Monday, December 31, 2012

How to Calculate Cap Rate

published Wednesday, February 23rd, 2011 at 8:02 pm by Nick Graff, CCIM

If you are investing in apartment buildings, it is essential that you learn how to calculate cap rate. The majority of industry professionals like brokers, appraisers, and other investors use the cap rate analysis to assess their opinion of value.

To learn more about investing in commercial Real Estate, click here to see the fastest way to wealth that I know of.

While most investors look at cash on cash return when comparing investment alternatives, multi-family investors look at cap rate. Cap rate is simply the cash on cash return that an income property provides as if the property was purchased all cash. In other words, if you have $1MM to invest and you want to look at all the places you could invest that money, you would use the cap rate to tell you what your cash on cash return would be. Cap rate is similar to the “price to earnings ratio” in the stock market.

More commonly, cap rate is used to compare values of properties in a given market. Instead of looking at other houses in the area to assess value like in residential; in commercial, industry experts assess the financial performance of one building compared to the other buildings in the market and use their cash on cash return to find how much an investor would most likely be willing to pay.

If you don’t know how to calculate cap rate, don’t worry, I am going to show you now:
There are a couple pieces of the information puzzle you will need to find the answer to the true cap rate.
First, you will need to know how much the net operating income of the building is.

To get that, find out how much the owner is collecting in revenue. This would include laundry income, cell tower space, billboard leases, parking leases, garage leases, and of course, rental income.

Once you know the total gross collected income for the previous 12 months, then find out the previous 12 months worth of expenses. This would include fixed expenses like taxes, insurance, etc. and revolving expenses like gas, electric, management, water, repairs, maintenance, etc. Some people stop there. Most appraisers do not. They also include projections to cover vacancies, credit loss, replacement reserves, etc.

When you have the income and expenses for the previous 12 months of operations, all you do is subtract the expenses from the income. If you had $100,000 in income and $40,000 in expenses, you would be left with a net operating income of $60,000.

Now that you have the net operating income, you can simply divide that number by the price of the property to get your cap rate. If you had a $60,000 NOI and the owner was asking $1,000,000 for the property, you would get a cap rate of 6% (.06).

Now that you know your cap rate, make sure that it is in line with the market. The higher the cap rate, the more cash flow it produces. On the contrary, the lower the cap rate, the less cash flow.
This means that the property you are looking at is too expensive if the cap rate is too low. If the buildings in your area say your prospective purchase is worth a 6 cap, and the owner is asking a 5 cap, then you know it is over priced. If they are asking a 7 cap, you may have found a bargain.

To learn more about investing in commercial Real Estate, click here to see the fastest way to wealth that I know of.
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Nick Graff, CCIM is an experienced commercial broker who specializes in finding apartment building deals in America for cash buyers around the world. If you or anyone you know would like priority access to his deals, visit http://www.apartmentbuildingbargains.com .

Friday, December 28, 2012

7 Ways To Find Great Deals on Multi Family Buildings For Sale

By Nick Graff, CCIM

1. CCIM.com – This is the most under-utilized and valuable service that I am aware of. It is free and it contains real nuggets of gold. Of course, you can go to http://www.ccim.com and find all kinds of resources about investing in commercial real estate, but the gold is found at http://findaprofessional.ccim.com/search. At that little-known link, you now have access to some of the best, most experienced commercial brokers in the market you are interested in and the property type you are looking for. Treat this information with respect because if you can nourish the relationships that you have the ability to develop, this may be the only resource you need to find great deals on multi family buildings for sale.

2. Evictions Court – If you own any rental property and have been through an eviction, you have seen a concentrated group of frustrated landlords. They are not ALWAYS looking to sell, but a good chunk of them are. Just go down to your county courthouse and find the days and times of evictions courts. Get in the habit of going to all of them. Just watch your first couple times and see the frustration. Introduce yourself and let them know you are interested in buying multi family buildings.

3. Canvassing – This is usually the best way to start finding buildings in your area. Canvassing is driving up and down the streets and neighborhoods where the multi family buildings in your area exist. You are not necessarily looking for buildings for sale. The main point is to get to know your market, know the buildings, and actually find the owner out at the property. You can uncover some golden nuggets if you are dressed well but not overkill, have a good conversation, and are good with followup. This is also a great way to build your database.

4. LoopNet – Everyone goes to loopnet first to find deals. This is a great place to get started because you can learn how to analyze deals. Once you are past that stage, the main reason I would use loopnet is to source multi family brokers. If you look for multi family for sale in your market, pull out all of the listings and call all of them. Don’t do it just to get a deal, do it to build relationships. Keep in mind that commercial brokers on loopnet are probably getting a lot of tire-kicker buyers. If you are qualified, then show them that.

5. Direct Mail – Sending letters to building owners is probably the fastest way to weed through all of the potential riff-raff and get straight to a good deal. This really depends on your budget. If you have at least a few hundred bucks a month, you can go to the county courthouse, record all of the 5 unit and up multi family buildings in your market and send a series of letters to them. You will get calls and most of them will be owners who are trying to get more than their property is worth. Expect to get 1 good deal from every 100 owners you talk to.

6. Ads - Of course, putting an ad in the local newspaper is one way to get leads. The bad news is that newspaper readership is way down because of the internet. The good news is that most investors, whether buying or selling, do look at their local paper still. Although, it is not the best way to spend your money, it is good if you have a sizable budget. Also, you can advertise using Adwords on Google if you know of some good keywords that owners may be typing in.

7. Banks – Forming key relationships with asset managers in your local banks can be a great source of great deals. If you can show that you are serious and qualified, you can work your way into getting direct access to OREO and pre-foreclosure assets. If you are buying distressed properties or distressed commercial notes, this is a must.

Thursday, December 27, 2012

5 Factors You Must Consider When Investing in Apartment Buildings

By Phil Wazonek April 3, 2012

When I am considering investing in an apartment building, the ultimate question in my mind is: Is this a good deal? Sounds obvious, but I am amazed at how many investors don’t know how to recognize a good deal. Learning to recognize a good deal takes research, education, and experience.
Here are the five most important issues to consider when investing in apartment buildings.

1. Cash Flow

Will this property cash flow? This is the most important issue to consider, and it depends on a lot of factors, including:

Strength of the local rental market (vacancy and delinquency)

Type of market you are buying into (C class buildings usually have more tenant turnover and higher repairs and maintenance than A or B class buildings)

Interest rate on your financing (is it conventional financing or a hard money loan?)

Size of your down payment

All of these factors considered, ask yourself, “Will this realistically provide income for me?” Also, ask the question, “How will this property cash flow compared to other potential properties?”
For example, a $150,000 house that rents for $1,000/month has a better income potential than a $300,000 house that rents for $1,600/month. A four-unit building that costs $400,000 may bring in $3,000/month in the same neighborhood.

Buying in the right neighborhoods and in the right stage of a real estate cycle will result in appreciation and profit.

Whether the property will provide income to you begs the question of whether income is important to you. Is it? Do you earn other income that would allow you to spend more of the income refurbishing the building? Do you need more income now, or is future equity growth more important?
There are no right answers to these questions, but they are factors to consider when looking at a potential purchase.

