Archive for Karen Hanover
Apartment & Multifamily Rent Due Diligence
Posted by:When a buyer is investigating an apartment or multifamily project purchase, the due diligence piece is quite important. As a part of due diligence, the buyer will examine rents from a number of perspectives. It isn’t just about making sure that the deposits equal what is being collected from the tenants.
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!
Tagged with: advertising , apartment & multifamily , cash flow , due diligence , Karen Hanover , market , marketing , rents
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
Apartment Foreclosure Due Diligence
Posted by:Investors, whether in stocks, bonds, commodities, homes, land or apartments all know the necessity of due diligence. In apartment foreclosure investing, it’s just as important.
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
Tagged with: apartment foreclosure , due diligence , Karen Hanover , market analysis
The commercial real estate market in America is in a bad position.
According to the Congressional Oversight Panel for TARP
(the government’s rescue program for big banks and financial firms):
Over the next few years, a wave of commercial real estate loan failures could threaten America‘s already-weakened financial system.
The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation‘s mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy.
Recently on CNBC, Elizabeth Warren, the chair of the Congressional
Oversight Panel for TARP, said: We’re looking at a situation where about half of all commercial real estate loans are going to be underwater by the end of this year, and that is going to have a direct impact on about 3,000 community banks, or about 40 percent of our entire banking system.
In order to survive, these banks will need to move these distressed assets from the non-performing side of the balance sheet to the performing side.
They will accomplish this by making very creative loans on very creative terms. They have no choice but to seriously consider just about any offer.
Once any new loan is in place it is now a performing loan. This is your chance to finally strike it rich and set yourself up for life by making creative offers while banks are highly incentivized to accept.
By comparison, the residential real estate market is in the worst shape it’s been in for many decades, and in the residential market, “only” about 21% of residential properties are currently under water.
How will the commercial real estate debacle affect the health of our nation’s small businesses?
According to Warren a disproportionate number of both commercial real estate loans and small business loans are made by community banks. Therefore, drastic increases in commercial loan losses lead to greater financial trouble for community banks which leads to fewer and smaller small business loans.
As continued funding becomes unavailable to small business, rising unemployment becomes an even greater risk, thus a prolonged weakness throughout the economy.
I will keep you posted on this.
FYI…
If you have not secured a spot yet at one of my upcoming Boot Camps where I show you how to profit from Commercial Foreclosures and Short Sales, you need to act fast as they are selling out all across the country.
CLICK HERE to check which Boot Camp still has a few remaining seats.
As every Boot Camp we’re offering other than October is either sold out or very close to sold out, we have added one last date in San Diego, CA.
Sign up now as seats are selling out quickly and no more dates will be added in 2010!
I look forward to meeting you in person at one of the Boot Camps!
Fondly,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
Tagged with: Commercial Foreclosures , Commercial Loan Failures , commercial short sales , 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…
Click Here to read the rest of the article…
Tagged with: apartment & multifamily , cash flow , credit loss , investment , Karen Hanover , mortgages , single family homes , vacancy
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
Tagged with: apartment & multifamily , cash flow , credit loss , investment , Karen Hanover , mortgages , single family homes , vacancy
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
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
Tagged with: apartment & multifamily , cash flow , credit loss , credit losses , expenses , Karen Hanover , vacancy , vacancy and credit losses , vacancy loss
