Investing, in my opinion, should be treated like a business.
It requires a product which produces an income or cash flow larger then the expenditures necessary to sell the product. Therefore, it should produce a profit for the manager or business owner.

Unfortunately, many investors are actually not investors at all in the business sense of the word. They are in fact speculators. Most people who own stocks are in fact speculators and not investors, according to my definition. These stockholders are speculators because their holdings don’t produce an income that exceeds their expenditures. Expenditures for stock holders include the erosive effects of inflation on the true value of securities and the cost of holding the stocks or commissions and management fees. These stockholders are speculating that the price of the stocks in their portfolios will rise over time and they will cash out their winnings. Meanwhile, the stock price could down or the company could go out of business and they could lose all of their invested capital. It has always been interesting to me that most people who buy stocks actually consider themselves investors when they are really speculating.

Analysis. What Analysis?

Many of the people who have an interest in apartment building investments are somewhat fearful of actually buying one because they don’t know how to evaluate them properly. On the other hand there are other investors, who also lack the necessary knowledge to truly evaluate the investment potential of an apartment building but they have no fear at all. This second group jumps right in and begins to make offers on properties just based on the recommendations of a realtor or even a friend who is equally inexperienced. Warren Buffet once said that “risk comes from not knowing what you’re doing.” In my opinion this sums up the true risks inherent with an apartment building investment. For this reason, all new apartment building investors should carefully study how to evaluate whether an apartment building will really be a profitable investment.

How to Learn Apartment Building Investing

The way to get the proper education is simply to read as many books as possible about the subject and learn how to analyze the rent rolls, the income and expense reports and the commercial appraisals when available. The new investor can also contact experts in the industry such as commercial mortgage brokers, commercial realtors and commercial appraisers. This is truly the “edge” that apartment building investors have over stock investors and even residential real estate investors. With apartment building investments you have access to the blue print for the business. It is just your job to properly understand what it is saying. The answers are in the details.

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Tags: apartment building investments, apartment investing, buying apartments

The imminent failure of both Freddie Mac and Fannie Mae has already begun to have a detrimental impact on the larger US economy and the ability of home buyers to finance the purchase of a new home.

This is an unfortunate circumstance for many young families who may not be able to qualify for a mortgage to purchase their new home because of tighter bank underwriting guidelines. While this is a negative situation for young families looking for their own homes it could be a potential wind fall for the owners and operators of apartment building complexes across the United States. All of the people displaced by the housing bubble along with new populations of young people looking for housing will have to turn to rental properties for housing. The fact that more and more residential, single family homes are entering into foreclosure should also further diminish the available supply of rental units on the market.

When a home is in foreclosure or bank owned it can’t be rented and it sits as an empty, unavailable property. For example, on the residential street where I live in Fort Lauderdale there are 3 or 4 houses on one block that appear to be completely abandoned and in some stage of foreclosure or bank ownership. No one can rent these homes because they are bank owned and waiting for a buyer. Meanwhile the prices of homes in the neighborhood are still priced well above the ability for most working families to afford, especially considering the difficulty many are experiencing when searching for an affordable mortgage.

The obvious choice for many young families and those displaced from their homes because of foreclosure is to find a rental property to live in while saving money for the future purchase of a single family home. With the expected decline in available rental homes available on the market due to bank ownership many families and young people will be looking to apartment buildings for housing. This increase in the number of potential renters comes just at a time when the construction of multi-family buildings has begun to decline.

The decline in the construction of new apartment buildings is due to the fact that many banks and real estate financiers are cutting back on new construction projects nationwide. They are unwilling to take the risk of funding new construction during a time when residential real estate prices are dropping rapidly. According to the Associated Press, the “Standard & Poor’s/Case-Shiller U.S. National Home Price Index tumbled a record 15.4 percent during the quarter from the same period a year ago.”

It remains to be seen what impact the decline in availability of rental properties will have on the rental rates for major metropolitan areas.