2. Leverage

Leverage is important in investing because the less cash you put down on each property, the more properties you can buy. If the properties go up in value, your rate of return goes up exponentially. However, if the properties go down in value, and you have a lot of debt on the property, the result can be negative cash flow.
Negative cash flow can be either “bad” or “good.” The “good” kind is short-term and makes you money.
For example, all the foreclosures we’ve bought had high vacancies and needed rehab work. So we needed the financial capacity to get through the negative cash flow until we could stabilize the property and create a very good positive cash flow. Then we had options to either sell the property or to refinance and pull out most of our money.

“Nothing down” investing is very attractive for the high-leverage investor, but should be approached with caution. If you are a long-term player, leverage will generally work in your favor if the markets in which you invest appreciate in the long run and your income from the properties can pay for most of the monthly debt service.

3. Equity

Does the property you are purchasing have equity or can you create equity? Equity can take a number of forms, such as:

Discounted price

Fixer upper – “upside” potential

Rezoning opportunity

Poor management

Foreclosure

There are many ways to create equity, but buying into equity is your best bet. Find a motivated seller who wants out of his property and is willing to give up his equity for less than full value. Or buy a property that needs work that can be done for 50 cents on the dollar or less. In other words, if the property needs $10,000 in work, make sure you get a $20,000 discount on the price or better.

4. Appreciation

Buying in the right neighborhoods and in the right stage of a real estate cycle will result in appreciation and profit. However, timing a real estate cycle is difficult and is very speculative. If you buy properties without equity or cash flow solely for short-term appreciation, you are engaging in a risky investment.
Buying for moderate long-term (10 to 20 years) appreciation is safer and easier. Look at long-term neighborhood and city-wide trends to pick areas that will hold their values and grow at an average 5 to 7% pace. Combine this tactic with reasonable cash flow and buying into equity, and you will be a smart investor.

5. Risk

Risk is a consideration that too few investors consider. Ask yourself, “What if my assumptions are wrong?” In other words, do you have a “Plan B”?

If you bought for appreciation and the property did not appreciate in value, can you rent for positive cash flow? If you buy with an adjustable rate loan and the rates go up, will this put you out of business?
If you have a few vacancies, can you handle the negative cash flow, or will it break the bank for you? Expect the best, but prepare for the worst.

Warning Signs of a Bad Deal

The Numbers Don’t Add Up. You’re in this game because you want to make money. If the numbers don’t add up, and the seller won’t drop the price or give you better terms, move on.

Missing Numbers. If the seller can’t provide you with the year-to-date profit and loss statements, plus the actual numbers from the previous two years, move on to another deal.

Made-up Numbers. Pro forma numbers are pure guesswork. They may be educated guesswork, but they are still a projection. Lenders won’t give these made-up numbers any weight and neither should you. This is where your experience plays a big role. After a while, you will quickly be able to figure out “who is blowing smoke” or if the numbers make sense.

Troubled Property. A property may look good on paper–the numbers are real and they add up. But a site visit paints a different picture. Perhaps it needs major repairs because the seller has been deferring the maintenance, hoping to pass the headache on to the buyer. Don’t let it be you.

Wrong Area. Don’t spend your money trying to reverse a trend. If the neighborhood is in decline, the property carries that stigma. Tenants will be moving on, and so should you.

Months on the Market. Good properties go fast. Bad properties linger in the listings for month after month. With detective work, you can figure out why it’s a dud. And that’s a viable learning experience. But your time will be better spent going after good deals.

Wednesday, December 26, 2012

Housing Slump Offers Opportunity In Apartment-Building Market

Published: Monday, 18 Oct 2010 | 9:56 AM ET

By: Sara Clemence, |Special to CNBC.com

The property in Fort Lauderdale, Fla. was originally valued at $285,000. Clint Gordon, a private investor in multifamily properties, offered the bank $50,000 cash—and within 10 days had closed the deal. A few days after that, he began renting it for $15,000 a year.

Barb Getty at one of her investment properties. "Anybody that’s getting into this business now, you get a whole lot of return if you’re paying cash for properties," he says. "You're just buying them so cheap."

Prices are “incredible” in Indianapolis as well, says Barb Getty, who owns 27 apartment properties in the downtown area. "You can start small like I did—20 percent of 40 thousand bucks isn’t a lot of money.”
Just as there have been massive price drops forsingle-family homesover the past three years, there have been big declines for apartment buildings. That suggests that it’s a good time for investors who want to be landlords to start buying.

But as with all investments, the story isn’t quite so simple.

Where’s the Flood?

Investors who thought that a tsunami of dirt-cheap multifamily properties would wash over the U.S. market in the past two years have been largely disappointed.

The distress was limited to certain places and property types, says Hessam Nadji, managing director at real estate investment services firm Marcus & Millichap.

"The pain was concentrated where we had gross overbuilding in overall housing: Florida, Phoenix, Las Vegas, Southern California, and to some degree smaller markets like Tucson, Charlotte and Atlanta," says Badji.

Marc Solomon, whose Solomon Organization owns 10,000 garden apartments in New York, New Jersey, Connecticut and Pennsylvania, says that it is difficult to find opportunities that make good business sense in his markets, which still offer slow, steady returns. "There’s a lot of dollars out there chasing these deals," he says.

While there were big price cuts in North Carolina's research triangle, competition is driving down yields, says Jim Scofield, senior investment advisor at multifamily real estate broker Apartment REP.

Last October, an investment firm “got a steal” on a community in Raleigh called Autumn River, with a capitalization rate of about 7.75 percent. The most recent transaction in the area involved a community called Southern Oaks, which had a 5-percent cap rate. (The cap rate is the full-year income from a property divided by the sale price).

"This is not just a phenomenon in the triangle, but in all the major markets—and especially all the apartment markets," Scofield says. "Manhattan, Washington D.C., Los Angeles, Denver, Chicago, Boston."

Risk and Return

There is less competition in markets where the supply is more fluid, but the risks are also higher.
"We landlords are happy," says Getty, adding the only thing preventing her from buying more properties is the ability to manage them on her own. Still, she hasn't been able to increase rents as much as she normally would.

Gordon says that his vacancies used to average three to five days. “Now I can have a vacancy of up to 60 days,” he says.

Despite all of the qualifiers, there is opportunity to be had in rental apartments because the timing is good, Nadji says. Average cap rates are still around 6.5 percent.

“I don’t think you’re going to get fire-sale prices,” he says. “But you can get that kind of return ahead of the job growth and ahead of the economic recovery.”

Rental occupancy rates contracted dramatically during the recession, as people doubled up to save money and young adults boomeranged back home. Vacancies nationwide hit a high of 8 percent in the last quarter of 2009, according to real estate research company Reis.

But industry insiders argue that rentals will bounce back quickly and dramatically as well. Indeed, in the third quarter of this year, vacancies dropped to 7.2 percent, according to Reis.

"Apartment rents are short term they adjust to market conditions very quickly," Hessam says. "We’ve seen a record demand for rental apartments so far this year—the strongest in over 10 years.”

Owning vs. Owning

Apartment buildings can also be attractive because investing in residential real estate seems similar to owning a home. But rental properties are different—starting from the purchase decision.

Homebuyers tend to look for a place they love that fits their needs and budget. But you have to see investment properties through the eyes of your tenant, Getty emphasizes. If your tenants won’t have cars, is it near public transportation?

