One of the best methods to keep your apartment building investment profitable and to increase its long term value is to be constantly vigilant about keeping your tenants satisfied. Satisfied tenants tend to stay at the apartment building longer and thus they reduce turnover and your costs. Many individual owners of apartment buildings make the mistake of lowering the rent of their apartment buildings because they erroneously believe that lower rents will keep their apartment buildings full and turnover lower.

In reality, however, I have found that most people chose to stay at an apartment building because they are content where they are. The price of the rent being paid by the tenant is only one of many factors that will contribute to his or her decision to stay and renew their lease. I have found that apartment building owners can maintain a high occupancy rate while charging market rents if they take a few steps to make sure that tenants are happy where they live.

I believe that the quality of management that the apartment building owner has in place plays a large part in the overall experience of most apartment building dwellers. Every multifamily building is going to have problems. There is no way to avoid mechanical breakdowns occasionally with units such as air conditioners, dishwashers, heating units, toilets, plumbing and lighting. What is important is that the management has a clear and steadfast plan for responding to these issues. The plan for addressing mechanical problems and tenant complaints has to be written in the tenant manual and distributed to all tenants. It is even more important that the management rigorously follow these plans to the letter. People in general like to see that the management has professionalism to closely follow the written procedures inside of the tenant manual. For example, if the tenant manual says that all mechanical issues having to do with the break down of an air conditioner are to be resolved within 24 hours during the Summer months then you better be sure that the management has the ability and resources available to get the job done in that period of time. One bad experience with the maintenance work done by the building management can lead the tenant to begin looking for another place to live.

People will stay longer at their apartment if they feel connected to a larger community. There are countless ways, with spending little money, that owners and managers can foster a strong sense of community within their complex. One successful method is to sponsor a quarterly event or party at the club house. The managers can buy a few pizzas to feed the people and decorate the party to correspond with a holiday. These parties are a great way for tenants to meet and mingle with other tenants. People will stay longer at their apartment if they are living close to friends.

The above examples are just a few ideas to get you started and thinking about tenant satisfaction and reducing turnover. Just remember that the rent is not the only factor that will play into a tenants decision to stay living at your apartment building.

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Realtor Listed Apartment Buildings

A listed apartment building is simply any multifamily property whose owner has decided to sign a listing agreement with a licensed real estate agent. Most listings for apartment buildings will be held by a commercial realtor who has experience multifamily with properties. This can work to the buyer’s advantage because the listing agent will be familiar with the analysis that goes into buying a multifamily property. The buyer should always be aware, however, that the listing agent only has a fiduciary responsibility to the seller with whom he or she has a signed listing agreement. This means that all facts and figures on the financial should be verified as best as possible. Don’t take the seller’s real estate agent’s word for anything. Check and double check the facts first before you make any decision to buy.

It is also important to remember that right now the market for multifamily properties is hot. With a listed apartment building your offer and interests will be competing with more buyers. This can potentially increase the price beyond profitability. Just because there are 15 other buyers willing to pay a certain price for the building does not mean that the property is worth that much. Apartment building investors need to have a clear method for analyzing a property’s profitability. If the building doesn’t meet your criteria or your goals the most profitable thing to do is to walk away.

Unlisted Apartment Buildings

Unlisted apartment buildings are any multifamily building that is for sale but not listed on the multiple listing service or with any realtor. Unlisted multifamily buildings offer both potential risks and rewards. The risks with an unlisted building include not being able to have access to all of the necessary records and information on the property. You many not have very accurate financial information for your property analysis. This will require you to do more due diligence of the property. You may also encounter owners of these buildings who have unrealistic expectations of the price they should receive when selling the property. This can be because the owner hasn’t raised rents to the market level while he is comparing his property’s sales price for the price that similar buildings. What these sellers fail to realize is that apartment building values are determined by the net cash flow on the building which is directly influenced by the gross rents. Therefore, a building with below market rents will not be valued as highly as the building that does receive market rents.

Photo Credit: Joe Gatling

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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.

