Apartment Market Digital Fall 2015

2015 ALSO IN THIS ISSUE

• Five Ways to Locate Multifamily Properties For Sale • Why Multifamily Insurance?

• Smoke-Free Apartments

• Know Your Renter Demographics • Real Estate Formulas You Should Know • 10 Ways to Create Value in an Apartment Complex • Successful Negotiations • What You Need to Know Before Establishing Your Niche in Multifamily Ownership • How to Prevent Water Damage • Overview of Exit Strategies

Five Ways to Locate Multifamily Properties For Sale

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ocating the best multifamily properties for sale is an ongoing process that requires you to look in multiple places. Luckily, there are certain tools that will help you in your search.

Online Technological advancement has made it easy for you to locate multifamily properties for sale over the Internet. Websites such as apartmentsforsale.com offer free resources for buyers and sellers of apartment buildings. Through this strategy, you can find an ideal property from anywhere in the world. This method is advantageous because you cut down the costs that you may incur while engaging the services of middlemen and agents.

Agents If you want to buy properties from a certain location, always consult the real estate agents in that area for information on properties for sale.

Working with the agents will save you time and money that you would otherwise use searching blindly for multifamily properties for sale. Moreover, the agents are experienced and will work within your budget to find the perfect property for you.

Auctions There are excellent quality properties sold at affordable rates in the auctions. Make sure that you search for auctions where these kinds of properties are sold. The auctioneer searches to retrieve their money; thus, you can secure properties at ridiculously low prices.

Drive-bys There are certain areas where multifamily properties are prevalent.

Therefore, you can drive by these neighborhoods, searching for multifamily properties for sale. Though it is cumbersome, searching in the right location can bear good fruits, since you can meet directly with the owner.

Property Registry You can also visit the government property registers to find your ideal property for purchase in any neighborhood.

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Why Multifamily Insurance?

ultifamily insurance is a must-have for any rental property that will be home to more than one family or group. When purchasing or refinancing an apartment complex, buyers are required by lenders to meet minimum insurance requirements.

Multifamily insurance is most often held by the property owner and helps to protect both the renter and the property owner in the case of a variety of instances. This type of policy will cover damage to the property in the case of open perils like storm

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damage, fire damage, water damage, and other such damages. This type of policy will also protect the property owner in the case of loss of rental coverage and may even include personal liability for both the renter and the property owner.

Multifamily insurance keeps both the owner and the renters safe. HO-3 is the most common coverage for those owners that also live on the property, while DP-3 policies are used for those owners that do not live on the property. The first policy is going to help rebuild the home in the case

of damage and will cover garages, personal property, personal liability, and medical payments to others if they are injured on the property. The second policy covers personal liability, dwelling insurance to help rebuild if the home is destroyed, structures like porches, garages and buildings that are stated by the owner in the policy, as well as loss of rental value while the home is being fixed.

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Smoke-Free Apartments

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rying to decide whether to make your apartment community smoke-free can seem like a difficult decision. There are still a lot of smokers out there that want to be able to smoke inside of their homes - but there are also a lot of health-conscious people who desire smoke-free living spaces. The following are a few pros and cons to making your apartments smoke-free:

• It’s actually less expensive to turn over a smoke-free apartment. In fact, it costs on average around $5,000 less than turning over an apartment that has been smoked in. This is because smoking results in stains - both from smoke and ash - that may require repainting the walls and ceilings as well as replacement of carpeting and fixtures. The costs of these tasks may reach as high as $15,000.

The Pros of Smoke-Free Apartments • The dangers of second-hand smoke have been well chronicled, which means that people with families are more likely to rent a smokefree apartment as opposed to an apartment where previous residents may have smoked.

• Making your apartments smokefree will reduce the risk of fire. According to the National Fire Protection Agency, smoking materials have been one of the leading causes for home fires for decades. In 2013, around 5 percent of all reported home fires were caused by smoking materials.

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The Cons of Smoke-Free Apartments • People that do smoke will be more likely to seek housing at a different apartment community if your apartments are smoke-free.

• You may upset and even lose loyal tenants that smoke if you decide to change your policy to make your apartments smoke-free.

Be sure to keep these pros and cons of smoke-free apartments in mind when deciding whether to make your apartment community smoke-free. For additional advice concerning your apartment community, contact us at Apartments For Sale today.

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Know Your Renter Demographics

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s an owner or a manager of a rental property, it’s important for you to familiarize yourself with the demographics of your most common renters. In terms of leasing your property, knowing these demographic groups and what appeals to them will help you market your property more effectively and even allow you to keep current tenants happy by anticipating which units can work best for which tenants.