Randall Gorman, president of La Jolla Capital Group in California, says prospective investors need to take the emotion out of their purchases.

"I don’t care if you’re buying a condo, a duplex or a ten-unit building," Gorman says. "Just because you’ve always loved that cottage-style apartment building that you drove by taking your kids to school, doesn’t mean the cash flow fundamentals work at a given price."

If considering a property, Gorman advises making sure you can run a cash flow model. Go beyond the cap rates the owner discloses, and figure out property rents by doing research online and in the neighborhood.
Calculate your annual revenue, and thoroughly survey costs like maintenance, taxes, utilities and incentives. (Property managers typically charge about 10 percent of a month’s rent.)

Add in a couple of months of vacancies—and don’t disregard the higher interest rates for commercial properties. According to PricewaterhouseCoopers, the national average interest rate for apartments in the third quarter was 5.68 percent. For the first week of October, Fannie Mae reported that the average 30-year fixed rate for a primary home was 4.27 percent.

If your final net income is $16,000 annually, aiming for a 10-percent cap rate puts the purchase price at $160,000.

"Don’t buy on what might happen, but on what is happening,"Scofield says. "Only buy a property if it is cash flowing to meet your investment return requirement on day one."

Even once you buy, it’s not a smart idea to treat your investment like a home.

"Investors make a huge mistake when they spend a lot of money on bells and whistles in their rental property," Getty says. "For instance, crown molding. A rental needs to compare well to others in the neighborhood, but don’t make it a palace—you won’t get that money back."

Are Small Apartment Buildings A Smart Investment?

By Kathleen Doler, For Investor's Business Daily

Posted 03/31/2011 03:57 PM ET

Recovering rents, rising occupancy rates and low sales prices are enticing investors to become landlords. The sweet spot for smaller investors is multiunit buildings with up to four units, according to market followers.
This size of apartment property can qualify for conventional financing backed by Fannie Mae (FNMA) and Freddie Mac (FMCC) with 20% to 25% down. When a landlord lives in one of the units, financing insured by the Federal Housing Administration may be available with as little as 3.5% down.

"I'm seeing rents go up in the markets where employment is strong: New York City, Seattle, Washington, D.C.," said Lesley Deutch, vice president of John Burns Real Estate Consulting, in Lake Worth, Fla. "All markets will be on the positive side this year."

How much rent growth just depends on where you are, Deutch says.
"Financing is starting to free up for more creditworthy investors," said Peggy Abkemeier-Alford, president of Rent.com in Santa Monica, Calif. "So small investors are scooping up multiunits."
In 2003, homeownership was 69% says Abkemeier-Alford. Now it's 66.5%, and "every 1% decline in homeownership equals 1 million new rental households."
Competition Big And Small
One caveat for investors is that smaller rental properties must compete with the many vacant homes now being rented out.
Slammed by a credit crisis and the recession, commercial real estate isn't out of the woods yet. But the apartment sector, which is part of it, is flashing encouraging signs for both big and small investors. In February sales of apartment portfolios priced $2.5 million and up rose 50% from a year ago to more than $2 billion, according to Real Capital Analytics. But it's still just a fraction of the activity seen a few years ago, and distressed properties accounted for 41% of February's sales.

Abkemeier-Alford predicts rents in top markets will rise 5% to 6% this year, and in bottom markets she expects 2% growth.

The national rental vacancy rate climbed to more than 10% on average over the past couple of years. But "in the most recovered markets in 2011 it will be around 5%, a big decrease," Abkemeier-Alford said.
Real Capital's analysis of large apartment deals found investor demand outstripping offerings around Washington, D.C.; Boston; Southern California's Orange County; San Francisco; Raleigh, N.C., and a number of Florida markets.

"In our area, sales of multiunit properties are very brisk," said Al Ricci, a broker at Ricci Realty in the Southern California city of Orange.

Where The Renters Are

Ricci works in an area called Old Town, near Chapman University. He says some parents are now buying multiunit properties to house their students plus other tenants. Rising rents, low vacancy rates, high on-campus student housing costs and low sales prices are bringing parents into the market as investors, according to Ricci.

He says triplexes that sold for $750,000 and up in 2007 are now priced at $600,000. But in his area, due to demand, "rents haven't changed." Ricci is the listing agent on three multiunit properties and expects to move all of them in 60 to 90 days.

Rental properties are an option for hands-on investors. Here, town houses line a Beaverton, Ore., street in 2009. AP View Enlarged Image

In Seattle, new hiring by Amazon.com (AMZN) should reduce rental vacancies and potentially drive rent increases, says Glenn Roberts, managing broker of Lake and Company Real Estate. "Amazon has leased 1.7 million square feet right next to downtown — they're really expanding," Roberts said. "And a lot of their employees won't be homebuyers yet, so they'll need to rent."
Roberts believes multiunit properties near downtown are an investment opportunity. "In the last 30 days, 13 multiunits have sold and closed, but there are 50 pending right now," he said.
The availability of low-down FHA loans for multiunits is often overlooked.

"People have been a little out of touch with FHA financing," said Rebekah Radice, a mortgage planner with Benchmark Mortgage in Colorado Springs, Colo. And some folks think FHA only offers small loans. But it raised the lending limits in high-cost areas, and then extended those raised high-cost loan limits to Sept. 30, 2011, Radice says.

FHA loans require mortgage insurance, paid in monthly premiums. After an April hike, the cost will range from an annual 0.25% to 1.15% of the loan amount atop a 1% upfront fee.

Michael Simpson, a multiplex property investor in Sacramento, Calif., advises new landlords to screen tenants, keep an eye on their properties and keep detailed books.

Simpson also says that potential landlords should research how their city or town treats multiunit properties. In Sacramento, any property with more than three units requires more extensive permits for remodels than a single-family building, he notes.

Monday, October 8, 2012

How to Hire a Property Management Company

Somewhere along the line of your real estate investment career, you may outgrow your ability to manage the number or properties you acquired. Or you may find that managing your own property is not a skill that you are gifted in or are good at. In those cases, you’ll have to locate, interview, qualify, hire, and manage a property management company.

Searching for a Property Management Company
• The absolute best method of finding the best property management companies is by referral. Get a referral for a property management company from someone who is happy with theirs or knows of someone who is happy with theirs.
• The second best method is by asking your broker or agent if they know of a reputable property management company.

Interviewing a Property Manager
Here are 13 questions to ask professional property management during your initial phone calls.

1. What is the general vacancy rate in your area? “Your area” could be a city, town, neighborhood, district, street, etc.
• This information is crucial in studying feasibility of owning property in this area.

2. How many units do you currently have under management? What type?
• If you are looking for them to manage your 4-plex, see it to that they at least manage 4-plexes. If you have a 20-40 unit or larger apartment building, see to it that they have under management the same. A property management company that manages 400 single family homes is not the same company that manages 400 units of apartment buildings.

3. How long have you been in business?
• If they have less than a year of experience, don’t use them. They need at least one cycle (spring, summer, fall, winter) completed to know what’s going on.

4. Do you have a start-up or account setup fee for new landlords?
• Know this upfront.

5. What are your percentage management fees? What other ways are you compensated?
• Plug these fees into your property cashflow analysis.

