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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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

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

One of these benefits, large cash flows, is the draw for astute investors. With 100 units cash flowing $250 each per month after expenses, it’s easy to see how that $25,000/month would be enticing.

Of course, there are unexpected expenses that can crimp our cash flow. There are repairs and unexpected maintenance items. We should be budgeting for those, but it isn’t always possible to foresee a broken pipe and flooded unit.

But, even with these unexpected problems, huge cash flow from apartments and multifamily investment keep the interest in this niche quite active.

Of greater concern are the two profit-killers, credit losses and vacancy rates. It’s one thing to have a negative expense, but quite another to have the income disappear on the front end.

The good news is that 100 units makes three or four vacancies or non-paying renters much less of a problem. But, any cessation of income on the front end must be addressed quickly and the rental income stream repaired.

Credit Losses Require Fast Action

When tenants stop paying rent, it could be a protest for some perceived wrong or a problem you can address. Doing so quickly can get that income stream going again with minimal damage. But, when the rent stops without any reason, it’s important to know the legal aspects of collections and possible eviction.

Take the appropriate actions on the very first day you can legally. Don’t wait, as every day is a lost day of income. Deliver all required notices on time, and take all legal action at the first opportunity. Sometimes just the first notice delivery will get the tenant back into compliance, but take the action.

Vacancy – Keeping It to a Minimum

A vacant unit generates no income. As soon as notice of move-out is given, marketing for a new tenant should begin. A waiting list would be the best solution, but fast action can create a waiting list of one, and that’s all that’s needed to re-occupy that unit. Get the cleanup and refurbish maintenance done as soon as the previous tenant moves out.

Vacancy and credit losses are part of the business of apartments and multifamily investment. But, taking the right action quickly will minimize the damage.

I’ll share more with you soon…

Warm Regards,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President