Archive for apartment & multifamily
Apartment & Multifamily Rent Due Diligence
Posted by:When a buyer is investigating an apartment or multifamily project purchase, the due diligence piece is quite important. As a part of due diligence, the buyer will examine rents from a number of perspectives. It isn’t just about making sure that the deposits equal what is being collected from the tenants.
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!
Tagged with: advertising , apartment & multifamily , cash flow , due diligence , Karen Hanover , market , marketing , rents
Why look at apartment & multifamily investment? The real estate investor buying multiple residential single family rental homes has a major goal of getting the best cash flow.
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
Tagged with: apartment & multifamily , break-even , cash flow , debt service coverage ratio , dscr , investments , Karen Hanover , properties , ratios
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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Tagged with: apartment & multifamily , cash flow , credit loss , investment , Karen Hanover , mortgages , single family homes , vacancy
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
Tagged with: apartment & multifamily , cash flow , credit loss , investment , Karen Hanover , mortgages , single family homes , vacancy
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
Tagged with: apartment & multifamily , cash flow , credit loss , credit losses , expenses , Karen Hanover , vacancy , vacancy and credit losses , vacancy loss
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
