Apartment Market Digital Summer 2011

Issue 4 • August 2011

How to Improve Your

Net Operating Income Also in this Issue:

• Investing in Foreclosed Apartments • Formula for Analyzing ROI Brought to you by

info@apartmentsforsale.com • 888-441-7355

• Property Investment Opportunities and more!

Property Investment

Opportunities More and more individuals and families are finding it difficult, if not impossible, to purchase a house. A variety of factors can prevent someone from being to obtain a mortgage and this is making renting often the only option available.

This trend has increased the need for rental units and this increased need provides a tremendous opportunity for a real estate investor, particularly with multifamily properties.

Consider these aspects of multi-family property investment opportunities: • With a multi-unit property you have a group of people (tenants) pooling their money together every month to pay the mortgage (your mortgage).

• This same group is also pooling their money every month to pay for maintenance and improvements to the building (your building).

• They are so happy with this arrangement; they give you extra so you have

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some left over every month!

• This group is actually happy to pool their money and make you wealthy!

Consider these other aspects of multifamily property investment opportunities: • If you own and rent out several singlefamily homes, you have tenants spread over a large area. With a multi-unit property, everyone is close.

• With several single-family homes, you have several lawns to maintain, and several roofs to repair. A multi-unit property has one lawn and one roof.

• Cash flow can be less risky with a multiunit property. If you have one singlefamily house and that tenant leaves, your cash flow also leaves. Consider a multi-family property with six units; if one tenant moves out, you still have rent from five more.

• As more people are turning to renting, this creates more opportunity for the

investor who owns multi-unit complexes. The rents you charge become more competitive and you can become more selective in the tenants you accept.

• If you decide to sell your multi-family property investment, all of the items above make it a good investment for someone else and a good opportunity for you to achieve a nice big pay day.

How to get started with multi-family property investment opportunities: • You probably already have a target market area where you invest in singlefamily homes. Revisit this area with a new focus on multi-family units.

• Use local property tax records to identify any out-of-state owners. Contact them and ask what their long range plans are for the property.

• These properties must be evaluated differently than a single-family home. You will need to develop a profit and loss ...continued on page 8 www.apartmentsforsale.com

Investing in

Foreclosed Apartments

Many investors are aware that buying foreclosed properties could be a good investment, but do not know how to buy a foreclosure. A true foreclosure purchase is done at public auction, after the property has been foreclosed but before the bank has taken possession. An investor must find out where the auctions are advertised, research the property, show up at the appointed place and time, and be ready (with a cashier’s check in hand) to bid!

However, knowing how to buy a foreclosure is not as important as knowing when to buy a foreclosure. There is one major benefit to buying foreclosures, and that’s the price. Foreclosed proper-

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ties can be sold at fraction of their value.

But there are a number of potential pitfalls. Here are some of the biggest to look out for.

Properties generally cannot be inspected: Foreclosures are sold “as is.” Usually, the owner or tenant has not even been evicted. Without access to the property, it cannot be inspected. A “drive-by” inspection may allow an investor a guess as to the property’s condition, but he cannot know specifics until he has paid for the property.

Properties are generally sold without title insurance: Foreclosed properties often have tax liens against them or a confusing ownership history. A thorough

title search should be an investor’s top priority when preparing to bid at foreclosure auctions.

Property values may be dropping: What looks like a good foreclosure purchase now may not turn out so great six months from now. In order to avoid surprises, an investor should only buy foreclosures in areas he is familiar with.

Knowing when and how to buy a foreclosure is an art, not a science. The artful investor will need to balance the risk against the reward in order make good foreclosure purchases! p

Apartment Market Digital • August 2011

3

Improving Net Operating

INCOME

4 Apartment Market Digital • August 2011

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O

wning an apartment building can be a very profitable investment. There are several steps you can take – some easy, some more complicated – to increase your net operating income (NOI). Your NOI is calculated by subtracting your annual expenses from your annual income. To increase your NOI, you reduce your expenses; increase your income – or both!

Reduce your expenses:

• Decrease your property taxes. If property values around your building have decreased, have your property reassessed. You could save thousands of dollars per year.

• Compare insurance costs. Contact several companies for bids.

• Keep an eye on repair costs. By keeping track of maintenance or repair issues, you may be able to anticipate costs. For example, if the dishwashers appear to be failing on a regular basis, it might be more cost-effective to replace all of them at one time.

Increase your income:

• Convert utilities. If you are currently paying all of the building utilities, you might consider converting to all, or partial, tenant-paid utilities. www.apartmentsforsale.com

• Increase the rent. If you raise the rent by $10 per unit in a 10-unit building, you have increased your income by $1,200 per year. The same increase in a 100-unit building will provide an additional $12,000.

• Add amenities.

• Laundry area. If you install coin-operated machines, you will increase your NOI with the proceeds. If you install free machines, you increase the convenience for tenants and can justify a rent increase.

• Storage spaces. On-site storage spaces can be “rented” for a monthly fee.

• Covered parking. If you add covered

carports or garages, you can charge an additional monthly fee for each space.

And the added value can bring higher rent.

Other amenities:

• Exercise room; • Vending machines; • Daycare center; • On-site ATM machine.