Tags: apartment building vacancies, apartment investing, Economy, fannie, Fannie & Freddie Mac Loans, freddie, freddie mac, rental vacancy

The first purchase of an apartment building can seem like an overwhelming endeavor for the buyer. There is a lot of information and terminology that is suddenly thrust upon the first time investor and chances are that the new investor doesn’t have the knowledge base to accurately sift through the information to obtain and utilize the most important facets. For example, the new buyer may be staring blankly at the rent rolls for a twenty unit apartment building for the last two years and not have any idea how to dissect that information. Or the new investor may be looking at the income and operating expenses supplied by seller’s realtor and not be able to determine if the information supplied is accurate or even complete. Therefore it is wise to follow a few easy steps before actually purchasing an apartment building, of any size, as an investment.

1) Get an Education — It is necessary for the first time apartment buyer to get the best education possible before actually making the first purchase to make sure that he or she understands exactly what they are entering into and to be sure that they are prepared for any challenges that may arise. The education of the first time apartment buyer should include both an academic and a real world, experiential, component. The academic education should consist of reading as many books as possible about the subject in order to learn the technical terminology and to learn how to do simple financial analysis that will allow the investor to make intelligent comparisons between different properties. The real world component should consist of talking to and meeting with as many other commercial property owners and investors as possible. This can be accomplished by joining real estate investment clubs and meeting commercial realtors

2) Find a Qualified Commercial Realtor — While finding a commercial realtor is not an absolute necessity for finding a great apartment building investment many commercial realtors may know about sellers who don’t actively list their apartment buildings on the market for sale but are anxious to sell none the less. It may also help the first time buyer to have a realtor that will represent him or her when it comes time to make an actual offer.

3) Start Comparing Apartment Building Properties — One mistake that I see novice apartment building investors make, time and time again, is that they let their emotions rule over clear analytical thinking. Because many apartment buildings for sale are priced beyond their ability to be profitable it is important for the first time investor to carefully compare the investment returns offered by one building to many others that he or she has examined to find the one that is the best fit.

4) Find Apartment Building Financing — There are many different methods to obtain financing for an apartment building investment. Some of them include traditional bank financing, hard money loans, a limited liability partnership and owner financing. Each deal will hinge upon the kind and availability of financing for that particular property.

Tags: apartment, apartment building investing, apartment investing, buy apartment building, Commercial Real Estate, how to buy apartment building, landlord, real estate

Let’s take a look at some of the actual returns for a small apartment building investment over a period of five years. Whenever you are making projections into the future concerning investment returns it is always necessary to make some assumptions. In this case we will keep our assumptions very conservative and well in line with historical averages.

Also, I will be using as an example an eight unit apartment building with a purchase price of $300,000.00. I want to use a smaller property with smaller numbers because I believe that just about anyone, who properly prepares him or her self with the proper education and preparation beforehand can realistically purchase, manage and profit from an apartment building this size. There are many methods for securing the money for a down payment that I discuss in my course but I don’t have the time right now to list and explain them all.

The purchase price for our eight unit apartment building is $300,000.00. We are using a bank loan for 75% of the purchase price and we are making a down payment in the amount of $75,000.00. The Net Operating Income of the building is $27,750.00. Our annual mortgage payment on the property is $19,952.76 based on our 25 year bank loan with a fixed interest rate of 7.5%. After paying our mortgage payment the building’s cash flow is $7,798.00. This cash flow gives us a cash-on-cash return of 10.4%. (the cash flow of $7,798.00 divided by the down payment of $75,000.00.)

Let’s take a look at what happens to your returns after five years. We will assume that the building’s income has grown by 3% a year. We will also assume that the expenses have increased 3%. The fixed rate mortgage payment remains the same for the life of the loan.

The Net Operating Income has increased from $27,750.00 to $32,169.86.

The new Cash Flow for year five is:

The new Net Operating Income of $32,169.86

-

The mortgage payment of $19,952.76

_______________________________________

= $12.244.00 Cash Flow at Year Five

The cash-on-cash return has increased from 10.4% in the first year to 16.3% in the fifth year.