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With the US Dollar falling and rising inflation many individual investors are looking for alternative methods to preserve and grow their capital. Apartment buildings are starting to receive a lot of interest from many investors who have little or no experience in the world of commercial real estate. Investors are now attracted to apartment building investments because of their relative security, positive cash flow and growth potential. These new investors are hungry to learn how to buy an apartment building. However, the first time buyer should do his necessary homework before actually investing his hard earned money in a multifamily property.

The last thing a new investor should do is to buy the first apartment building deal that comes across his table. In fact, in my role as a commercial property finance consultant, as soon as I hear that the investor I am speaking with has never bought or managed a multifamily building previously AND that this is the first deal that he or she has ever looked it, then I know immediately that it is a deal that will never get done. I don’t even have to look at the rent rolls or the income and expense statements. To many readers this may sound cynical or brash but it is simply the truth. And it has nothing to do with the intelligence of the investor it just simply has to do with the fact that banks will not lend money on an apartment building that is not or will not soon become profitable.

Many beginner commercial real estate buyers are under the assumption that they will somehow be able to convince their commercial mortgage broker and the commercial mortgage bank underwriters the property is such a great deal at the purchase price because there is a new mall scheduled to be opened down the street or that the neighborhood is undergoing revitalization or because a big employer is moving into the city. All of this may be true but a bank will not generally lend money on an apartment building unless it is already profitable and the bank will usually want to see at least a 20% down payment. And I don’t blame beginning investors for believing what they do. Many real estate agents and property owners will say just about anything to get a building sold. The job of the real estate agent and the property owner is to get the property sold for the most amount of money that the market will bear.

The first time apartment building buyer needs to be aware of the fact that the real estate agent selling the multifamily building represents the seller’s best interest and not his or hers. For this reason it is imperative for the first time investor to have as much education and knowledge going into the deal as possible. The first skill the buyer must have to separate the junk deals from the deals that will be profitable, cash flowing apartment buildings. He or she should begin by taking all or some of the steps below:

• Get a book education first. Learn about the industry and terminology by reading many commercial real estate investment books Stay away from the books that over promise and under deliver. It if seems to easy to be true then you know that it is.
• Develop your analytical skills. You need to be concentrating on Debt Service Coverage Ratios, CAP rates and Internal Rates of Return. You don’t want to be thinking emotionally about the investment. This does not mean that you should eschew creative financing and acquisition strategies. It just means that these strategies and methods should be firmly based and tested in the real world.

• Network and forge relationships with commercial real estate professionals and investors. Every major metropolitan area has at least one very active real estate investment club.

• Build a “master mind” team of advisers that will help you evaluate your investment decisions. This team could include attorneys, accountants, appraisers, realtors, mortgage brokers, business men and other entrepreneurs.

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One of the great aspects of being an apartment building owner is the ability the owner has to increase value in a variety of different ways. All of these methods for increasing value will not apply to every apartment building, however, I would venture to propose that there is not one apartment building in any state in this country that could not use at least one of these methods to create more value very easily. If you compare this ability to other investments like stocks or bonds you can truly begin to realize why so many fortunes have been built by investing in multi-family properties.

Forced Appreciation — Forced appreciation is any repair made on commercial real estate that “forces” the value of the property to appreciate.

Cosmetic Repairs:

Making cosmetic repairs makes the property more appealing to potential tenants while also keeping current tenants happier. Repairs that can have a dramatic impact on appearance include painting exterior walls, painting interior walls, repairing the landscape around buildings and replacing aged, dirty and worn out appliances.

Raising Rent:

This may seem like an obvious way to increase the value of an apartment building but it is truly surprising how many rental buildings are charging rent that is 10% to 20% below market rates. Many smaller apartment building owners manage the property themselves and thus find it easier to keep rents below market to retain tenants. This theory is flawed in practice because it doesn’t take into consideration that, nowadays especially, many people will move from an apartment for reasons having nothing to do with the rent. For example, many people relocate for better job opportunities in another city.

Replacing Utility Equipment:

If an apartment building owner is paying the electric bill for common area lighting he or she can save a lot of money every month by simply replacing all of the lighting fixtures with energy efficient bulbs.

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Buy an Apartment Building Today?