6. What is your policy on who keeps the late fees collected – the landlord or the management company? Or is it split?
• Know this upfront.

7. Do you have your own maintenance staff or do you use independent contractors?
• Gives you an idea of their sophistication.

8. What is the cost for an eviction process from start to finish?
• In San Francisco, it costs about $5000 per eviction. In NY, it costs about $300.

9. Is there a per new lease charge to the landlord?
• Know this upfront.

10. How do you advertise your vacancies? Who pays for advertising?
• Typically, good property managers will have a referral system in place.

11. What are your business hours?
• Know this upfront

12. How are tenant emergencies handled? Weekend calls?
• Gives you an idea of their sophistication.

13. What monthly reports do you typically send owners?
• Know this upfront

NOTE: This interview is not for telling them what you want from every question asked. It is merely to gather information in order to make a decision on if you want to continue.

Character Traits You Want In Your Property Manager:
1. Tough-minded leader yet a people person, diplomatic
2. Creative and entrepreneurial instinct
3. Excellent communicator
4. Good negotiating skills
5. Capable organizational and administrative skills
6. Basic mechanical skills to verify contractor work
7. Local market and in-depth industry knowledge
8. Decisive
9. Integrity and honesty

Qualities and Capabilities You Want the Management Company to Have
1. High quality staff and support personnel
2. Confirmed reputable name in the marketplace and govt. offices
3. Reliable and modern reporting system for financials, operations, and maintenance
4. Excellent tenant relations that are visible and apparent
5. Licensed to manage and posses industry certifications

Components of a Sound Property Management Agreement/Contract:

1. Leasing
• Use best efforts to keep property rented by procuring tenants for the property and negotiating and executing on behalf of the owner.
• All leases for the property shall not be in excess of 12 months without written permission from the owner.

2. Rents
• To collect the rents and revenues from the property and serve or cause to be served all notices for the collection of rent and other charges.
• To initiate actions for evictions and when necessary, to settle, compromise, or release such actions or suits and reinstate tenancy.

3. Service Contracts
• To execute in the owner’s name for utilities and services for the operation and maintenance of the property.

4. Accounting
• Property manager shall keep proper books of account for the property and books shall be open for inspection by owner.
• Property manager shall furnish to owner a monthly statement on or before the 10th of each month.
• Find out if owner is required to keep a reserve monies account with property manager.

5. Compensation to Property Manager
• In consideration for the services rendered to the owner by the property manager under the agreement, the owner agrees to pay the property manager on a monthly basis.
• Compensation can be a percentage (%) of collected rents, a fixed fee, or a per door fee. The percentage ranges from 4% to 10% typically.
• Find out if there is a per new lease fee.
• Find out who keeps the late fees, or is it split?
• Find out if there is an extra charge at any time during the eviction process.

6. Terms of Agreement
• Initial terms are usually for 12 months. Try to avoid a 12 month initial term. If you are not able to do so, negotiate a 6 month term agreement. Never sign on for more than 12 months at any time.
• Either party may terminate the agreement by giving a 30-day written notice to the other party. Avoid 60-90 day requirements.

7. Terminations
• Immediately upon termination, the property manager shall provide owner with all originals or copies of leases and all agreements and related documents.
• All property financial records in possession of the property manager shall be delivered to the owner.

8. Provisions and/or Additional Provisions
• Delete any clause(s) stating that the property manager will act as real estate agent or receive commission if and when the owner sells the property.

9. Fiduciary Responsibility/Statutory of Compliance
• This is the code of ethics clause.
• States the property manager will perform all duties in the agreement.
• The property manager’s first obligation is to obey and abide by the law.
• The property manager will notify owner of professional opinion matters.
• The property manager shall keep the owners’ information strictly confidential and not shared with the public.

10. Be leery of “hold harmless” clauses.
• Responsibility is a two-way street. This clause relinquishes the property management company from all liability of damages to the property.

Monday, October 1, 2012

Essential Tips for the New Apartment Investor

1 – Proformas - Don’t buy on broker proformas!
To verify what the broker or owner is reporting for rental amounts, do your own quick n’ easy market rent survey. Call the actual apartment complex first to ask what the rents are (pretend you are a potential tenant). Then, call two to three competitors and do the same. The information you gather will confirm whether or not the income that is proposed is viable and achievable.

2 - Operating expenses are ALWAYS underestimated – triple check them.
Investor check #1: have the operating expenses double-checked by an experienced investor or professional property management company.
Investor check #2: get original copies of all utility expenses shown for 12 months.
Investor check #3: be conservative, then check if the deal still works and meets your objectives (e.g. cash flow, return on investment, cap rate, etc.)

3 – New property tax bills that can wipe out your cash flow - Be wary of reassessing property tax bills…know when it happens and at what rate. In California, property tax is re-assessed upon the transfer of new ownership to the higher level. In Ohio for example, taxes are reassessed every 3 years, setting you up for a shocker of a new tax bill if you’re not prepared.

4 – Income and expense statements versus property tax returns – make sure the income amounts on both forms match each other! For example, if the income statement shows an annual income of $100,000, but the same property’s tax returns show an income of $80,000, which one are you likely to believe? The tax returns of course! The question is: where is the missing $20,000 in income?

5 – Watch out for these properties – today especially, watch out for “all-bills paid” or “master-metered” properties. These apartment buildings have one master utility meter for electric and gas and water, although water is typical. The ideal arrangement is for each apartment unit to have individual utility meters. Can you imagine paying the entire electric bill for all 50 units?

6 – Don’t over-pay! Do yourself a favor and convince yourself you’re not over-paying by getting up-to-date sales data of comparable apartments. Make sure sales data is no more than 6 months old.

7 – Yes, location remains important. You can “fix” a property, but you can’t fix a location. Start off by getting simple demographic information for your area. Do this by going online to the city’s Chamber of Commerce and begin researching there. Next, call the Chamber’s office and ask to be connected to the Economic Development Department. Or ask to speak to the Director of Business Development. Confirm that your property’s location is sound by asking for data on the following: job growth, population growth, areas of revitalization, paths of progress, business growth and company relocation incentives.

Monday, September 24, 2012

The 7 Biggest Mistakes Apartment Investors Make

#1 – Underestimating the Property’s Operating Expenses
• Beware of broker’s proformas. The expenses (as well as income) listed in the broker’s statements or brochures are often best-case scenarios and typically do not depict the true operating state or condition of the property. The expenses shown normally are too low and the income shown normally is too high.
• Ask for the “actual” income and expenses of the property. The owner, the broker, or the property management company will have access to them. Base your final analysis from these figures.
• Examine expenses three ways: expenses per unit, expenses per sq. ft., and expense as a percentage of the effective gross income. These figures become more meaningful when you compare them to other properties that are similar.
• Get a second opinion on what you believe the operating expenses should be from either an established local property manager or someone who has operated a similar property. The popular saying “what you don’t know can’t hurt you” does not apply here.

