Some investment related articles we did at PhoenixMarketTrends.com

• Case Study: A Central Phoenix Condo From Lender Owned To Long Term Investment:

This is a case study of a condo purchased by an out of town investor.  It was a lender owned property taken from a plain dirty place to a wonderful inviting home.

• How To Search For Income Multifamily Properties, Duplex, Triplex, Fourplex, In Greater Phoenix.

There are several ways to search for multifamily properties, here and at Phoenix Market Trends and we review them here.

• Being An Active Investor Is The Way To Passive Income

I like this post because I believe you have to be responsible for you own assets and that includes real estate, though your involvement may be limited, but it needs to be there.

• Real Estate Investment Strategies: Opportunities For High Long Term Returns With Multifamily

Multifamily is now in a many year low.  You can find properties priced at the same levels at the 1980’s.  That’s just extraordinary and there is a clear reason for it.  Just the same, there are very good reasons why well purchased multifamily properties will do well in the future, maybe even the near future.

While this weblog is particulary focused on multifamily and our partner weblog is mostly residential we publish general investment articles that are not specific to multifamily there.

Some of the latest articles include.

1. Investment Strategies:  Don’t wait to buy real estate, buy real estate and wait!.

Time is on the side of real estate investors, but only if they have real estate in the portfolio.

2. The location and investment return expectations.

You can’t change the location so pick it carefully. Your investment performance and source of the return will depend on it.

3. Making a move into real estate investing.

It’s not a plunge but a step by step walk.

The purchase of an apartment building can be overwhelming but once you have made the decision to either start with a multifamily building, move up via a 1031 exchange from houses or add to your portfolio of houses then it gets easier.  There is a lot of information, property and contract needs and terminology which differs from houses: it’s not that different on the one hand and its very different on the other. 

While a rental house can be small hobby or easy investment an apartment building is a business and the scale of it can quickly become a burden if mismanaged.   The same attention must first be paid to buying a property as later managing it.  There is much to review and know: the lack of understanding of certain documents or the consequences of not obtaining certain documents and not doing specific inspections and due diligence can make a good investment bad and an investor can end up in a completely different situation then intended.

For this reason a multifamily investor needs to have advisers whom know the multifamily market, the properties, areas and even better an adviser, a Realtor who owns multifamily properties or has owned them in recent times.

Besides having a strong team of advisers an investor should firs start with some of the steps outlined below.

1) Educate Yourself  

It’s very important to educate yourself about the buying process, analysis process and the running or a business.  A clear understanding of how the business works will help make it a better investment or maybe even prevent you from buying if learn that it is not for you.  The vital key is to base your education on relevant information and data coming from experienced sources not a relative or friend who heard a story.  There are investment associations in many parts of the county. 

In Arizona there is AZREIA, where you can find like minded experienced persons, educational classes and support.  Don’t just reach for the first book you see.  There are plenty of gurus out there that have not practiced what they tech nor done any real estate transactions in years.

2)  Build a team including a Qualified Commercial Realtor —

You don’t need a Realtor to help you with your investment, just as you don’t need a lawyer, you don’t need to do inspections and you don’t even need to buy title insurance if you pay cash but prudence would prevent most people from being so reckless. 

A qualified Realtor, especially a commercial Realtor, especially a commercial Realtor who is a CCIM (Certified Commercial Investment Member) and especially one who has the former qualifications while also having hands on experience as an owner him or herself.   There is nothing like the hands on experience and the representation of a third party to help with making a sound investment. 

Representation will help you in multiple ways in not only educating yourself with the process and inner workings of the buying and running process of the property but being represented by a qualified person means a cleaner and smoother process.

3) Find Apartment Building Financing —

Financing! indeed.  While the property is important and unless your paying cash then the financing you obtain to secure the property is just as important and often more important then the property itself. 

It’s not only about the ability to get financing but they type.  I won’t bore you with too many details but you should explore them all before you make the purchase or even seek a property.  Analyze the financing just as much as the property, with the options cost and analysis and risk.