Increasing your apartment building’s net operating income is not difficult, but it does require careful planning and some creative thinking. p

Apartment Market Digital • August 2011

5

Formula for Analyzing

Return on Investments

Return on investment is simply a way to measure profit. Instead of measuring it in terms of a total dollar amount, return on investment measures profit as compared to cost, ultimately arriving at a percentage. A return on investment formula is important because it helps a landlord determine whether a certain investment is “worth it.” While a profit of $100,000 sounds good, it may not be worth it if the investment costs $10 million, yielding a return on investment of only one percent.

A basic return on investment formula equals: (income from investment) - (total cost of investment) total cost of investment

6 Apartment Market Digital • August 2011

In the context of apartment ownership, a good return on investment formula requires advance planning and diligent record-keeping. A calculation of the income derived from the investment will often be simple; it will be the accumulation of rent and any increase in the value of the property. However, the calculation of the total cost of the investment requires the owner to identify all costs of ownership and to track them consistently. Some examples of costs which should be included in an apartment owner’s formula are: • Down payment • Mortgage payment • Real estate taxes • Income taxes • Advertising • Salary of property manager • Scheduled and unscheduled

maintenance • Purchase and replacement of appliances • Utilities not paid by tenants • Insurance premiums • Legal fees • Certification fees Ultimately, an apartment owner’s formula should help him identify how much rent must be charged in order to make an acceptable return on investment. Anywhere between 5% and 50% might be considered an acceptable return on investment. Each individual landlord must decide for himself what an acceptable return is, but failing to use a return on investment formula can lead to losing money through unbudgeted expenses. p

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Investing in

Apartment Buildings

Some so-called experts are telling us the economy “is in the toilet.” With more and more people unable to acquire financing to buy their own toilet, their focus is turning to renting. Not just renting the toilet, but renting a home to live in - including the toilet.

Right now is an amazing time to consider investing in apartment buildings. For one thing, they have several toilets. Here are some other reasons: • According to recent studies, onethird of the population rents their residence, and that number will continue to grow. www.apartmentsforsale.com

ment buildings during the real estate peak now owe more than what the places are worth. Some are going into foreclosure, some are being sold at a loss. Many are being sold at bargain prices.

If you want to increase the • If you want to increase the value of an apartment building, you are in value of an apartment building, control – you don’t need to wait for you are in control the real estate market to go up. To increase the value, you can raise the rents, cut your expenses, or make improvements on the building. closure problem grows – people still • If you want to increase your monthly need someplace to live.

• Many owners who bought their apart...continued on page 8 • It doesn’t matter if the economy is in the toilet, it doesn’t matter how bad the job market is or how large the fore-

Apartment Market Digital • August 2011

7

Property Investment Opportunities ...continued from page 2 statement comparing the income to the expenses, taking into account vacancies.

• Learn as much as you can about the area, the people living in the area and their occupations. Pay close attention to proximity to colleges (the occupan-

cy rate may fluctuate with the school year), to new businesses in the area, to construction, and to crime reports in the area.

These are all things you would do with a single-family home, but with a six-unit

property, it is six times as important.

Property investment opportunities are increasing throughout the country, and multi-family units proving to be one of the best income-producing methods available. p

Investing in Apartment Buildings ...continued from page 7 cash flow, again you are in control – just • Close to reliable public transportation; • Convenient shopping (especially groraise the rents. cery stores) close by; • With most new businesses you won’t see immediate positive cash flow. • Nearby parks or other recreation facilities.

When you are in• Apartment buildings vesting in apartnear college campus ment buildings, are easy to rent during you get a steady When you invest in the school year, but flow of cash starting immediately several single-family may have high vacancy other times. and continuing ev• Some of the best ery month. homes, you have financing terms are • Investing in apartseveral toilets to available for investing ment buildings is buildsometimes confix, several lawns to inings.apartment Often you can fisidered “too difficult” to pursue. maintain and several nance as much as 85% of the purchase price.

This results in less roofs to replace.

Many current apartcompetition for ment owners are comthe best opportuWith an apartment fortable with the idea nities.

• For creating a building, you still have of seller financing.

• When you invest in steady income for your retirement several toilets to fix, several single-family homes, you have sevor building a financial estate to but only one lawn and eral financing negotiations and several pass along to your only one roof. closings. If you are inchildren, very little vesting in apartment can surpass ownbuildings, you have ing an apartment one negotiation and building. one closing per building.

• Look for a great location, such as: • Near hospitals or other medical facili- • When you invest in several single-family homes, you have several toilets to ties; fix, several lawns to maintain and sev• In neighborhoods with good schools;

8 Apartment Market Digital • August 2011

eral roofs to replace. With an apartment building, you still have several toilets to fix, but only one lawn and only one roof.

Investing in apartment buildings can be financially very rewarding. Be sure to do your research and carefully analyze every deal before you enter into the business of renting apartments (and toilets). p

is Brought to you by

888-441-7355 Publisher

Darrel Dickson

Graphic Designer Chris Krebs

The statements and representations made in the news articles contained in this publication are those of the authors and as such do not necessarily reflect the views or opinions of PPI Creative.

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