#2 – Paid Too High of a Sales Price
• Just because “the numbers” work out on paper doesn’t mean that the price you paid is okay. For example, if you put down a 50% down payment, the numbers will most likely work out and the property will cash flow positively. The large down payment may have overshadowed the “too high” sale price you paid.
• Paying too high of a price will “trap” your current and future equity.
• Do your homework first by getting sales comparables. This is sales data from recently closed transactions of properties similar to yours. First look at the price per unit figure and make sure you are not paying way over that. Secondly, make sure the property you are comparing yours too is actually comparable. The following should be similar: number of units, unit mix, rentable square footage, year-built, amenities and utilities and located within a few miles from each other.
• A healthy attitude to have is this: “don’t fall in love with the property. Fall in love with the deal.”

#3 – Lack of Due Diligence or Not Doing the Required Homework
• I’ve heard of some investors who have planned their summer vacations more thoroughly than their latest real estate investments.
• Due diligence is the process of “doing your homework” on the investment property. It is the process of checking, double-checking, and confirming any important information (financial, legal, physical) that was used as a basis on determining if the particular property is a good, average, or bad deal. This process takes you on an information-gathering and fact-finding mission. Proper due diligence takes persistence and weeks to accomplish. Due diligence is not used as an excuse to back out of a deal, but it is primarily a means to protect you financially and legally.
• Proper due diligence will enable you to uncover potential problems with the property or as we call them, “elephants underneath the carpet” before the deal is closed. These potential problems can be very costly (time, money, legal) and can turn a good deal into a bad one very quickly. An educated real estate investor knows and understands the importance of completing their due diligence tasks.
• One sure fire way to lose your earnest deposit is to not keep track of your contract dates such as contingencies for inspections, financing, clear title, and appraisal. If you allow yourself to go beyond the set dates in the contract, you hereby waive your rights to those contingencies.

#4 – Hiring Incompetent and Incapable Property Management
• From my experience, this is probably the biggest reason why investors fail. Unknowing investors “hand over” the responsibility of the property to a property management company to manage the property, but all they do is manage to run it into the ground. Sound familiar? Or know someone? It’s all too familiar.
• One of the most important and valuable strategies is to set up a system of accountability for the property manager you hire. You cannot manage what you cannot measure. You cannot measure what you cannot monitor.
• Make sure the property management you hire is an established leader in the apartment industry, has great local market knowledge, a sound marketing plan and marketing skills, and has a reliable and accurate financial reporting system.
• Think of your apartment building (two units or one hundred units) as a business. A typical business collects income, pays for its expenses, and you should profit from all of your efforts. Your property should be no different. Therefore, your business (the property) will be as profitable and successful as the leader (the property manager) of the business (the property). Hire only the best.

#5 – Failing to Understand That Every Property Has a Lifetime
• Just as human bodies have a lifetime, properties do as well. When properties get older, they start to fall apart and need repairs (just like us!). One of the biggest mistakes that you can make as an investor is to ignore the fact that over time, you’ll have to spend money on the cosmetic upkeep of the building, inside and out. The building may need a roof replacement and the electric or plumbing systems may need to be updated. All of this can cost thousands of dollars. Every building goes through these phases and some more so than others. It really depends on the age and condition. So make sure that you have a long-term plan to handle such repairs. Establish a reserves account or you can call it a savings account for each property. Or refinance the property and pull money out to do these upkeeps.
• The smart thing to do is to have an annual operating budget for the property, where the upkeep and improvements are budgeted and financially prepared for well in advance each year. Remember, this is a business.

#6 – Taking on Too BIG, Too Quickly
• The allure and excitement of real estate investing can be enormous. Human nature of ‘wanting more now” often times causes us to commit to more than we can actually handle. And that’s what gets us in trouble and in over our heads. The solution to this is an easy one: get good advice from someone who’s been doing what you want to do. Some investors have too much pride to ask for help. But the old saying, “pride comes before the fall” is so true.
• It’s not a good idea to purchase a 100 unit apartment building when the only experience you have is renting out your single family rental homes. However, it is possible to do this successfully with the right assistance and instruction of someone who has direct experience.
• Get a real estate investment advisor. That person could be someone you hire (like us) or it could be an experienced associate of yours (or a referral).

#7 – Being in Denial When Property Problems Appear and Won’t Go Away
• One of the great life lessons I learned in business is “what you do not confront, will not change”. When property problems do surface, it is actually human nature to see if it will go away by itself. But much deeper problems occur when it is not dealt with in a timely manner.
• Because of all the moving parts in any investment business, disaster can be the result if the problems are not swiftly dealt with at their root causes.
• Whether you know it or not, you are not the only person who has or is experiencing property problems. Odds are someone who is more experienced than you may have solutions for you. Acknowledge the problems and seek help until you find answers.

Monday, September 17, 2012

The 7 Habits of Highly Successful Apartment Investors

#1 – They Only Invest in Apartments...The Power of Focus!
• The best and the brightest apartment owners are the best and brightest at one thing – buying apartments. They don’t stray away from their specialty, but rather focus on apartments only. They don’t try to be “jack-of-all-trades”. Neither should you if you want to be one of the best and brightest.

#2 – Not Over-Leveraging DEBT…Cuz It’s a 4-letter Word!
• Heavy debt is a cash-flow killer. Even though debt is pretty much the norm on most deals, be smart about it. Having high debt is a trap that snares cash-flow and equity. Proverbs says that the “borrower is slave to the debtor”.
• An easy way of measuring your “debt-safety” level is to figure out your breakeven-occupancy percentage. To do this quickly, simply add up all of your annual operating expenses plus your all debt. Then, divide that number by your potential gross income. You’ll find that your operating expenses will typically not vary much, but that your debt can have a huge impact on your breakeven point in occupancy. The higher the debt load, the higher the breakeven point in occupancy. For example, if your breakeven occupancy point is calculated to be 60%, then after that, it’s all cash flow. But if your calculation comes out to be 90%, that spells trouble. You have no room for error and must keep your apartments 90% occupied just to pay the bills.
• Even though there are financing programs available that allow you to perhaps finance an investment with no down payment, it may not be a good idea. Run your numbers. Be prudent.

#3 – Properties Are Managed Effectively and Professionally
• Having top-of-the-line property management, whether you do it yourself or hire a company to do it for you is a major key to success.
• In a nutshell, a top management company’s ultimate goal is to maximize potential rental income, reduce operating costs, strengthen tenant retention and relations, enhance visual appeal of property, and increase property value. If they can do this, you have a winner.
• Apartments that have the best reputation in the community have the highest rents, the lowest turnover, and have sound and solid property management.

#4 – Patiently Acquiring and Having Tolerance for Mistakes
• Rome was not built in a day. Building a good-sized and wealthy portfolio requires years to build and is built one property at a time. Successful apartment owners take their time and strategically plan out their acquisitions over a period of years. The real estate cycle and market conditions have to be just right in order to make the best buying/selling decisions. Time and timing are the keys.
• Have you noticed that life tends to have built-in provisions for the mistakes we make? The most successful apartment owners that I personally know, made huge mistakes in the past that have brought them literally to their knees, but the most successful ones bounce back to do even bigger deals.
• Allow yourself room and grace to make mistakes. It is the highest form of learning that we know of.

