First, it’s important that the investor hasn’t reached this decision point in a vacuum. There should have been some general situational due diligence, as well as area and market statistics analysis. What should already have been done?

· The investor should have a firm plan for their personal investment needs and risk tolerance. They should have formulated a plan that takes into account their profit requirements and a time line to reach a well-defined goal.

· Financing capability should be fairly well-defined at this point. The investor should have gathered information about available funding options, and assessed them in relation to the investor’s goals and financial abilities. In other words, what can they afford to buy?

· A thorough market survey and analysis should already be in hand. What are prevailing cap rates and rents? Which areas appreciate better, and which attract tenants?

· Working with Realtors or alone, the investor has accumulated a list of properties that appear to be good candidates for the plan and this market.

Once an investor is at this point in their process, it’s time to dig deeper with more thorough and focused due diligence. While the market has been studied, and certain areas are targeted, it’s now time to compare the properties in those areas.

Which properties are best suited for the plan and goals, and which will yield the greatest balance of short term and long term return on investment? It’s in this phase that two very similar properties can be compared and a decision made on which is the better buy.

Let’s say that two properties in the same area have precisely the same number of units, almost the same square footage, and the units are all just alike, with the same bedroom/bath configurations. Both properties are for sale for the same price, $1,000,000. Project A has an annual income of $225,000, while Project B realizes an annual income of $310,000.

Because the real estate itself is of secondary importance to cash flow, Project B is the choice. How, if they’re so similar, can Project B do 37% better in cash flow? Obviously, vacancy rates must be lower, expenses lower, rents higher, or a combination. The lender is basing decisions on cash flow, and the investor should as well.

Now that a decision has been made, it’s time to do more due diligence, verify the numbers, and make the purchase and financing arrangements.

The key is to have a plan that meets the investor’s needs and abilities, analyze the market carefully, compare investments based on cash flow, then get the deal done.

I’ll share more with you soon…

Fondly,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President

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!

There’s a lot to investigate, from a market analysis perspective through valuation, cash flow analysis and return on investment, short and long term.  What is sometimes overlooked is the value of the added financial information available in an apartment foreclosure.

Banks have apartment foreclosure data:

Generally, the bank or lender holding the property has a big file of data on the property, from the initial loan application and financial analysis, to the situation at the time of the foreclosure.  The goal of the bank is to get out of the apartment management business and back into the loan business. 

A prospective buyer can usually get a look at some or all of this data, a great help in the due diligence process.  Once an investor has demonstrated credibility, the bank can see it in their best interest to share financial and apartment foreclosure property data that will aid the investor in making a purchase decision.

Normal market analysis is still important:

All of the normal items to consider in a local and regional rental property market analysis are still a part of an apartment foreclosure due diligence process. 

What are population demographics, and are people moving in or out?  What does the competition look like?  What’s the physical and structural condition situation?  What are prevailing rents, and how do they relate to the expected rents for the subject apartment property?  Are there any recent or known pending changes in local employment, commercial or industrial activity?  Are current rents at market rates?  How long are leases?  Are infrastructure or transportation improvements in the works that might increase property value or rentability?

Special considerations for the apartment foreclosure property:

Obviously, the major question in the apartment foreclosure due diligence process is to ascertain why the previous owner defaulted.  If high vacancy rates were a factor, then will the situation that created them still be in play? 

If credit losses contributed, was it due to employment issues, or was it temporary or something that isn’t expected to continue in the future.  Is the property occupied, and how are rents being paid?  If vacant, condition issues will be quite important.

So, the potential apartment foreclosure investor should expect to complete extensive due diligence.  But, some of the information that may have been difficult to get from an owner/seller may be easier to come by in the due diligence process for an apartment foreclosure.

I’ll share more with you soon…

Fondly,

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

Far from merely a flat spreadsheet of the monthly rents collected, there are a number of important financial revelations that come from careful analysis of timing of expiration of leases, comparison of rents within the project for similar units, and comparison of project rents to the local market competition.

These three major considerations do not stand alone, as all three influence the others. Whether to purchase the apartment project, and a schedule of actions to take after the purchase, are determined by these three analysis items.

Comparison of Internal Rents

Just because there are multiple identical 2 bedroom units in a project being considered for purchase doesn’t mean that they’re all generating the same rent.

Not only is this determined by when leases were originated, but can reflect the negotiation between tenants and management. Knowing which units should be at higher rents is important to valuation and income analysis.

Local Market Due Diligence

Markets are fluid, and no apartment project purchase should be made without thorough local market rent due diligence. Not only should there be a comparison of rents for comparable units, but the buyer should do a careful analysis of population movement and local commercial activity and job stability.

This analysis could show that a project-wide adjustment of rents is on the horizon, upward or downward.

Lease Expiration Analysis

Charting a time line of lease expiration dates, including the rents for each unit, yields a lot of information important to the decision to purchase, but also a schedule of the actions to take after purchase.

If a spreadsheet is set up to show current rents along a time line, as well as proposed rents at lease expiration dates, a projection of first year ownership revenues can be created. Especially when there is opportunity to increase rents, this process can show increases in return on investment from rent adjustments that can change the valuation of the project as a whole.

Likewise, if there is a softening of rents in the market area, there may need to be extra marketing costs for incentives, and possibly even lower rents as leases expire. This could rule out the project for purchase, or change the purchase price to reflect a lower value due to lower future rents or cash flow.

I’ll share more with you soon…

Warm Regards,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President