Archive for apartment & multifamily
Real estate investors have long recognized the benefits and multiple returns of rental property ownership. These investors have found real estate to be better than stocks, with the prevailing “buy low – sell high” strategy.
They’ve also realized that the return from bonds, though lower risk investing, isn’t going to meet their long term needs.
Why Invest in Real Estate At All?
Rental property real estate investment has proven over time to be low risk, but high return investing. The high returns come from:
· Cash flows from rents
· Tax advantages from depreciation and other tax write-offs
· Paying down mortgages, freeing up equity for other investments
· The old standby buy low and watch the property value appreciate over time
Applying these investment objectives to a single family property, or a duplex, a great many investors have found the ability to leverage and increase the number of properties in their portfolios. But…
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Real estate investors have long recognized the benefits and multiple returns of rental property ownership. These investors have found real estate to be better than stocks, with the prevailing “buy low – sell high” strategy.
They’ve also realized that the return from bonds, though lower risk investing, isn’t going to meet their long term needs.
Why Invest in Real Estate At All?
Rental property real estate investment has proven over time to be low risk, but high return investing. The high returns come from:
· Cash flows from rents
· Tax advantages from depreciation and other tax write-offs
· Paying down mortgages, freeing up equity for other investments
· The old standby buy low and watch the property value appreciate over time
Applying these investment objectives to a single family property, or a duplex, a great many investors have found the ability to leverage and increase the number of properties in their portfolios.
But, if owning a half dozen rental homes is good investing, is there a better way to use the same cash to increase the number of rental units?
Same Investor – Multiply Returns with Apartment & Multifamily Properties
One reason many investors do not consider the apartment & multifamily investment opportunity is their belief that it’s beyond their financial ability.
This is definitely not the case. The same amount of cash that can be required to purchase and mortgage a half dozen single family rental properties could purchase an apartment or multifamily project with many times that many units.
Yes, the purchase price is much higher, but the mortgage financing is based on cash flow rather than the credit history or income of the buyer.
Cash Flow Makes The Deal
Instead of going to a lender with a credit score, down payment, and proof that the borrower can make the notes, the apartment & multifamily investor goes in with a cash flow analysis of the property.
Sure, there are other factors, condition, location, structure and land value, but it’s the cash flow that seals the deal. The lender applies certain ratios to determine how secure the cash flow will be, with normal vacancy and credit loss rates. If there’s enough cushion for the unexpected, the loan can be secured.
Real estate investors shouldn’t limit their possibilities using residential loan qualification factors as a guideline. Apartment & multifamily investment is about cash flow, and security of that cash flow.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Apartment & Multifamily investment requires excellent control of expenses to maximize cash flow. But, vacancy and credit loss are two items that need just as much attention, though they’re on the income side of the financial sheet.
It can be a lot easier to negotiate a better deal on landscaping services than to analyze and attack multiple issues that make up vacancy and credit losses. That’s because there can be marketing factors, as well as management failures in the interview and tenant selection processes.
Vacancy Costs in Apartment & Multifamily Investment
Vacancy costs are comprised of more than just units that aren’t rented at the time. There’s also the costs involved in rehab of the units between tenants. So, turnover is a part of vacancy loss. These two items comprise the marketing and tenant relations side of the vacancy loss picture.
How is the marketing working for the project? Has ownership been keeping up with changes in demographics that influence available tenant prospects? Is the marketing plan being regularly reviewed with new market information?
Are the advertising media being used still as effective as when they were first put into play? What could be done differently to generate interest and get empty units occupied? Does the math tell ownership that rent cuts would be better for cash flow than retaining empty units? Or, possibly a free rent promotion could fill the units, cutting vacancy loss.
Credit Loss in Apartment & Multifamily Investment
This is on the expense side, but credit loss many times begins with the interview and selection process. If vacancy loss is a problem, it can contribute to credit loss later if ownership relaxes their tenant selection criteria in order to fill units.
Sometimes, the dislike of taking appropriate eviction action can delay the turnover of a unit, increasing credit losses.
Are there adequate credit check and references follow-up practices? Are they being followed? Sometimes, if legally allowed, increasing deposit requirements for marginal tenants can help in this regard.
If some tenants are having rent payment problems that are temporary, can they pay with a credit card? If they can get over a rough patch with credit, it may keep an otherwise good tenant and cut credit losses.
Vacancy and credit losses are damaging to apartment & multifamily cash flow, so they should be attacked and resolved at every opportunity.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
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
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
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
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
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
One misconception that keeps many real estate investors out of the apartment & multifamily property investment markets is that they don’t have the assets or credit worthiness to borrow in this market. True, the amounts of money are larger, and loan amounts and payments are higher as a consequence. But, the criteria lenders use for these types of loans is different.
“Cash flow is king” is a popular saying, and it’s actually quite true in the apartment & multifamily investment lending environment. Borrower credit history, and value of property structures and land take a back seat to cash flow. If the cash flow supports a loan, with enough cash flow to make payments with profits left over, loans can be had.
Cash Flow For Apartment & Multifamily Properties
As the words imply, “cash flow” is going to be the money stream flowing in or out in the operation of an apartment or multifamily investment. As it is cash, all operating expenses should be subtracted from rent income, yielding the net operating income. Once this monthly positive cash flow is calculated, there is a way to determine the approximate amount a lender will loan against the apartment or multifamily apartment.
DSCR – Debt Service Coverage Ratio
Lenders take the net income, or cash flow from operations, and a ratio is calculated to determine the amount of money that can safely be loaned against the apartment & multifamily property. This DSCR is a multiplier indicating the ratio of the loan balance to the cash flow. An example would be an apartment or multifamily investment property that cash flows $45,000 per month, or $540,000 per year. Many lenders want to see the cash flow at 1.25 times the cash flow. In this example, the lender would not want to loan more than $432,000 against the property, as $540,000 is 1.25 times that loan amount.
Anything less than the 1.25 amount would be considered too risky by this lender, as vacancies or other problems could result in a troubled loan. A higher DSCR, such as 1.33 would look better, as the cash flow provides a third more cash each month than the payment. Lower, say 1.15, would not be as good, as the cash flow is only providing a 15% cushion over the loan payment.
Apartment & multifamily investment can be the goal of many more real estate investors once the mechanics of cash flow, DSCR, and lending decisions are understood.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