#5 – Effectively Partner
• Proverbs 15:22 states, “plans fail for lack of counsel, but with many advisors they succeed.” Throughout history, no one has achieved impossible dreams or built amazing companies without effective partnering and/or outside advice.
• The apartment investment business can be very dynamic with lots of moving parts to it. Don’t be average over a lot and master of none. Do what you do best and hire out the rest to the best.
• Successful apartment owners know the value of relationships. Success is a relationship business. Finding the best deals, solving the biggest problems, and finding the money for your deals come from relationships.

#6 – All Business Systems are Accountable
• Well-run and profitable apartment investments seem to go under the radar. But what you will hear more of are the apartment communities that are failing or are in deep trouble. Upon deep inspection, you’ll find that the troubled apartments have a key component to their operation that has stopped working. And that failed component has caused or will cause other facets of the operation to fail down the line soon. Nonetheless, a profitable apartment business has nearly every business component running at good to satisfactory levels.
• Successful apartment owners have excellent internal communications and accurate financial and operational reporting. Their systems allow them to hold their apartment’s business systems accountable to those responsible. Here is a sampling of typical apartment business systems: accounting, revenue, internal controls, property staff, marketing system, maintenance, and marketplace.

#7 – Well-insured and Entities are Set Up For Maximum Protection
• “Plan for the worst and be happy if it doesn’t happen” is the attitude and habit of the most successful apartment owners.
• Their goals are to build a legal fortress with insurance coverage and with the use of entities such as LLCs, LLPs, Corporations, TICs, etc.
• A poorly protected investor may not only lose his or her properties to a real or frivolous lawsuit, but personal property as well. As of 2006, there are over one million attorneys in the U.S., all wanting to deploy their skills (on your property).
• Before doing any of this on your own, consult an attorney and tax strategist first.

Monday, September 10, 2012

Apartment Investing Builds Retirement Nest Eggs

Dear Apartment Building Investor,

This is not meant to scare you, but according to The Wall Street Journal, the average 35 year old person in the United States will need to have saved a nest egg of at least 3 million dollars by the time they retire at age 65. That may seem like an astounding number and it basically leaves investors a few choices to build a nest egg of that magnitude.

The first choice would be to play the lottery and hope. Unfortunately, right now this is the plan that many millions of Americans are undertaking right now. You might be one of them.

The other, and more common route, is to contribute to your 401k and maximize on your employers matching contributions. This has worked for some people in the past but as good, high paying, professional careers become more scarce in the United States this route doesn’t appear to be a wise choice for most people. Most people’s 401ks are mostly invested in a basket of stocks, mutual funds and bonds. The problem with putting your nest egg into a 401k is the fact that you are basically counting on the fact that the stock market will be in a bull market when you are ready to retire. If not, you will end up like many people who in 2008, when the stock market nose dived, were forced postpone their retirement by another decade because the value of their retirement nest egg had dropped so dramatically.

So what is the answer to securing your retirement future? It just might be a strategic apartment building investment. Here’s why:

1) Other People’s Money. As oppossed to invesments in stocks apartment buildings offer the opportunity to invest with other people’s money. In fact, investing in apartment buildings allows you to purchase the building with up to 100% other people’s money by using a combination of partnerships and traditional bank financing. In addition, the balance of the mortgage is paid off over the life of the loan using other people’s money in the form of rent payments made by your tenants.

2) Scarcity and Demand. A record low number of multifamily units will be completed this year. The increase in rental housing demand is being met by a sharp reduction in the supply of new apartments. Just to put this into perspective, over the 10-year period from 1998 through 2008, there’s an average of about 240,000 new rental completions per year. Last year, there were 160,000. And this year, completions are expected to be below 80,000 units, which would make it a 50-year low. This level of new completions is actually less than the estimated annual loss due to obsolescence, meaning that we’re seeing essentially a net zero increase in the stock at a time of strong demand. New starts are not expected to approach historical levels until late next year, 2012, which means it would likely not be until late ‘13 and into ‘14 that we’ll see completions return to historical levels. And obviously it’s the completions that are what’s important in affecting the supply demand fundamentals.
3) Demographics. Roughly 3 million young adults had been living with family during the past five years, according to data from the Census and real-estate investment brokerage firm Marcus & Millichap, and housing experts estimate that they now generate about one-third of rental demand.

4) Instant Returns. Factoring in maintenance costs and other variables, an investment property should produce at least a 6% return on the initial cash investment in the first year after it is purchased. For example, an investor who puts down $250,000 in cash on a $750,000 property would need to clear at least $15,000 in the first year.

What does all of this mean to you as an investor? It means that the time to begin buying apartment buildings is right now. I am not promising that you will be the next Donald Trump but I certainly believe that apartment building investing now offers one of the safest and securest ways to secure the comfortable retirement that you deserve.

The next step is to get started. But don’t go out today and begin buying apartment buildings unless you are properly prepared. You need to arm yourself with all of the tools, information and market knowledge to ensure that you are investing in the right property that will not only continue to pay for itself over the years but also offer you a hefty monthly cash flow that will put money in your pocket.

If you are truly serious about learning to buy profitable apartment building then get started today by enrolling in the “Buy Your First Aparment Building E-Course”

Investing in apartment buildings is a lot easier than you probably think but the most important thing is not to jump into the market blindly. Enroll Today in my “Buy Your First Apartment Building E-Course” and you will have instant access to all of the information that will allow you to properly analyze a property to ensure that it becomes a cash cow and not a money pit. Remember, the risk is all mine. If you don’t find the information or if you simply decide that apartment investing is not for you, then I will happily return your entire tuition, no questions asked. So get started today and I guarantee you will not regret it.

Sincerely,

Ted Karsch,

Monday, September 3, 2012

Small Multifamily Properties = Big Profits

by Spencer Cullor on October 15, 2011

advantages to investing in small apartments

Many real estate investors overlook some of the most profitable investment properties because they don’t understand how smaller properties can equal big profits. They get caught up in the “bigger is better” mentality and miss out on some of the most profitable investments right in their own backyards. Contrary to what some real estate gurus say, you don’t have to buy multifamily properties of 150 units or more to make a big profit. Smaller multifamily properties can provide an investor some of the strongest investment opportunities if you know what you are looking for. You can find them everywhere, and often times can buy them for much higher immediate returns and at better purchase terms than larger properties.
We define smaller multifamily properties as those having four to 100 apartments or units. This size of property can be a great fit for individual or a small group of investors. At this size, the income can adequately cover the expenses of the property and factor in management, debt service, and vacancy expenses.

Some of the advantages of investing in smaller multifamily properties are:

Smaller properties usually have less competition than larger properties. When acquiring smaller properties, you are usually competing against individual investors instead of large companies, institutional investors, or investment groups.
You can find properties with higher cash on cash returns. Often times you can buy smaller properties that provide higher cash on cash and internal rates of return on your investment dollars.
They take less equity to purchase. Because they are smaller, they don’t require millions of dollars in equity to purchase, allowing you to purchase them individually or with a small group of investors, and own a higher percentage of the property.
With smaller properties, you can often make more money per unit each and every month than with bigger properties.
There are more of them in your backyard. There is a larger number of smaller properties than large apartment complexes which makes them easier to find.
Many have more flexible sellers. These properties are normally owned by private individuals who have the ability to get creative if they want to and don’t have to go to a large ownership group for approval.
They are often managed by less sophisticated investors who are scared to raise rents, fearing that their tenants will move out. This provides more opportunities for hands-on owners to achieve management improvements and value creation.
They can be closed on quicker than larger properties.