4) Look At Many Apartment Building Properties —

When search for properties and consider any property see your exit strategy.  Lots of things change in the time of ownership the longer you own it but you can always have an exit strategy even if it changes.  Which ever strategy you have get to know the good the bad: the prime and bad neighborhoods: where is growth in population going to help or hurt you: what is going on in a neighborhood.  It’s only buy getting into the neighborhoods and properties the you’ll get to know the business you’re about to buy.

When you have the tools and knowledge necessary to proceed with the investment and you have decided that it’s something for you: do it! 

I often see investors who are perpetually learning and analyzing but never actually put in an offer on a property or purchase one: this is sometimes after spending years and tens of thousands of dollars learning.  If you are careful and have good advisement and you don’t let your emotions decide then in more cases then not you’ll do just fine.  You should not be afraid of making as mistake: there is risk involved but at least in real estate you can control the bulk of the risk or at lease mitigate it.

A question I get quite often, mainly because I work with buyers and sellers of investment properties, including homes and multifamily, is: what are the rents in a particular area. 

A buyer needs to know this to establish the value of the property being considered: to evaluate the demand and supply in a particular neighborhood: and the gauge the ability to pursue other techniques to increase his/her return, things like repositioning.

A manager -whether an owner manager or a hired manager- needs to know the market to keep vacancy rates low but also to maximize the return and track any trends.

When a property may go up for sale or an owner needs to evaluate the investment, he/she will also need to know -that is of course if they don’t already know- what the rental market is like, what are the trends, and what affect will they have on the price and in who’s favor will the negotiations tip. In each stage the access to reliable rental data is vital.

But how to you get that data and how do you ensure it’s the best data?

There are many ways to get rental data.  Some people assume that looking through a paper is good or craigslist: others ask a Realtor: and yet others do a rental survey.

The two former data gathering sources can be used as an overall gauge but this is never as accurate as the latter: the rental survey, and it is this that I want to focus on. 

The Rental Survey.

A rental survey a concise study of the rental market -whether single family homes or multifamily apartment – which involves more then a surface view: it involves getting into the details by getting a first hand look at your competition. To get the most accurate rental data you should do as many of the following activities as possible.

1.  Drive the neighborhood and see how many signs are up? Are they individual owners or management companies.  If you see signs over and over the same location it could mean multiple things but higher vacancies are one of them: this could also signify a very transient neighborhood and tenants that move often lower your income and increase risk.

2.  View the apartments or homes if possible.  It’s not the rates themselves that are singularly important.  What is a tenant getting for the rent.  Which utilities are included or not and who is responsible for what.  In addition the condition of the property is very important: flooring, paint, state of the kitchen and cleanliness are very important and have a large affect on the rental rate.

3.  Speak with the owners or management companies to see how long the property has been available  and are there any concessions offered.  Each is a good source of information but you need to vet it as well as you may not get the whole story.

4.  Talk to a management company of Realtor who does management in the area.  Some Realtors do management and some -though few- do a rental survey themselves.  You may want to talk to someone like that but be courteous about requesting free information if you’re not a client.  It takes a lot of work to do a proper survey.

5.  Talk to fellow investors who do work in the area.  Some real estate investment clubs and organizations have enough members that you’re bound to find someone who is in the know.  In Greater Phoenix there are several clubs but AZREIA is the larges and the meeting are a great source first hand information.

6.  Then compare to active listing in the various sources available to see any discrepancies between what is being offered and what is actually happening; You can also compare what you have found to a general survey of rental rates in Phoenix, like this one to see if there are any trends.

Just as you would want to know where you customers will come from, how much they earn, and spend before you open any sort of business you want to know the same for an investment property because this is where your cash flow will come from and you want to know the quality and value of that cash flow. 

Even small discrepancies can affect values greatly.  Over time an owner can lose lots of income due to improper rental pricing or loss of value when selling.  A buyer can be in a much stronger negotiating position if he/she knows the strength of the income and any market pressures on it.

A rental survey should be part of any due diligence for a buyer and seller and a regular activity for managers/owners of a property. 

Part of our service for our clients is a rental survey when buying or selling an investment property.