In the mean time the actual value of the building has increased by 3% each year to $347,782.00. And increase of $47,782.00 after five years

In addition, the mortgage balance has amortized. The principle amount of the 25 year fixed rate loan has decreased by $20,106.76. The remaining loan balance is now $204,893.24.00.

Putting aside the income returns seen from the Cash Flow every month for 60 months and just looking at the appreciation and loan amortization you have a total return of $47,782.00 + $20,106.76 or $67,888.76. That is a whopping 90.5% cash-on-cash return for a period of five years.

These kinds of returns for many investors who are stuck in the stock market might seem too good to be true. But, remember that we only used one real assumption and that was a growth rate of 3% which is well within historical average norms.

Tags: apartment building investing, apartment building investments, apartment building investor, apartment investing, apartment investment returns

As I stress time and time again to new apartment building investors, before making an offer on any apartment building real estate property be sure that the investment will be a profitable one. Banks and commercial mortgage lenders will only lend money on an apartment building that has a Debt Service Coverage Ratio of at 1.2. Once the investor has done his or her work and found a profitable apartment building to purchase then the next step is to structure a offer.

The Offer Letter

The offer that the investor makes on an apartment building should be in the form of a typed letter detailing the terms and conditions under which the investor is offering to purchase the property. After the buyer has figured out the value of the property then he or should deduct around five percent off of that figure and make that the offer price. The investor should also make the offer contingent upon receiving financing, under specified terms, within 30 to 45 days for an amount of at least 75% of the purchase price. The buyer should also include an expiration date of one week on the offer during which time the seller can review the offer.

How to Make the Offer Stronger

1. Get a letter of interest from a commercial mortgage broker that simply states they are willing to lend 75% of the properties value. This letter of interest should not be confused with a commitment letter. The bank is under no obligation to lend the money if they decide to turn down the deal.
2. Put together a professional sales agreement in simple language that is fair to the buyer and seller. This will ensure that your letter is taken seriously.
3. Include any information that will make your offer appear stronger. If you have a lot of real estate investment experience, include your curriculum vitae. If you are going to pay your down payment with cash on hand then send a copy of your bank statement showing the cash.

Tags: apartment building offer, apartment investing, apartments, buy apartment building, make an offer on apartment building, real estate investing, real estate investor

With the recent melt down of the sub prime mortgage market banks are tightening up their lending practices in the commercial sector of the finance industry as well as the residential. What this means for the apartment building investor is that he or she needs to make sure that he is working with a commercial mortgage broker who has experience preparing apartment building loan packages in tough times.

The underwriters at banks are now being especially stringent when following their own guidelines. In the past, when a borrower submitted a loan package to a bank loan program that required the borrower to have a minimum net worth of at least 1 million dollars for the purchase an apartment building for 1 million dollars they may have let the borrower float through with a net worth of only $900,000.000. Those days are over. The apartment building investor now needs to be especially diligent when applying for the loan and preparing the loan package for bank underwriters.

Many loan programs for commercial real estate acquisition and refinance have also disappeared. It is now very difficult to qualify for an 85% loan-to-value mortgage on an apartment building whereas in the past they were more accessible. What this means to the apartment building investor is that he or she needs to be working with a commercial mortgage broker that specializes in apartment buildings or at least a broker that only does commercial real estate loans. The two sides of the lending industry commercial and residential, are so different from another that I have never encountered a mortgage broker that I would consider especially adept in both arenas at the same time.

It is important for the apartment building investor to realize that a commercial mortgage broker will usually only charge one point in fees on an apartment building investment. One serious mistake that many apartment building investors make is that they try to contact the banks directly and submit their own loan packages in an attempt to shave half of a percentage point of the interest on the loan. What these novice investors don’t understand is that all banks who do apartment building investments are actually brokers. This means that they sell their loans to the secondary market.

The investor who tries to place his apartment building loan by himself is actually hurting his chances of finding the best rate and terms on his apartment building loan. Many banks and “direct lenders” only offer one or two loan programs that they are willing to underwrite for multifamily properties. A commercial mortgage broker who specializes in apartment building financing will be able to offer the investor ten or twelve different loan programs to choose from that match his personal financial profile and that of the property as well.