As you can see, there are many advantages to investing in smaller properties, where some of the biggest returns can be found. It’s easy to get caught up in the game of trying to compete with larger investors who own more units, but like a mentor of mine told me early on in my investing career, “It’s not how many multifamily units you own, it’s how much you make per unit.”

Thursday, August 23, 2012

How to Hire a Property Management Company

Somewhere along the line of your real estate investment career, you may outgrow your ability to manage the number or properties you acquired. Or you may find that managing your own property is not a skill that you are gifted in or are good at. In those cases, you’ll have to locate, interview, qualify, hire, and manage a property management company.

How to Determine Your Multifamily Capital Expense Budgets and Recurring Replacement Reserves

by Spencer Cullor on October 25, 2011

One of the most overlooked aspects of acquiring a multifamily investment property is adequately accounting for capital expense items and recurring replacements that the investment property needs in order for you to reach your investment goals (See “The Importance of Having a Capital Expense Budget When Buying a Property“). Overlooking these expenses will kill your investment before you even sign the loan papers.

Capital Expense Budgets and Replacement Reserves Defined

The replacement reserve is for recurring replacements that you will have to take care of on a normal basis, such as replacing flooring or old appliances that have reached their end of life, and replacing items such as air conditioners or roofs several years down the road. In contrast, a capital expense budget is a one-time amount that you should budget for when acquiring a property. This is a repair expense or an expense to upgrade key components of the property that cannot be covered by the typical replacement reserve.
To meet your investment goals, you need an accurate capital expense budget and recurring replacement reserve, and you need to use them in your financial analysis and underwriting of the property you wish to acquire. Failing to account for a capital expense budget and recurring replacement reserve will leave you scrambling for cash when items break down, and it will make it very difficult to reach your investment goals when these items break down that should have been targeted for replacement up front.

Accounting for Capital Expense Budget and Recurring Replacement Reserve

One of the first things you need to know is how much should be set aside for your Capital Expense Budget. A good way to figure out the capital expense budget amount is to have a contractor inspect the property with you before you put in your offer, and put together a list of all the items that should be replaced over the next three to five years or your investment timeframe and an estimate of the costs to do so. Then you can take that total amount and subtract out the recurring replacement reserve amount for each of those three to five years or your investment timeframe. The amount left is what you will need to fund your capital budget (Total Capital Needs minus Replacement Reserve multiplied by Years before items need to be replaced).
For example, you inspect a 40 unit property that you plan on owning for five years after acquisition with your contractor, and figure out that the roofs need to be replaced, the buildings need to be painted, and half the appliances are in need of replacement; you calculate that the total cost to fix those items is $150K. You decide that you can only set aside $300 per unit per year or $12,000 per year ($300 x 40) into the replacement reserve. Therefore, you know that you will only have $60K over those five years ($12,000 x 5) to work with from your recurring replacement reserve. Now subtract your Total Recurring Replacement Reserve of $60K from your Total Capital Needs of $150K, and you will find that you need a $90K ($150K minus $60K) capital budget to take care of the other items that would be impossible to fund out of the operations of the property without severely affecting the cash flow and investor returns.
Therefore, you want to include that number in your evaluation of the property and adjust your offer accordingly, to make sure you can reach your desired return. If you can’t make the returns you desire after accounting for the capital expenses, you should pass on the opportunity.

Be Sure to Evaluate Each Property on its Own Merits

Each property is different, so it is important to look for these items when inspecting a property and putting together your offer. If you do not feel you have the skills to identify these costs, it’s always recommended to have an experienced contractor on your team who can help you identify them. There are some rules of thumb that we use when evaluating a property. For a capital expense budget we account for at least $1000 a unit on every property. For older properties with a lot of deferred maintenance it can be over $5000 a unit, and for new properties it can be as low as $1000 per unit; but for most properties, we budget $2000-$3500 per unit for a capital expense budget.

How much should I set aside for a Recurring Replacement Reserve?

For a recurring replacement reserve, most lending institutions will make you set aside $250 per unit per year for a newer property and $300 per unit per year for an older property. I have seen as much as $400 per unit in areas such as coastal cities, where assets are exposed to more elements. When you talk to your lenders, make sure to ask them if they escrow for these funds or if you will need to set them aside, and how much they require you to set aside for their financing. Even if they do not escrow for these capital budgets, it is essential that you set funds aside for these normal expenses that arise when owning a property.
When should I fund the Capital Expense Budget and Recurring Replacement Reserves?
We typically find it much easier to fund the capital expense budget when putting together the funding to buy the property. If you are raising money from investors, it is almost always easier to raise this money up front, rather than trying to go back after closing to put this money together. The recurring replacement reserve is funded out of the operations of the property on a monthly basis. For example, if you have a 40 unit apartment complex and a $300 per unit replacement reserve per year, you would take the $12,000 per year and divide by 12 months, setting aside $1000 per month to fund the recurring replacement reserve out of the monthly operations of the property.
Having a capital expense budget in addition to a capital replacement reserve before submitting an offer can help you account for all expenses and necessary capital required to close up front, allowing you to meet your investment return goals. If you do not account for these expenses up front it can leave you scrambling for more cash when large repairs and expenses are needed on your property, falling short of your investment goals.

Wednesday, August 22, 2012

Keys to Getting Started in Multifamily Apartment Investing

by Spencer Cullor on January 12, 2012

“I want to start investing in apartment complexes. How do I get started?”
If that is a question you have asked yourself recently, you are not alone. It’s something I hear on a weekly basis from both new and experienced real estate investors. They all want to know the keys to get started in multifamily investing the right way.
If done correctly, investing in multifamily apartments can be one of the most rewarding and best ways to grow your net worth and increase your income. However, one of the most important things you need to do when getting started is avoid making big mistakes that can take you years to recover.
It is important to get started right.
Below are keys to getting starting in multifamily apartment investing. You can start doing these things today to shorten your learning curve.
Educate Yourself
The most important thing you can do as an investor is educate yourself. Find out all you can about multifamily investments. Learn how they work. Learn how value is determined. At first it’s like learning a new language, but with a little practice it will become second nature. If you are serious about being a successful multifamily investor, it is important to build a strong foundation. That foundation should be built through your investment education.
Evaluate Properties Every Day
After you have educated yourself on the basics of the industry, including how to evaluate properties, you are ready to take the next step. One of the best ways to learn about commercial real estate is by actually evaluating as many properties as possible. Determine what they are worth. Evaluate the areas they are located in and what needs to be done to fix them up. Figure out what you would pay for them to get your desired return. My first year in the business, I personally evaluated over 100 investment opportunities, and what I learned was invaluable to my current investment career.
Start small, build a strong base, and grow
This is where my advice might differ from many of the gurus out there. We’ve all seen the excited investor run out of a seminar and start telling people how they are going to go out and buy a 150+ unit apartment complex without ever owning a single multifamily property. It does happen, yes, but that is definitely the exception to the rule.
Don’t get caught up in the numbers game. Start small, where you are comfortable, and grow as you learn the business. Investing is not a sprint, it’s a marathon. Build a strong foundation stepping up a little in size with each investment and you will grow your business the right way.
Getting a good investment education, evaluating properties every day, and starting small will help you get started in multifamily investing the right way. These steps will cut your learning curve dramatically and help you to avoid making big mistakes. Once you build a strong foundation, you will be on your way to building wealth and massive cash flow.
See you at the top!

