Archive for Karen Hanover
Real estate investors have long recognized the benefits and multiple returns of rental property ownership. These investors have found real estate to be better than stocks, with the prevailing “buy low – sell high” strategy.
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…
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Real estate investors have long recognized the benefits and multiple returns of rental property ownership. These investors have found real estate to be better than stocks, with the prevailing “buy low – sell high” strategy.
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
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
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
Apartment & Multifamily investment requires excellent control of expenses to maximize cash flow. But, vacancy and credit loss are two items that need just as much attention, though they’re on the income side of the financial sheet.
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
Marketing and advertising, though many use the terms as if they mean the same thing, are really different. Advertising is a function of marketing, but marketing is a broader planned approach to positioning an apartment or multifamily property in the local marketplace.
Advertising includes the ways in which the property is presented to the prospective rental pool in a way that follows the marketing plan.
Marketing for Apartment & Multifamily Properties
Taking some niche examples, what might a marketing plan contain for an apartment or multifamily property? First, it will be identification of the target prospect or renter who would be most likely to want to live in the project.
This includes looking at the “why” that could be location, amenities or size and layout. Once this is determined, a marketing plan can be put into play.
· Taking the top couple of reasons renters would like this property from the research above, examine where these prospects live now, work, and places frequented for entertainment.
· If it’s an age group, this could point out marketing approaches and advertising media later that would appeal, such as focusing on modern and online access for younger, or convenience and ease of access for older prospects.
· Location is easy, as a college or major technology employer that’s providing the prospects can be the main source of tenants, thus a focus for marketing efforts.
Advertising for Successful Apartment & Multifamily Marketing
Once a marketing plan is in place, the methods used to advertise for tenants will be determined based on their ability to reach the best prospects at the lowest cost.
There are a great many ways to advertise apartments & multifamily properties, and just as many differences in reach, cost and results. Media sales people have a job to do, but just taking demographics in a sales presentation at face value could be costly and ineffective.
· Young professionals could be targeted quite well with a website and search engine presence.
· Those same young professionals, as well as college students, use Craigslist a lot, so it’s a great free advertising resource.
· College bulletin boards, and the same for large employers and institutions are another free resource that works.
· Large employer or institution newsletters may offer ad space.
· Of course, all of the traditional media, TV, radio, newspaper, and magazine can be effective. But, have the ad sales person show hard numbers for the number of prospects that fit the marketing plan.
Marketing & advertising for apartment & multifamily properties can be very cost effective with a plan and careful media selection.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Commercial short sale opportunities are being presented to investors all around the country. The pressure on business from the high residential foreclosure rates and mortgage woes have put weaker business properties into distressed situations.
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
Banks love to make money. But, that love is in the movement of money, lending, and collecting interest. It’s not in owning and managing commercial real estate.
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
Cash flow is king in apartment & multifamily investment. It’s used to determine cap rate, as well as DSCR, Debt Service Coverage Ratio. If the cap rate looks good, and the DSCR is 1.25 or better, lenders come to the table with mortgages.
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
