Archive for cash flow
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
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
Apartments and multifamily investment can be one of the most profitable niches in real estate investment. With tax advantages, large cash flows, economies of scale, and a steady demand for rental units, apartments and multifamily investments make great portfolio additions.
One of these benefits, large cash flows, is the draw for astute investors. With 100 units cash flowing $250 each per month after expenses, it’s easy to see how that $25,000/month would be enticing.
Of course, there are unexpected expenses that can crimp our cash flow. There are repairs and unexpected maintenance items. We should be budgeting for those, but it isn’t always possible to foresee a broken pipe and flooded unit.
But, even with these unexpected problems, huge cash flow from apartments and multifamily investment keep the interest in this niche quite active.
Of greater concern are the two profit-killers, credit losses and vacancy rates. It’s one thing to have a negative expense, but quite another to have the income disappear on the front end.
The good news is that 100 units makes three or four vacancies or non-paying renters much less of a problem. But, any cessation of income on the front end must be addressed quickly and the rental income stream repaired.
Credit Losses Require Fast Action
When tenants stop paying rent, it could be a protest for some perceived wrong or a problem you can address. Doing so quickly can get that income stream going again with minimal damage. But, when the rent stops without any reason, it’s important to know the legal aspects of collections and possible eviction.
Take the appropriate actions on the very first day you can legally. Don’t wait, as every day is a lost day of income. Deliver all required notices on time, and take all legal action at the first opportunity. Sometimes just the first notice delivery will get the tenant back into compliance, but take the action.
Vacancy – Keeping It to a Minimum
A vacant unit generates no income. As soon as notice of move-out is given, marketing for a new tenant should begin. A waiting list would be the best solution, but fast action can create a waiting list of one, and that’s all that’s needed to re-occupy that unit. Get the cleanup and refurbish maintenance done as soon as the previous tenant moves out.
Vacancy and credit losses are part of the business of apartments and multifamily investment. But, taking the right action quickly will minimize the damage.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Tagged with: apartments & multifamily investment , cash flow , credit losses , Karen Hanover , vacancy
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
An apartment or multifamily property foreclosure is an unfortunate circumstance for the current owner and borrower. But, it can be a great opportunity for another apartment & multifamily investor looking for a bargain purchase of a great cash flow property. True, there may be problems in condition and cleanliness due to a period without tenants, but the offsetting bargain price can make all the difference.
Assuming the mere fact that it’s a foreclosure makes it a poor investment candidate is far from accurate. Apartment & multifamily projects go into foreclosure all of the time, and reasons and motivations of the concerned parties can create all sorts of situations and opportunities. In examining the situations and motivations of those involved in an apartment or multifamily foreclosure, the smart investor can ferret out profitable properties.
The Mortgaged Owner Losing the Property
Though it can be the case, the assumption that the owner losing the property is in this situation due to poor cash flow or problems not economically correctable is not accurate in many cases. Sometimes the owner has gotten into a situation with other less profitable or negative cash flow investments, and can no longer continue without bankruptcy. The foreclosed property in this case may be cash flow positive, and a factor in their ability to hold out until the current crisis.
It could be that there has been an increase in vacancies due to property condition and poor management. But, if the condition items or management issues can be corrected at reasonable cost, negotiations with the foreclosure lender can gain concessions that make this a profitable apartment or multifamily investment.
The Lender
Motivation here is obvious. Lenders make money loaning money, not managing apartment & multifamily projects. The lender wants this property off the books as quickly as possible. Unlike a single family home that can just be boarded up and ignored, there could still be tenants and some cash flow, so management headaches are present as well.
The Foreclosure Investment Buyer
Again, no mysteries here. The apartment & multifamily foreclosure property buyer is looking for a bargain purchase with excellent future cash flow. The ability to accurately identify costs and mortgage requirements to reach that positive cash flow point is crucial. But, outlining the issues and costs during the negotiations can result in price or financing concessions from the lender that will make the deal happen.
Apartment & multifamily foreclosure purchase opportunities are out there. Don’t let misconceptions deter researching them.
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Tagged with: apartment & multifamily foreclosure , cash flow , foreclosure , investments , Karen Hanover , lender , mortgage