Tags: apartment investing, apartment real estate, apartments, Commercial Real Estate, real estate, real estate investing

Determining the value of an apartment building investment is one of the greatest difficulties that many new commercial real estate investors face.

Most people who invest in apartments have some experience investing in other types of real estate, typically residential homes or duplexes and triplexes. The issue that new investors face is the fact that apartment buildings are valued by different methods than residential real estate. In fact, it is usually quite easy to find the fair value of residential estate using a comparative sales approach. The comparative sales approach simply uses the existing sales prices of similar residential properties in that particular area and determines value based on an average sales price of comparable properties. This should be very straight forward.

However, commercial real estate investors and appraisers use a variety of appraisal methods to determine the fair market value of an apartment building. These new methods should not deter the new investor because once they are understood they actually will help tremendously to locate the best apartment building for acquisition.

The first unfamiliar term that a new apartment building buyer will encounter is the capitalization rate or CAP rate for short.
As the new investor is searching for an apartment building his Realtor will supply him the CAP rate of the property. The CAP rate is a measure of the income produced by an apartment building divided by the cost of the building. For example: if an apartment building is purchased for the price of $1,000,000.00 and the property produced an annual net operating income of $100,000.00 the CAP rate of the property is 10%. (Net operating income is gross rents minus expenses.)

Net Operating Income:  $100,000.00
Purchase Price:        $1,000,000.00

CAP rate =                    10%

An investor can also use the CAP rate to determine the maximum price he can pay for a property when he knows what the net operating income is.

For example, if the investor is looking at an apartment building that is seeing a net operating income of $150,000.00 and he wants to see a CAP rate of 11% he can determine the maximum purchase price as follows:

Net Operating Income:  $150,000.00
CAP Rate:               11%

Maximum purchase price:  $1,363.636.00

This simple formula to devise the capitalization rate (CAP rate) of an apartment building is limited however. The simple CAP rate assumes that the investor will be purchasing the property for cash and does not take into account the financing terms that will affect the investor’s rate of return on the building. In other words the simple CAP rate is good number to use when comparing apartment buildings as potential investments but a little bit more analysis is necessary to determine exactly what the true rate of return will be on a particular building when using financing to purchase the property.

The goal for the individual investor is to determine what the property is worth to him or her. In other words, the investor should only be concerned with paying a price for the property that allows him to realize his sought after rate of return. The best way that I have found to determine the investment value of an apartment building is to use the “Band of Equity Investment Method”. The “Band of Equity Investment Method” of determining value will tell you the maximum price that you can pay for your apartment building and still realize the rate of return that you are looking for. The greatest advantage of this valuation formula is that it takes into consideration the terms of financing that the investor is using to purchase the property. Thankfully, this method is not that complicated and it merely requires that you know some financial information about the property and the terms of the financing that you will using.

Here is how the “Band of Equity Investment Method” is figured:

Mortgage: 	Loan To Value of Mortgage  X  Mortgage Constant =  ______

Property: 	Down Payment on Property (as a percentage)
                                 X  Desired Rate of Return   =_______

Mortgage:        80% (.80)  X  7.99% (.0799) = 0.06
    +
Equity:          20% (.20)  X  11% (.11) = 0.02

Cap Rate:        0.08 = 8.0%

With this new “derived” CAP rate you can now determine your maximum purchase price for any apartment building and ensure that you will be realizing at least an 11% rate of return on your investment. For example, you are out looking at 14 unit apartment building with your realtor and he tells you that the net operating is $150,000.00. You know that your bank will give you a 30 year loan at an interest rate of 7.99%. You know that you need to see at least an 11% return on your investment. You simply divide $150,000.00 by your derived CAP rate of 8% and you get the price of $1,875,000.00. You know that you can purchase the building with a 20% down payment and a 30 year loan at 7.99% and still realize a net return of 11% on your investment.

Tags: apartment builting, apartment investing, cap rate, Commercial Real Estate, derived CAP rate, landlord, property analysis