Thursday, August 2, 2012

Create True Passive Income & High Cash Flow with Apartment Investing

You can truly create high passive income and high cash flow through investing in apartments. ANd for the same investment you can make so much more than you can over single family homes.

Let’s look at a simple example:

Imagine if you were to buy a $250,000 single-family rental house. That $250,000 house may rent for somewhere in the neighborhood of $1,500 per month. The underlying mortgage on that house may be somewhere between $1,000 and $1,400 per month. So you may end up getting between $100 and $500 per month in positive cash flow.

Now, let’s take a look at a similar investment from a commercial standpoint. That same $250,000 investment may end up getting you a 10-unit apartment complex, which comes out to $25,000 per unit to acquire the property.

Let’s say each of those units were two-bedroom apartments, which could rent in most areas of the United States anywhere between $400 and $600 per month. For simplicity’s sake, let’s use an average of $500 per month. At $500 per month times ten units, you’re bringing in $5,000 per month – more than triple the rent that you could expect to get from that same $250,000 single-family house. Your underlying mortgage payment would be very similar to what you would expect on a residential property; for this example, let’s use $1,400 per month.

Your cash flow on this 10-unit apartment building will be $3,600 PER MONTH ($5,000 per month income, minus $1,400 mortgage payment). Now that will make a difference in just about anyone’s life!

In fact, if you wanted to GIVE AWAY one apartment to an on-site property manager, and maybe pay them a few hundred dollars a month for part-time help, you’d have your property working on auto-pilot and you’d STILL be making thousands per month –- true passive income!

Monday, July 23, 2012

How To Become Wealthier, Faster Investing In Real Estate

By Dave Lindahl

Having rehabbed over 470 properties in the last seven years and collected over 600 apartment units I’m often asked, how can I become wealthier faster investing in real estate?

While most investors concentrate on some aspect of single family houses, I was always interested in apartment houses first, and then single family homes as a means of getting more apartment houses.

From the very beginning of my investing in real estate, I liked the idea that a group of people (the tenants in a building), would get together and pool their money to pay down the mortgage on a property, and I liked the idea that they would also pool their money together to pay for all of the maintenance work for a building.

I especially liked the idea that they would give an owner so much money that the owner would have a bunch of money left over at the end of every month that could be used to either re-invest, save or to go out and have a good time with.

Essentially, I like the idea that other people were willing to help make me wealthy.

The first property I purchased was a three family apartment house. I used credit cards to fund the down payment. When I began to purchase my third three family, I realized that there were a lot of good deals out there and I needed a system to come up with down payments.

That’s how I developed my “Chunker Strategy”. What I do is buy a single family house with little or no money down (through private money or partners), flip it and use a chunk of money to live today and use the other chunk for another apartment house.

I became an expert at flipping single family houses. I learned to wholesale, retail, pre-foreclosure, rehab, subject to and lease option single family houses. I became a transaction engineer because I didn’t want to lose any potential deal that might be available to me.

I soon came to realize that I could also wholesale, retail, pre-foreclosure, rehab, subject to and lease option apartment houses as well.

You see, when I throw out my marketing dragnet for single family houses, I find that I was also attracting motivated sellers of smaller apartment houses. If for some reason I wasn’t interested in holding an apartment house for cash flow, I could make a chunk of money flipping it using one of the methods that I described above.

Learning how to invest in apartment houses is like adding another tool to your tool box. You might not need it every day, but when you get the chance to use it, it pays for itself over and over again.

Every once in a while, you come across a great deal on an apartment house. A deal that is going to bring you in a great monthly cash flow of eight hundred dollars a month or more. These deals are actually more common than you think, you just haven’t trained your mind to recognize them.

Imagine for a minute, as you are buying and selling your single family houses, you start “collecting” apartment houses with cash flows of at least eight hundred dollars a month (if you are buying 3+ units, you will want at least a net positive cash flow of eight hundred dollars a month, unless you are in a first half of a rising market, and then and only then should you get less).

You will find these deals by dealing with motivated sellers. These deals do not commonly come through real estate agents. There are many good marketing courses available that teach you how to attract motivated sellers, get one and prosper!

Let’s say that you collect just four apartment houses a year, one every 3 months. At the end of the first year you will have a net positive cash flow of $3,200 per month. That would equal $38,400 per year.

Now let’s say that you continue to flip single family houses, get chunks of cash, and when the opportunity arises you continue your shrewd method of investing and continue to collect four apartment houses the next year. You have just increased your monthly income to $6,400 per month and your total yearly net positive cash flow from your apartments to $76,800.

Let’s jump forward to the end of year four. You have now collected a total of 16 apartment houses. Your monthly income from your apartments is $12,800 per month, your yearly net positive cash flow from your apartments is $153,600!

That means that if want to take all of year five off and do nothing, no flipping single family houses, no buying more apartments, no doing nothing, you would still get $153,600 in as a net positive cash flow from your existing apartments.

With $153,600 you can do a whole lot of nothing!

Now you might be thinking whoa...what about all those tenants?! I don’t want to deal with any tenant-you don’t have to. As your purchasing your property, you factor in the cost of a good management company. If the property still cash flows properly, buy it. If it doesn’t…next!

Some people don’t have a problem managing their own buildings. I did it for my first two and one half years in business but I soon realized that dealing with my tenants took time out of me going out and finding more deals, so I systemized the management of my buildings and hired a girl to work in my office and manage them for me.

I haven’t talked to or taken a call from a tenant in over four years and yet I happily deposit those cash flow checks in my bank account every month!

When I buy properties out of state, I hire local management companies to manage them for us. The rule of thumb is to pay them 8 –10% of the gross collected rents for buildings with 20 units or less and 5 – 8% for buildings with 20 units or more.

Let’s get back to the cash flow because cash flow is the real reason you should consider buying apartment houses while your doing your single family investing.

The cash flow gives you the freedom to do what you want when you want, go where you want when you want, and buy what you want when you want. This is exactly why we are in the real estate game.

What if you don’t decide to invest in apartment houses? It’s now four years later, you’ve been flipping a lot houses and are making some good money, heck, you’ve even got some single family houses that your holding for long term cash flow.

Let’s look at the reality of the situation. If you want another payday, you have to buy and sell another house. The cash flow on your single family keepers average $300 per month, what happens if you lose your tenant for just one month? You’ve probably lost your profits for most of the year.

If you were collecting apartment houses during that same four years while buying those single family houses, you would have a pay day in the tune of $12,800 per month each and every month for doing nothing (your net positive cash flow). The management company does all the work! If you lose a tenant in your three family building, no problemo! The other two tenants still pay enough to cover the expenses and also give you a little cash flow.

Not only that, you are creating more and more equity in those apartment buildings through the pay down of the mortgage and the appreciation that takes place each month that goes by. Your setting yourself up for some huge paydays further on down the road.

How do you become wealthier faster investing in real estate? Start collecting some apartment buildings as you buy and sell those single family homes.

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