| Buying income producing apartment buildings is one of | | | | so, what are they? |
| the greatest wealth building strategies for real estate | | | | Survey the properties, collect the information, enter the |
| investors. Real estate offers investors the ability to | | | | data into an excel spreadsheet, and analyze it |
| acquire ownership with minimal cash down and benefit | | | | thoroughly. |
| from the massive leverage effect which increases | | | | It's very important that you pay particular attention to |
| profits by using OPM (other people's money). | | | | the "net effective" rents vs. "quoted market" rents. For |
| Apartment buildings are on the one most viable | | | | example, if you survey rental comparable #1 and they |
| investment vehicles and should be considered as an | | | | quote a market rent of $500 per month for a |
| effective strategy to build real estate wealth. | | | | one-bedroom/one-bathroom floor plan, but they offer a |
| In this article, we will discuss several steps included in | | | | potential resident one-month free on a signed 12-month |
| the process of buying an apartment building. Let's roll | | | | lease; the real "net effective" rent is $458 per month |
| up the sleeves and have some fun! | | | | not $500 per month. |
| Step 1 - Master the Basic Formulas | | | | The formula for determining the net effective rent is |
| Before you set out to buy your first apartment building, | | | | as follows: $500 per month divided by a 12 month |
| it's extremely important for you to have a solid | | | | lease equals $41.67 in discounts per month that the |
| understanding of the basic terminology, mathematical | | | | new resident receives over the length of their lease |
| formulas, and financing strategies used in the | | | | term. Another way to calculate this is to simply take |
| apartment investment industry. Having a firm | | | | one month free over a 12 month lease as follows (1 |
| foundation in place will greatly improve your chances | | | | month/12 months=8.33%X$500=$458). Basically a |
| for success. Visit your local book store and browse | | | | tenant will be paying for 11 months but that cost is |
| the real estate section for books on apartment | | | | spread over a 12 month lease term. You got the idea |
| investing. | | | | now, right? Excellent! |
| Step 2 - Locate Multiple Properties | | | | Complete the net effective rent exercise for each |
| Probably the most challenging task with apartment | | | | individual floor plan at each property surveyed. This will |
| investing is locating the right property that offers solid | | | | take a little time getting use to, but as you call more |
| financial benefits. These sound investments are sought | | | | properties and complete more exercises it will become |
| by many active real estate investors. Assuming you're | | | | second nature. The most important thing to remember |
| a novice investor seeking to buy your first apartment | | | | is that you are now performing a more sophisticated |
| building, it's wise if you conduct your search within your | | | | level of analysis and this will give you a competitive |
| local community and/or nearby neighborhood. Keeping | | | | advantage in the marketplace. |
| your search within close proximity of your home base | | | | It will also greatly benefit you once you start your |
| will allow you to monitor your investment more closely. | | | | underwriting process as you will be able to more |
| Start the search by browsing the local newspapers | | | | accurately forecast cash flows and investment |
| under the classified section. This is one of best | | | | returns. The last thing you want to do as a serious |
| sources for active apartment listings, but it also | | | | investor is to overpay for a property based on inflated |
| captures the most eyes and leads to more | | | | numbers. |
| competition. Nonetheless, it's a great start. | | | | Study the competition's product, site layout, interior and |
| In addition, search other online ads such as and that | | | | exterior amenity package, asking rental rates, specials |
| offer a great selection of apartment buildings for sale. | | | | concessions (free rent offered), and net effective |
| Contact a local real estate broker to assist you with | | | | rental rates, and occupancy rates in order to "fully |
| your search. If you decide to go this route, look to | | | | understand" your subject's position in the marketplace. |
| work with a well respected and experienced "buyer's" | | | | Step 4 - Analyze Operating Statements |
| broker. Moreover, browse through your list of contacts | | | | After you have completed your market study, start |
| and begin asking friends and family members if they | | | | analyzing the subject property's operating statements |
| know of any accountants, attorneys, bankers, etc. who | | | | and rent rolls. It's best if you are able to obtain several |
| may know of local apartment building owners. | | | | years of historical data. This will allow you to properly |
| The goal is to start expanding your network and | | | | evaluate the historical financial performance and |
| quickly informing others that you're actively looking to | | | | stability of the income stream you will be buying. If |
| buy apartment buildings. You will be surprised at just | | | | you're talking directly with an owner of the apartment |