For example, if you know that your property is attracting a preponderance of young single males, you could use ads that subtly — not overtly — promote the “bachelor pad” appeal of your units. Ads that show off the features of the apartment from the

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perspective of someone who wants to entertain and may occasionally have temporary overnight company will boost the chances of your leasing to this demographic. Mentioning features like entertainment rooms, built-in cable TV, roof access and balconies will likely go a long way with this group. But you have to be careful with how you employ this practice.

Federal housing laws prohibit suggestions that anyone is not allowed or discouraged from renting in your building based on their sex, race, religion, disability, familial status or national origin. So, for instance, you can’t advertise that your building is “close to a synagogue” if you are trying to attract Jewish renters. But you could say that your management

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office is closed on certain holidays.

It may be best to consult an expert in such laws if you are unsure how to proceed.

On the flip side, if you know that specific demographic segments are most likely to rent, you should take care which units they’re shown and which they lease. For example, it’s probably a bad idea to put a person from the aforementioned young bachelor group directly over or next to the apartment of an elderly couple, due to possible noise from entertainment and/or guests. By employing smart planning, you can keep all residents happier and have less friction.

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Real Estate Formulas You Should Know

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s a real estate investor, learning and understanding the many calculations and formulas used in evaluating and analyzing the performance of your investment is vital.

Here are some of the most important real estate formulas that you should know about.

The Capitalization Rate The capitalization rate or the cap rate is used to estimate the overall rate of return of commercial property based on the income that the property is expected to generate. The cap rate is calculated by dividing the Net Operating Income (NOI) with the existing market value of the property.

Net Operating Income (NOI) NOI is a property’s income after reducing all the necessary operating

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expenses. Simply put, NOI measures a real estate investment’s profitability by evaluating the underlying cash flows before the effects of taxes and financial costs are considered. NOI is calculated as the revenue generated by the real estate less the operating expenses.

Gross Rent Multiplier (GRM) This simple formula gives you a bird’s eye view of the feasibility of investing in a particular property unit depending on the sales price and the projected income from the property.

GRM is given as the ratio of the price of the property to the potential annual rental income.

prior to tax by the amount of equity initially invested. Unlike the cap rate, cash-on-cash return takes into account debt financing, vacancy, and other losses.

The Debt Service Coverage Ratio (DSCR) This is one of the most common and least understood formulas. In real estate DSCR is the ratio of a real estate’s investment annual net operating income to its annual mortgage debt service. A good DSCR should be above 1.

Cash-On-Cash Return Also known as, the equity dividend rate, cash-on-cash return is the ratio that is derived by dividing cash flow

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10 Ways to Create Value in an Apartment Complex

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he best thing about investing in apartment buildings is that it enables you to have a steady cash flow through multiplied profits. Moreover, shrewd real estate investors are always looking into how they can increase their cash flow as well as the value of their apartment complexes.

Here are 10 ways to improve the value of your apartment building • Increase Rental Rates: You may not be renting your apartments at market value. You can increase your rental rates to market value. You must wait for the lease to expire.

quests quick, and sponsor occasional parties or events.

• Remodel the Apartments: Remodel with fresh paint, new appliances, lighting/bath fixtures to be able to charge more rent.

• Water Savers: Fit water saving shower heads as well as low-flow faucet aerators in every unit.

• Convert Unutilized or Excess Storage: Create into rentable living units.

• Add amenities: Tenants will pay extra for amenities such as a washer and dryer.

• Install energy-efficient lighting: Install in the common areas to save costs.

• Add Vending Services: Soft drink and snack machines help create extra income.

• Minimize Tenant Turnover: Keep rents at market, maintain grounds nicely, respond to maintenance re-

• Change Your Tenant Base: Do away with renters who make late payments, those engaged in crimi-

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Apartment Market Digital • Fall 2015

nal activities, or those who don’t pay, and focus on attracting your target tenant profile.

• Perform Cost Segregation Analysis: Consult a professional cost segregation analyst.

When you take the appropriate steps to improve the value of your apartment complex, you will get the opportunity to charge more rent.

With this, you will get more revenue on a monthly basis, as well as a higher asking price when you decide to sell the property.

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Successful Negotiations

uccessful real estate players are successful because they work hard and they’re good negotiators. Anyone can make up their minds to be hard workers, but it takes effort, experience, learning, and observation to learn the skill that good negotiators possess. Negotiation is essentially intelligent persuasion that you’ll use to put matters to your advantage.

