Oversight Panel for TARP, said: We’re looking at a situation where about half of all commercial real estate loans are going to be underwater by the end of this year, and that is going to have a direct impact on about 3,000 community banks, or about 40 percent of our entire banking system.

In order to survive, these banks will need to move these distressed assets from the non-performing side of the balance sheet to the performing side.

They will accomplish this by making very creative loans on very creative terms. They have no choice but to seriously consider just about any offer.

Once any new loan is in place it is now a performing loan. This is your chance to finally strike it rich and set yourself up for life by making creative offers while banks are highly incentivized to accept.

By comparison, the residential real estate market is in the worst shape it’s been in for many decades, and in the residential market, “only” about 21% of residential properties are currently under water.

How will the commercial real estate debacle affect the health of our nation’s small businesses?

According to Warren a disproportionate number of both commercial real estate loans and small business loans are made by community banks. Therefore, drastic increases in commercial loan losses lead to greater financial trouble for community banks which leads to fewer and smaller small business loans.

As continued funding becomes unavailable to small business, rising unemployment becomes an even greater risk, thus a prolonged weakness throughout the economy.

I will keep you posted on this.

FYI…

If you have not secured a spot yet at one of my upcoming Boot Camps where I show you how to profit from Commercial Foreclosures and Short Sales, you need to act fast as they are selling out all across the country.

CLICK HERE to check which Boot Camp still has a few remaining seats.

As every Boot Camp we’re offering other than October is either sold out or very close to sold out, we have added one last date in San Diego, CA.

Sign up now as seats are selling out quickly and no more dates will be added in 2010!

I look forward to meeting you in person at one of the Boot Camps!

Fondly,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President