Archive for rental
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
Marketing and advertising for apartment & multifamily properties takes many forms in many media. Promotion is generally accepted to be different in that it is some concession or give-away as opposed to an ad in print or other media.
In today’s Internet world, some marketers consider a website as a crossover, in that it can be considered advertising, but also promotion, with the ability to offer specials and other incentives to prospective tenants.
Free Rent for Apartment & Multifamily Promotion
There’s not a lot of originality in this approach, but many use it, as rent concessions can fill units. The trick to doing it right is to balance the cash flow negative with the occupancy positive. “Free Rent” promotions abound when markets get soft and there’s more competition for tenants.
One consideration is the balance between how much free rent and the length of the lease. There are apartment & multifamily renters out there that jump from “free rent” deal to the another, as their moving costs are low.
One month free on a six month lease may be acceptable, but two months on a twelve month lease could be better, as the prep costs to get tenant ready for the next one run up the costs of this type of promotion.
That’s a cost some owners forget in free rent promotions. It’s not just the income that’s given away, but also the cost of getting the unit tenant-ready when there’s a move-out. One month free on a six month lease can result in two vacancies next year, and a month or more of rent lost as expense in getting the unit re-occupied.
Prospective tenants who respond well to free rent promotions can be living paycheck-to-paycheck, and like the idea of a break from rent during the lease. A bit like forced savings, adding $30-$50/month to the rent might not deter them, as they’re looking more at the big cash infusion the skipped month brings.
Another use for free rent promotions is tenant retention. A free month for a new lease might be an excellent tactic, as the costs to get a new tenant into the unit are that much or more anyway.
The Internet for Promotion
The Web shouldn’t be overlooked for apartment & multifamily promotion. The vast majority of renters out there are active on the Web, Facebook, Twitter, and other social and business networks. Creating a website, and offering specials and promotions there will be less expensive than other media, and can be more effective.
I’ll share more with you soon…
Warm Regards,
Karen Hanover, CCIM Candidate
Apartment Education Institute, President