The value of separate meters on a property cannot be underestimated.  Most multifamily properties have one meter for water and maybe separate meters for electricity: in small multifamily properties is normal to have individual electric meters but it’s uncommon to have the same with water: that’s probably why its often missed.

Below we’ll compare two similar properties: one with separate water meters and one with a master water meter and the affects on income and the property value using a cap rate for evaluation.  This is just a simple evaluation to make a point. 

The properties are very similar: the rents collected from the tenants are the within 5 dollars of each other on average so we’ll just use the same rents for the sake of being clear.  Also, since other expenses vary like taxes, insurance, maintenance and landscaping we’ll reduce the analysis to the water, sewer and trash expenses since the other expenses have no bearing on our topic.

Property One:  4 plex with total rental income of $2,808.00 per month.  The units have washers and dryers in each unit and one master water meter.

	Monthly	Annually
Potential Income	$2,808	$33,696
Water/Sewer	$245	$2,940
Trash	$60	$720
Total W/S/T expense	$305	$3,660

Property Two: fourplex with total rental income of $2,808.00 per month.  Similar to the property above the units have a washer and dryer.  In this case the builder put in individual water meters for each units.  There is an additional expense to do this when the property was built: in fact its quite a substantial expense but its of great value to the former and current owners.

what does that mean to the bottom line in the pocket money?

On a monthly basis the owner gains $305.00 additional dollars of income and $3,660.00 yearly.  While this is not a lot of money in itself if you compare the total potential income of the property it translates to 11%. 

What does it mean for the property values?

At current cap rate of 7.75 it’s $47,222 in additional value: and at a conservative cap rate of 9.25 it’s $39,567 in additional value.

So, if you see two very similar properties priced, each at $310,000 which is better?  Of course the property with separate water meters because your buying for the same price but the value is greater as is the income.  

Even if the property with separate water meters were to cost $25,000 more it’s of greater value then the master metered property.  In fact that $25,000 turns into a 15% return on that money and with positive leverage the return would increase.

So when looking at properties look carefully at how they are metered and consider the true value it reflects on your return, because often its substantial.

But there is actually more to it.  Separate water meters have additional benefits to the owner.  Besides the increase in income and value there are no bills to pay, it’s much easier to control expenses, and things like unreported water leaks in the toilet will not affect your wallet but the tenants.  This is important in units that have their own washers and dryers: a washer can use up a lot of water that the owner will not have to pay for.

For savvy investors this can provide a way to increase the return on the money invested at the point of purchase and/or at time of sale.

originally posted at PMT

Question:  Should I be investing in single-family or multifamily properties in the future?

What is your goal?  Is it cash flow: appreciation: a combination of the two?  Then of course, what type of investor are you? Short term speculator or long term passive income investor?  

When the market was rapidly appreciating or even if it was appreciating at a steady pace then single family homes may be a better investment.  In such a scenario you’re giving up cash flow completely and often adding to the property on a monthly basis because in an appreciation market you will rarely get any sort of cash flow: people are buying homes and the home rental market is usually not as good.  You hope to make your money by realizing the gain in appreciation. 

While this can work an investor has to be on top of the market trends because a change in the cycle can quickly diminish the return or make a home more difficult to sell. 

In a stale market like we are in now an investor can purchase a home, lease it and realize a small cash flow but you’re still hoping for some king of appreciation to realize a solid return.

Small multifamily properties follow different market rules and serve a different purpose but any building up to 4 units does take on some of the characteristics of a single family home.  Small multifamily properties, in general, do not change hands as often as homes because there is a smaller pool of buyers for them and they are usually purchased for long term cash flow rather then short term price speculation.  It’s rare that a family will buy a multifamily property to occupy. 

Where a single family home and multifamily property up to 4 units are similar is in financing.  Financing for both is in general similar or was similar.  In both cases a buyer can receive conventional residential financing with very similar interest rates.

But to get to the point.  If your goal is to create a stream of passive income then your more likely to achieve such a goal with a multifamily property then a house.  A multi-family’s purpose as an investment is cash flow and not appreciation.  Of course appreciation is expected but it often depends on the rental rates because this is a business: as the business generates more revenue the value grows and vice-versa.

