Archive for investments
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
TARP Accounting – 2011 Budget Statements
Posted by:TARP, the Troubled Asset Relief Program, as instituted by the government to help combat the real estate and mortgage crisis, has been a success according to the “Rescuing the Economy” document from the 2011 Budget of the U.S. Government.
In this document, there are broad overview statements as to the accounting of money expended versus the funds returned to the taxpayer by the banks and institutions who received them.
· Since President Obama took office, only $7 billion in TARP funds have been provided to banks – much of it to smaller institutions.
· Major banks subject to the “stress test” have raised more than $140 billion in high quality capital from the private sector during the same period.
· As of December 31, 2009, the Treasury received $165 billion in TARP repayments.
· Also as of the end of 2009, taxpayers had received about $17 billion in interest, dividends and capital gains through the sale of warrants.
At the apex of the crisis, the Treasury had guaranteed that taxpayers would get back at least what they invested in money market funds that participated in this temporary guarantee program.
According to the “Rescuing the Economy” document in the budget, “The program achieved its purpose, and it was terminated in September 2009. Not only did it not cost taxpayers a dime; it earned $1.2 billion in fees.”
The document further states that the Treasury has developed a four-step exit strategy for modification of TARP as rebuilding of the economy moves forward.
1. Treasury will continue winding down or terminating many of the government programs put in place to address the crisis. This process is already under way.
2. Future commitments will be limited to the goals of preserving home ownership, stimulating credit for small business, and support of markets that securitize and support consumer and small business loans.
3. Other than those stated uses, remaining funds will not be used unless there is an immediate and substantial threat to the economy stemming from financial instability.
4. Investments in banks and companies acquired through TARP will be carefully managed and unwound as soon as practicable.
TARP is not a thing of the past, but it’s winding down.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Tagged with: banks , economy , financial , funds , investments , Karen Hanover , TARP , treasury
Apartment & multifamily property investment is by far the major target of large scale rental real estate investors. And, there’s ample reason for this choice.
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
Tagged with: cash flow , commercial real estate , investments , investors , Karen Hanover , mobile home parks , office complexes , retail , shopping centers , storage units , strip malls
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
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
