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

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