In today’s turbulent financial markets many investors are looking for ways to grow their money that will offer a steady flow of predictable income and limited market risk. More and more people are buying apartment buildings to help diffuse the effects of inflation on their portfolios. Apartment buildings offer many exceptional advantages over traditional investments such as stocks, bonds and mutual funds. This is especially true in a recessionary market environment. In fact there are many attractive attributes of an apartment building investment that many investors who are new to commercial real estate may not even know about. There are some interesting facts about buy multi-family property investing that could radically change your perception about this fascinating and lucrative part of the investment world and inspire you to go out and buy an apartment building of your own.

Warren Buffet once said that “wide diversification is only required when investors do not understand what they are doing.” This quote seems especially true about the average investor in the United States who is listening to the advice of a financial adviser who in reality knows little more about the markets then himself. Usually financial advisers will recommend that a client be well diversified in investments ranging from stocks, bonds, mutual funds or maybe even a real estate investment trust. The adviser is putting his or her client into a group of “diversified” investments that were recommended by the firm’s top adviser and the research department. Unfortunately, however, for the individual investor is the fact that these investments are basically designed to preserve the firm’s capital under management and they don’t take into great regard the individual investor’s need to grow his capital.

The most successful investors and those that see the greatest returns are those that specialize in a particular sector. And the timing has never been better to begin specializing in apartment building investing for the average investor. The stock market is under intense earnings and inflation pressure. Investors need to look at a direct investment in an income producing apartment building to establish a profitable stream of cash flow that could last for decades to come. Many thousands of individual investors have been able to secure their financial futures by specializing in this unique niche and leaving behind the mediocrity of financial advisers and stock pickers.

If there has ever truly been a recession proof business it has to be apartment building investing. Even with the US economy is turmoil and business cutbacks people will always need a place to live. The actual demand for rental units in the US has never been higher then today. A total of 36 million of all households in the US are renter occupied. In total, a full 83% of all households under age 25 in the US are occupied by renters. Furthermore, a full 55% of all households between 25 and 35 are renters. The growing senior segment of society will be living longer and looking for rental properties as well. These are a few impressive statistics that demonstrate the strong current and projected demand for rental housing.

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Cost Segregation

One of the great advantages of commercial property investing is the tax benefits. The IRS has a program that allows the owners of apartment buildings or any other commercial property to increase the level of accelerated depreciation allowed in a tax year.

The tax savings may go back to property acquired after 1986, and they apply to new or future construction. They also extend to existing buildings under renovation, expansion and leasehold improvements, as well as to property about to be acquired. It can also be used for financial accounting, insurance and property tax purposes. The primary goal of a cost segregation study is to identify all construction-related costs that qualify for accelerated income tax depreciation. Cost segregation is not a tax shelter and it is not tax evasion.

Ask Yourself These Questions To Determine if You and Your Property Qualify:

Do you own a commercial property valued at $500,000 or more?

Do you pay federal income taxes?

Do you operate a corporation or entity that is for-profit?

Are you planning to the hold the property for more than one year?

To Obtain the Benefits of Cost Segregation You Must Get a Study

Your cost segregation study will analyze the taxes and costs incurred to buy, construct or renovate any kind of commercial real estate. You will need to procure the services of an expert or CPA to conduct the study. The CPA will dissect the costs to determine the accelerated income tax schedules. In order to meet the minimum qualifications of a cost segregation study, property owners must be taxpayers or intend to pay taxes. The cost of a study can range between $10,000 and $100.000.00 depending on the size and complexity of the project.

Advantages of Cost Segregation

• Considerable return on investments property that do not need to be insured.
• Increased tax deductions for depreciation and reduces taxable income.
• Opportunity to correct misclassified assets and claim “catch-up” tax deductions.
• Ability to achieve faster building and acquisition cost write offs.
• Reduction in insurance costs by identifying the components of the property that do not need to be insured.
• Determine personal property versus real property for write off versus capitalization prior to construction. This allows you to write off these items opposed to capitalizing the assets. This can provide you with huge tax benefits.
• Defers taxes on capital gain amounts until the property is sold.
• Reduces real estate property taxes.
• Reduces federal income tax and increases depreciation.

Tags: apartment building cost segregation, apartment building investment analysis, apartment building tax savings, buy apartment building