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

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