Apartment Market Digital Summer 2011

Issue 4 • August 2011

H o w t o I m p r o v e Yo u r

Net OperatiNg iNcOme

• Investing in Foreclosed Apartments

• Formula for Analyzing ROI

• Property Investment Opportunities

and more!

Also in this issue:

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2 Apartment Market Digital • August 2011 www.apartmentsforsale.com www.apartmentsforsale.com

More and more individuals and fami-lies are finding it difficult, if not impos-sible, 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 pro-vides a tremendous opportunity for a real estate investor, particularly with multi-family 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 mainte-nance and improvements to the build-ing (your building).

• They are so happy with this arrange-ment; they give you extra so you have

some left over every month! • This group is actually happy to pool their

money and make you wealthy!

Consider these other aspects of multi-family property investment opportuni-ties: • If you own and rent out several single-

family 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 multi-unit property. If you have one single-family 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 complex-es. 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 single-family homes. Revisit this area with a new focus on multi-family units.

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

• These properties must be evaluated dif-ferently than a single-family home. You will need to develop a profit and loss

Property Investment

Opportunities

...continued on page 8

3Apartment Market Digital • August 2011www.apartmentsforsale.com

Investing in Foreclosed Apartments

Many investors are aware that buying foreclosed properties could be a good in-vestment, but do not know how to buy a foreclosure. A true foreclosure purchase is done at public auction, after the prop-erty has been foreclosed but before the bank has taken possession. An investor must find out where the auctions are ad-vertised, 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 fore-closure 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-

ties can be sold at fraction of their value. But there are a number of potential pit-falls. Here are some of the biggest to look out for.

Properties generally cannot be in-spected: 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 in-vestor a guess as to the property’s con-dition, but he cannot know specifics until he has paid for the property.

Properties are generally sold without title insurance: Foreclosed properties of-ten have tax liens against them or a con-fusing ownership history. A thorough

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

Property values may be dropping: What looks like a good foreclosure pur-chase now may not turn out so great six months from now. In order to avoid sur-prises, an investor should only buy fore-closures in areas he is familiar with.

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


Improving Net Operating

I N C O M E


Reduce your expenses: • Decrease your property taxes. If prop-

erty values around your building have decreased, have your property reas-sessed. You could save thousands of dollars per year.

• Compare insurance costs. Contact sev-eral companies for bids.

• Keep an eye on repair costs. By keep-ing track of maintenance or repair is-sues, 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 re-place all of them at one time.

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

Increase your income: • 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 ad-ditional $12,000.

• Add amenities. • Laundry area. If you install coin-oper-

ated machines, you will increase your NOI with the proceeds. If you install free machines, you increase the con-venience 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

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!

O

Formula for Analyzing Return on Investments

Return on investment is simply a way to measure profit. Instead of measur-ing 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 mil-lion, 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

In the context of apartment owner-ship, a good return on investment for-mula requires advance planning and diligent record-keeping. A calculation of the income derived from the invest-ment 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 in-vestment requires the owner to identify all costs of ownership and to track them consistently. Some examples of costs which should be included in an apart-ment 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 in-vestment. 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 unbud-geted expenses. p



Some so-called experts are telling us the economy “is in the toilet.” With more and more people unable to acquire fi-nancing 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 build-ings. For one thing, they have several toilets. Here are some other reasons: • According to recent studies, one-

third of the population rents their resi-dence, and that number will continue to grow.

• 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-

closure problem grows – people still need someplace to live.

• Many owners who bought their apart-

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 bar-gain prices.• If you want to increase the value of an apartment building, you are in control – you don’t need to wait for 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. • If you want to increase your monthly

Investing in Apartment Buildings

...continued on page 8

If you want to increase the value of an apartment building,

you are in control

cash flow, again you are in control – just raise the rents.

• With most new businesses you won’t see immediate positive cash flow. When you are in-vesting in apart-ment buildings, you get a steady flow of cash start-ing immediately and continuing ev-ery month.

• Investing in apart-ment buildings is sometimes con-sidered “too dif-ficult” to pursue. This results in less competition for the best opportu-nities.

• For creating a steady income for your retirement or building a fi-nancial estate to pass along to your children, very little can surpass own-ing an apartment building.

• Look for a great location, such as: • Near hospitals or other medical facili-

ties; • In neighborhoods with good schools;

• Close to reliable public transportation;• Convenient shopping (especially gro-

cery stores) close by; • Nearby parks or other recreation fa-

cilities.• Apartment buildings near college campus are easy to rent during the school year, but may have high vacancy other times. • Some of the best financing terms are available for investing in apartment build-ings. Often you can fi-nance as much as 85% of the purchase price. Many current apart-ment owners are com-fortable with the idea of seller financing. • When you invest in several single-family homes, you have sev-eral financing nego-tiations and several closings. If you are in-vesting in apartment buildings, you have one negotiation and

one closing per building. • When you invest in several single-fam-

ily homes, you have several toilets to fix, several lawns to maintain and sev-

eral roofs to replace. With an apart-ment 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

8 Apartment Market Digital • August 2011 www.apartmentsforsale.com

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Investing in Apartment Buildings

Property Investment Opportunitiesstatement comparing the income to the expenses, taking into account va-cancies.

• 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

When you invest in several single-family

homes, you have several toilets to

fix, several lawns to maintain and several

roofs to replace. With an apartment

building, you still have several toilets to fix,

but only one lawn and only one roof.

...continued from page 2

...continued from page 7

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Apartment Market Digital Summer 2011