| how many contacts this strategy will generate. Post | | | | building, request operating statements in a trailing 12 |
| an ad in the local newspapers classified section under | | | | month (called T-12) format. One of the main benefits |
| titled "Wanted - Apartment Buildings." | | | | of this format is that it provides you with "detailed |
| Perhaps the best and most profitable search strategy | | | | monthly" figures so that you can analyze each month's |
| is locating "off-market" properties owned by motivated | | | | operations in further detail. |
| sellers. "Off Market" properties are not officially on the | | | | A T-12 format will also allow you to detect any |
| market for sale. This strategy is generally implemented | | | | "one-time anomalies" either in revenue collected or |
| by the more experienced investors. It commands the | | | | expenses incurred. For example, let's assume you are |
| most time, energy and effort, but also is one of the | | | | analyzing a 30-unit apartment building and the listing |
| most profitable strategies if executed correctly. | | | | broker provided you with a year-to-date (YTD) |
| The major benefit of this search strategy is that you | | | | operating statement ending June 2007 (six months of |
| will be dealing directly with the owner and bypassing | | | | operating data). Many novice investors would annualize |
| the brokerage community which will show the same | | | | the operating statement's data and capitalize the net |
| property to 100 other active investors. Just imagine, 100 | | | | operating income to determine a purchase price. |
| investors bidding on the same property that you want | | | | Let's analyze this scenario one step further. "WHAT |
| to buy! A mass marketed property generates a hyper | | | | IF" the other income line item was reported at |
| competitive bidding environment (as it should) which | | | | $20,000? If you were to annualize that amount, you |
| leads to higher offer prices. High prices translate to | | | | would be valuing the property on the basis that it |
| lower returns because you will be forced to invest | | | | generates $40,000 per year in other income (cable |
| much more equity. | | | | revenue sharing, late fee, non-sufficient fund fees, |
| Stay focused and work hard and smart at becoming | | | | month-to-month fees, carport rent, storage rent, etc.). |
| an expert at locating "off-market" deals because its | | | | Now, let's assume that you requested operating |
| one of the quickest ways to build real estate wealth. | | | | statements in a trailing 12 month format vs. a |
| Step 3 - Conduct a Detailed Market Survey | | | | year-to-date format. Because of the monthly |
| Now that you have located several apartment | | | | breakdown, you were able to identify that in the month |
| buildings for sale, its time to conduct an in-depth market | | | | of April, the owner reported revenue of $15,000 which |
| analysis in order to fully understand the market rental | | | | was solely attributed to a "one-time event" for |
| rates, occupancy rates and each property's position in | | | | renewing a 10 year cable contract. |
| the marketplace. The first step will be for you to locate | | | | It's very common practice for cable providers to |
| the top 3 to 5 competing apartment properties in the | | | | provide apartment landlords an upfront bonus for |
| neighborhood that are of similar size (total units) and | | | | renewing long term contracts. If an investor were to |
| vintage (year built). Once you have identified the rent | | | | pay the seller for this $30,000 one-time event revenue |
| comparables, contact each property directly and | | | | stream using an 8.0% cap rate, the implied value would |
| conduct a market survey. Ask each property the | | | | be $375,000. Basically, an investor would have |
| following questions: | | | | overpaid by $375,000! |
| * What is the age of the property? | | | | Don't be fooled into believing just because a |
| * What year was the property built? | | | | year-to-date operating statement reports a specific |
| * How many units does the property contain? | | | | amount of revenue the property actually generates |
| * What is the current occupancy rate? | | | | that amount each year. Be certain to request |
| * What has the occupancy rate averaged over the | | | | operating statements in a trailing 12 month format so |
| last 12 months? | | | | you can easily analyze operations on month-by-month |
| * What is the monthly rent for each different floor | | | | basis. This is an absolute must do! |
| plan? | | | | Smart apartment investing requires patience, |
| * Are you offering any rental concessions (free rent)? | | | | thoroughness, and a very detailed oriented mindset |
| * If so, what type of concessions are you offering for | | | | when analyzing the rental competition and operating |
| each floor? | | | | statements. Make it a fundamental rule to ask the |
| * Do the individual units offer full size washer and dryer | | | | important questions and never invest a penny until you |
| sets in the unit? Stackable sets? Or, washer and dryer | | | | fully understand the complete story for each |
| connections? | | | | investment under consideration. |
| * Does the community offer any outdoor amenities? If | | | | |