In the current market more people are renting because financing is difficult to obtain in it will be even more difficult in the next few years as the financing markets readjust.  Multifamily property prices have corrected as well.  they are down from the speculative heights. 

What is it that your are after in real estate: if it’s cash flow then you’re more likely to get it with a multifamily property. 

Other things to consider:

A single family home and multifamily are still different beasts.  In a fourplex you have more people to deal with, 4 kitchen vs. 1, at least double the amount of bathrooms and 4 heat-pumps, 4 water heater, more pipes and just more of everything so the risk increases.  Management is different as well.  A multifamily property is truly a business, much more so then a single family home.  

There is no easy answer to the question first posed.  It can only be answered through a thorough discussion of your goals and tolerances.  One of the better solutions is to have both types of properties. 

Call us if you would like to discuss your options.  We have direct and indirect experience with both types of investments over 10 years and we’ll be glad to share what we learned.

posted from PMT

There are many ways to analyze a real estate investment purchase;  besides investigating location, demographics and timing an investor will also come across the Gross Rent Multiplier, the Cap rate and Cash on Cash, as indicators of investment performance.  Many brochures from sellers and agents will contain these numbers.  Below is an overview of what these are and their pros and cons.

GRM (Gross Rent Multiplier)

This method calculates the value of the property using gross rents that are expected in the investment or projected rental income (PRI)
GRM x Forecast 1st year PRI = Value

For instance:  A property that has a forecasted first year income of $40,000 and the investors desired GRM is 9 then the value is $360,000.  Similarly if a property is on the market at $250,000 and it has a PRI of $19,000 then the GRM is 13.

 
Pros and Cons of the GRM.
The main advantage of the gross rent multiplier is its simplicity.  This simplicity is also its fault.  The GRM does not consider vacancy or credit losses, operating expenses, financing and tax consequences.  In addition, it only looks at one year of income when determining value

CAP Rate (Direct Capitalization)

The cap rate uses the income stream to determine value.

The cap rate is calculated by dividing the Net operating income(NOI) by the price.
NOI/Price=Cap Rate.

Similarly if you have a desired cap rate or you know what the market cap rate is you can divide the NOI by the cap rate to arrive at the price.  So if a property has $30,000 NOI and the market cap rate is 10 then $30,000/.10 or 10% = $300,000. 

What’s your desired cap rate?

Pros and Cons of Cap Rate:
The cap rate brings operating expenses into establishing the value.  Its simple to calculate. 

It does not allow for investment factors such as appreciation or depreciation, financial leverage and amortization, income taxes, nor risk.

 
Cash on Cash

Cash on cash is another method to determine performance.  It’s calculated using the first year cash flow before taxes, using only the investors initial outlay or investment. 

Calculate cash on cash by dividing the first-year cash flow before taxes by the initial investment (down payment) to arrive at cash on cash or yield.

Cash on cash is often used to calculate the length of time required to return the initial investment to the investor.  Cash on Cash can be compared to the dividend on a stock, the interest payment on a bond.

Pros and Cons of Cash on Cash:
It’s easy to use, many investors are cash oriented.  It takes into account credit losses, operating expenses and financing.  It does not allow for other relevant investment factors such as appreciation, income taxes, mortgage amortization or risk. Its also difficult to use it to meaningfully measure performance between investments.

Each of these three quick analysis methods, the GRM, CAP Rate, and Cash on Cash are a good start as a preview for further analysis; investors should be careful not to overly put too much weight into these measures to either accept or disregard an investment property. 

In a future post we will cover more in depth measures such as the IRR (Internal rate of return) and Capital Accumulation.  Both of these will give an investor a more in depth view of their investment.

originally posted

When we plan to buy a commercial property we must keep in mind that there are significant differences between the most common transaction on the market – single family residence, and multi family building, or a commercial site.

Generally we can distinguish two kinds of commercial property.

First type is income producing, and the other is an owner occupied property. 

