Archive for apartment & multifamily
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
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
Tagged with: apartment & multifamily , apartments , cash flow , dscr , investments , Karen Hanover , lending , multifamily
Funding Apartment & Multifamily Investments
Posted by:It’s a shock to many new apartment & multifamily investors when they find out that it can be easier to get a large loan for the purchase of apartment & multifamily project than to get a jumbo home loan. There are sound financial reasons for this, with lenders searching for mortgage income streams that provide security from cash flow backed by property value. The components of funding decisions for apartment & multifamily investments include:
Property Value – As with a residential home loan, there is careful consideration of the condition and value of the property’s facilities and land occupied. This isn’t the major criteria in granting a mortgage, or in deciding how much to loan, but it is one of the factors.
Cash Flow & Cap Rate in Mortgage Decision – Apartment & multifamily mortgages are decided primarily on the cash flow, which is used to calculate a capitalization or cap rate, and this cap rate is compared to other properties for sale and recently sold in the area. If recent apartment sales have closed at an average cap rate of 9%, and the subject property is at 11%, the lender will be more likely to originate a mortgage on the property.
The cash flow, or net operating income component, is a major focus of the lender. Careful scrutiny of financial data will be done to verify rental income is accurate. Just as carefully analyzed will be operating expenses. Are they normal, better or worse than the typical apartment or multifamily project? Are they likely to change for better or worse under new ownership? Are local business and economy healthy, with any improvement or problems foreseen? Any softening of rental demand could cause a drop in average rents, cutting cash flow, and placing the mortgage into default. Higher vacancy rates due to a major employer leaving the area could do the same.
DSCR, Debt Service Recovery Ratio – This ratio is used by the lender to determine how much to loan. Many use 1.25 or thereabout for this number, and it indicates a multiplier of cash flow over the mortgage payment. $10,000 in monthly cash flow, with a monthly mortgage payment of $8000 would yield this 1.25 DSCR. Higher is better, lower might kill a deal.
But, the good news is that a profitable property, with a DSCR higher than 1.25, a strong and secure cash flow, and a cap rate higher than other comparable properties is a strong candidate for a great mortgage deal. It’s not credit score or job income, but property financial performance that seals the deal.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Tagged with: apartment & multifamily , cap rates , capitalization rate(s) , cash flow , debt service coverage ratio , dscr , Funding , Karen Hanover , mortgage
