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.
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