An income property produces rental revenue, which is called a rent.  Usually the rent is a source of a mortgage loan repayment.  In the order to qualify for a loan, the rent income must support a loan amount.  The borrower is usually considered a secondary source of repayment.  What lenders consider as primary factors in assessing the quality of the property are the net operating income and the debt coverage ratio.

The other important information lenders seek are: how long are the leases, who are the tenants, what is condition of the property.  Especially in today’s market conditions banks are looking for a high quality deal.

The owner occupied property is a place where the borrower conducts his business.  In such case owner’s enterprise must bring enough income revenue to qualify for a mortgage.  The information the lenders look for in this case is a little bit different.

The most important factors are the quality of the property and quality of the business conducted by the borrower.  Bank has to have a guarantee that the owner has an ability to repay the debt.  The business must be well established, and has to document a sufficient historical cash flow.

In assessing a quality of the property a physical quality is only one of the factors taken into consideration.  The risk of the enterprise is also important issue.  The banks like multi family and industrial buildings because they offer stable income with very little risk.  The other common property types we should have no problems to qualify are office condos, flex spaces, retail strip centers, mini storage facilities.  But there are other types that pose a greater risk to the lender.  Those difficult to lend property types might be a gas station – poses environmental risk; a hotel, a motel or an assisted living facility – single purpose property.  Even restaurants and bars are included in to this property type.  In the last case a cash flow is difficult to prove, and there is no collateral. Usually the lenders require a significant down payment in that type of transaction. 

Another important facet of commercial property transaction is an appraisal.  The inspection must be ordered by the bank. But the worst thing is the fact it is very expensive. The usual fee is $1,500 – $5,000, and must be paid up front.  Naturally there are much more issues to the commercial property transaction, but these will be covered in the future.

If you have additional questions about financing call.  Ralf Sztorc, 623.388.3798

APOD (Annual Property Operating Data)

This is an operating statement for an income producing property. This can be a house, land lease, multifamily or any other real estate.  The APOD conforms to standard real estate practice; it does not conform to accounting practice when calculating Net Operating Income (NOI).   The APOD is a way to combine the basic income and expenses of a property including debt, but not including depreciation or capital expenses.  From the information on this form you can continue to generate a cash flow worksheet. 

You would use the APOD as a starting point for gathering income/expense information from what ever sources you received it.  The results are always as good as the information that is put into it.  The more accurate the information the better will be that analysis that follows

SEE A FILLED OUT EXAMPLE OF AN APOD 

A Cap Rate or Capitalization rate is one of the basics real estate valuation.  This is a direct income approach: value equals net operating income divided by cap rate. You’ll see the Cap rate as a base of analysis in most real estate marketing materials and market trends discussions.

The capitalization rate is a very simple measure made up of 3 components.  The Cap Rate, NOI or Net Operating Income and Value.  Knowing any two will help you figure out the third. 

If you want to determine the cap rate of a property first look at the NOI.  The Net Operating Income (NOI) does not include things like debt service, depreciation and capital expenditures; it simply reflects the buildings capacity to earn income. 

Cap Rate = (NOI divided by market value)   or the cap rate for a fourplex priced at $330,000 with an NOI of $26,500 is 8.03  ( .0803 (8.03%) = ($26,500/$330,000)

If you do some research in the market and find that for a certain type of property the current market cap rate is 7.25% then you can determine what the value of the property is.

($26,500/.0725  = $365,517)

What the current cap rates are in a given market is very diverse, depending on location, property type and property class.  Just as with any other measure the more precise you get the better the results will be.  You can look at a Greater Phoenix cap rate but you would be safer looking at individual sub-markets.  It’s not always ease.  In fact it’s never easy to be very precise about current cap rates but its certain to say that currently they are on the rise.  Meaning that prices are decreasing as a result of investor demands for increased cash flow as a hedge against risk.

The Cap rate is a good way to quickly and simply monitor the market and establish the viability of potential real estate property; it’s a measure to quickly include or eliminate potential properties to buy, establish a value for selling a property or foretelling the market trends.  It should not be used for more then a stepping stone to a more detailed feasibility study.