Archive for rents
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
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
Tagged with: apartment & multifamily , cash flow , expenses , income , Karen Hanover , rental , rents
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
Tagged with: advertising , apartment & multifamily , apartments , Karen Hanover , marketing , promotion(s) , prospects , rental , rents , tenants , units
Due Diligence in Apartment Lease Analysis
Posted by:Due diligence in the valuation of a prospective apartment project purchase includes a financial breakdown of leases and rent payments.
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
Tagged with: apartment leases , apartment rents , apartments , due diligence , Karen Hanover , purchase , rents