This is especially so in a competitive environment like the multifamily real estate market. Here are some good tools in negotiation:

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• Information on the opposite party: Have as much information as possible about the seller or buyer, and his or her motivation to sell or buy. What prices do they have in mind? This information is useful when negotiations begin and you’ll have already considered your position versus theirs.

• Controlled emotions: There are buyers and sellers who make outrageously low, high or unachievable demands. You therefore need to keep your emotions in check lest you

scuttle the whole deal. Avoid getting too attached to the property you are dealing with. This can cause you to lose objectivity when a business deal turns into something more personal.

• Gaining concessions and not ceding your ground: Good negotiators are always looking to make the opposing party cede some ground without thinking they’re getting a raw deal. On the other side, you need to keep calm and avoid giving away so much that the deal is not helpful to you in the long run.

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What You Need to Know Before Establishing Your Niche in Multifamily Ownership

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he real estate industry is proving to be a gold mine as an investment opportunity in the current market. It is a wonderful investment option that guarantees the owner’s massive profits if he or she put in place all the necessary measures and requirements.

To become an established multifamily owner in the real estate industry and create a niche for yourself, there are certain Must-Knows and Must-Dos to ensure you achieve success in your investment.

Before purchasing an apartment Before you decide to purchase an apartment, there are certain issues you should put into consideration.

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Start by surveying the local market and note the needs and urgency of consumers for apartments. Note the current local rates to purchase an apartment and the renting rates.

Assess the type of apartment that cashes in more returns according to the local rates, whether residential or commercial apartments and invest promptly. Keep in mind the intricacies that come with either type of apartment, like maintenance, repair and renovation costs.

Inform yourself about local laws on lands and housing to ensure there are no political red tapes to hinder you investing into apartments. Familiarize yourself with the requirements by the local authorities to rent out or purchase apartments.

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A good apartment should be built in a favorable neighborhood that will suit your customer needs.

The right neighborhood will result in appreciation in the value of your apartment and guarantee you profits. The environment and location of your apartment will also increase the market value of your property, dictating the renting rates that you will impose on your tenants. Whether in an urban or a rural setting, ensure the apartment you purchase is in a good environment.

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How to Prevent Water Damage

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voiding the potential for water damage involves ensuring that all pipes are working properly. You should check under the kitchen sink by running water and watching underneath to see that there are no leaks in the pipes. If there are leaks then the pipes should be replaced, preferably with new PVC pipes.

During the initial walk through, your tenants should be shown where the shut off valve is located under the sinks and behind the toilets. Test the shut off valves so you know that they work. This will prevent most emer-

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gency plumbing calls in the middle of the night. In the bathroom, flush the toilet to verify that it is working.

When you perform your periodic maintenance inspection, double-check all faucets and pipes. This is also a good time to snake any slow or clogged drains. Overflowing bathtubs can be stopped by installing a device that will automatically shut the water off when it reaches a certain level. Keep an eye on your water heaters. They can start to leak slowly and gradually worsen or they can let loose and flood the space. You can install a leak detection device on your

water heater, or simply add it to your periodic inspection list.

Poor landscaping around the building can also cause water damage. Be certain that the ground slopes away from the building. It is important to note if the gutters are doing their job. Being vigilant of all sources of water damage is a continuous task that needs to be executed by management, maintenance staff and tenants.

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Overview of Exit Strategies

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he real estate business is similar to a burning building in that it is not safe to enter without first knowing where all the exits are. Before buying any property, you must first come up with an exemplary exit strategy. Moreover, your exit strategy should always influence the kind of offer you make on any property. The exit strategy also helps you to determine the kind of financing source to use.

The exit strategy enables you to analyze all the market trends; thus, you can exit at the ideal time for optimal profits. In case of a short-term investment, your exit strategy will require short-term financing. The best financing sources of this kind of

investment include your cash, hard money, your credit, or home equity.

Also, you may receive financing from a partner for split profits or a private lender who offers short-term loans.

In the short-term, investments do not get tied up for more than six months. If you get tied up for longer, your liquidity and ability to move quickly will simultaneously reduce. In the case of short-term exit strategies, you should buy in places “A” credit buyers are buying. The high demand will increase your profit margin within a short time. If your strategy is the lease options, then you should prepare for long-term financing strategies.

If your exit strategy is not to exit, but instead you wish to rent the property on a long-term basis, then you should not go to the banks for financing. Banks charge higher interest rates and will thus reduce your profit margin.

Having an exit strategy will save you a lot of money and simultaneously reduce the risks involved with every deal you make. The main exit strategies include wholesaling, rehabbing, seller finance, lease option, buy and hold, and pre-habbing.

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