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

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…

Click Here to read the rest of the article…

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

Large cash flows, available financing based on those cash flows, and economy of scale in expense reduction all come into play to make apartment & multifamily investment a worthwhile goal. But, if the right property isn’t available at the right time, where is a commercial real estate investor to turn?

One could go out of their desired area, but it’s not always a good decision to own and manage from afar. So, why not look at some alternative commercial investment property types?

Office Complexes or Shopping Strips and Malls

The face of business in this country has changed in the last dozen or so years. The Internet is a major factor, allowing more people to work outside of normal large business cubicles. Businesses are finding that outsourcing saves money in many cases. Small consulting and sub-contracting businesses have flourished.

These individuals or very small businesses need office space, and office complexes with small spaces with centralized conference areas have become popular. The ability to house many offices under one roof creates economies of scale, reduces expenses and increases cash flow.

Small business is still the generator of most of the jobs in this country, so shopping strip centers and malls will always draw shoppers. Investment in these types of commercial real estate will continue to be an excellent long term investment & cash flow proposition.

Storage Units

What if someone sent you a proposition to spend a fraction of the construction cost of residential rental property, yet rent it out for almost as much per square foot? That’s what storage unit properties are bringing to investors all around the country. They aren’t just a “build-and-own” opportunity.

Many of these projects were constructed as retirement income vehicles, and their owners are no longer able to manage them or heirs are selling in the estate. Storage unit properties are worth a close examination.

Mobile Home Parks

Construction costs keep going up for on-site built homes. And, in some cases, the cost of building mobile homes is going down due to efficiency of operation and processes.

That’s why mobile homes as a place to live aren’t going away. A mobile home park is an investment in land and infrastructure, but not in repair of the living units. Keeping an eye out for a mobile home park investment could be a decision an investor will celebrate down the road.

I’ll share more with you soon…

Warm Regards,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President

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

Properties that are mis-managed or suffering from previous poor decisions in better times are missing their mortgage payments and approaching foreclosure.

Far from an indication that they are not good properties for investment, it’s related more often to management or expenditures made in better times that are now coming back to haunt their owners.

Basic Short Sale Concepts

Commercial short sales are similar in the basics to residential short sale situations. The owner of an income-producing commercial property is having trouble making their mortgage payments, and the lender is threatening further action.

It isn’t a foreclosure yet, and a buyer may create a great purchase opportunity by stepping in and relieving the bank or lender of the costs and hassles of foreclosure.

A buyer in a residential short sale provides the lender with comparable sale data, current comparable property listings, and other data to support an offer significantly lower than the current mortgage balance.

The homeowner/borrower helps by providing documentation of their distressed financial status and eminent foreclosure or bankruptcy. The goal is to get a deep discount deal from a bank or lender wanting to avoid the foreclosure process.

Commercial Short Sale Specifics

In commercial rental properties, whether office complexes, shopping malls, or other property types, the cash flow is the primary valuation factor and lending decision component. It could be assumed that the property wouldn’t be in a short sale position if the cash flow was as it should be.

This could be the case, but it needn’t be because of factors outside the owners’ control. Poor management or decisions on major expenditures could create drains on otherwise good rental income flows.

There is also the strong possibility that the property in mortgage trouble has been subsidizing other losing investments of the owners. As these other property situations deteriorate, an otherwise very desirable property is unable to stay afloat because its cash flow is being drained to fund other poorly performing investments.

When an investor can uncover an opportunity like this and negotiate a successful short sale with the lender, an excellent investment is the result.

Commercial short sale opportunities do require a high level of due diligence, but it can be very well worth it.

I’ll share more with you soon…

Warm Regards,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President

It isn’t about the credit score of the buyer, and it’s less about the standard residential concept of “loan-to-value.” Though appraised value is important, cash flow is critical. There are two ways in which lenders look at the cash flow.

These ratios indicate the ability of the property to generate enough cash to pay the monthly mortgage, as well as leave a profit for ownership.

Cash Flow Analysis, Stability and Future Risk

First, it’s very important to get the income and expense numbers “right.” Are all of the rents at market rates? If some tenants have been given special deals, or just generally the rents are all below market, then income could be better if rents are increased at expiration of leases.

Expenses should be appropriate, reflecting efficient management, reasonable repair costs, good turnover rehab practices, and no “sweetheart deals.”

Any expense categories that are out of line should be addressed, or a plan put in place to deal with them after purchase. When approaching a lender for an apartment or multifamily mortgage, documentation of the ability to raise rents and/or cut expenses quickly could result in a better mortgage deal, as cash flows can be expected to improve.

The next consideration is the expected stability of rents and cash flow into the future. Lenders hate risk, so a marketing plan, budgets, and projections of future vacancy and credit losses is critical. Once the current and projected cash flow is determined, two common ratios can be applied to see how lenders will look at the property for a mortgage.

DSCR – Debt Service Coverage Ratio

This ratio takes the net income from operations, or cash flow, and compares it to the expected mortgage payment. Most lenders want to see a ratio of at least 1.25-to-1 of cash flow over the mortgage payment. In other words, if the mortgage payment is to be $8000/month, then cash flow should be at least $10,000/month to yield this 1.25 DSCR.

Break-even Ratio

Here, the lender takes the annual operating expenses, adds the annual debt payments, and divides the total by the Gross Operating Income (GOI). What they’re going is seeing at what point the income overtakes the expenses, or the break-even. If the annual expenses are $35,000, and the debt payments total $72,000/year, a GOI, gross operating income of $150,000 would look like this:

($35,000 + $72,000) / $150,000 = 0.71, or 71%, the Break-even Ratio

Generally, lenders want a Break-even ratio lower than 80%.

I’ll share more with you soon…

Warm Regards,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President

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

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