If you use a standard broker there’s not much benefit to calling very far ahead of making a move.  Of course, I suggest employing a full service wealth development specialist (WDS).  I suggest that the initial conversations start 1-2 years prior to disposition and 6 months ahead of acquisition.  I provide these consultations without charge…so do many other client centric investment brokers.  Perhaps you should stop reading this and call.

 Dispositions

The primary reason for starting early is to prepare your Due Diligence Package formatting.  A, well organized complete package will separate your property from others with similar revenues in similar condition.  Buyers and Banks factor for risk.  Key components of risk are items that are unclear or unknown.  By starting your Due Diligence Disposition package early you can instruct your Professional Management company how you want expenses reported. 

We want costs shown as Operational Expenses only if they are indeed directly related to operations.  The same is true of revenues.  Instruct your manager to keep all extraordinary and capital expenses accounted for separately.  It’s simple:  building a new parking lot is cap-ex; stripping the old parking lot is operations.  The reason that’s important?  Take the case of a 53 unit apartment that spent $68,000 switching out their single paned aluminum windows and sliders for Argon filled vinyl.  The individual heat bills dropped by $15/month, the appearance was upgraded, and the units are less drafty…clearly improvements.  But poor reporting of expenses would reduce the value when evaluated by Cap Rate by inflating the expenses by $68,000:

 

 

Right:                                                          

Operational Revenues:   $500,000                                                                             

-Operational Expenses:   –200,000                                                     

Net Operating Income:  $300,000       

 

 Imputed value at 6.9 Cap:      $4,347,826

      

Wrong:                                                                      

Net Operating Income                $500,000

-Operational Expenses                -268,000                          

 Operational Revenues                 $232,000    

         

Imputed value at 6.9 Cap:         $3,362,319

Imagine improvements to your property reducingits value! A good broker would likely have figured this out during due diligence once the property was under contract…but it would not have become obvious until then.  Prospective buyers wouldn’t have stopped to give your (apparently) under-performing property a second look. 

 A free meeting saves a million bucks.  Now that’s what I call a high yield investment! 

 Want to increase your yields?  Contact Rick Bean or Robert Poe at 503.577.1034 or rick@rosecitycre.com

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There are no bang for the buck investments that exceed the return of employee training…and nobody does it as well as Grace Hill. This months session on resident retention should be seen by all of your multifamily staff. Best of all…its offered at no charge.

PRESENTED BY: Patty Morgan-Seager & Andrew Botieri
DATE/TIME: Wednesday, October 21, 2009 – 4pm ET, 3pm CT, 2pm MT, 1pm PT
SESSION DESCRIPTION: Showing clients that you appreciate their loyalty can make a tremendous difference in your resident retention efforts. But how, when your community’s resident retention dollars have been reduced? Their panelists will share some great new ideas and proven techniques for “re-marketing” to your current residents. This topic is a crowd pleaser, so RSVP early to guarantee your spot!

COST:  Gratis!  Thank you to Spherexx.com, Welcome Home America and Multifamily Insiders for sponsoring October’s chat event.

RSVP: Visit www.gracehill.com and look for the details of this event on their home page. Click the RSVP link to sign up and receive Chat Event Instructions. Then, login to Grace Hill about 10–15 minutes prior to the event and click on the Chat Room link, under the chat description, to be delivered to their Chat Room.
*Space is limited to 350 attendees in our chat room. Be sure to login to the chat room 10–15 minutes prior to the event.

Improve your profits!

Customer appreciation is the key to resident retention…and that’s one of the keys to increasing NOI.  The best way to increase profits is to buy right!  Contact Rick Bean at: rick@rosecitycre.com or 503.577.1034 to develop an investment strategy that is customized to your needs.

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One strategy of acquiring investment properties is to pool individual owner’s equity stakes and take title as Tenants In Common, or a TIC.  TICs feature an undivided unity of possession, but they may, or may not have unities of percentage of ownership, title, or time of acquisition and disposition. Upon the demise of a co-tenant their interest passes to their devisees/heirs, not the co-tenants. It is critical that an executed Operating Agreement be in place to define critical items including:

*Ownership percentage

*Conditions under which the property will be sold

*How distributions from operations will be made

*Rights and responsibilities of each investor

*How to handle cash calls, should they be required

*How individual TIC owners may dispose of their interest before the property is sold

STRENGTHS INCLUDE: Pooling resources may permit the ownership of far larger assets than could be acquired individually, resulting in economies of scale for management and maintenance.  The investor that owns a 10-plex can’t afford MBO (Management By Others).  4 or 5 TIC  investors that put that each contributed the same amount as the 10-ples owner could afford to have a live-in manager.  Then the job becomes managing the manager…which is far less time consuming. 

Overall flexibility. TICs permit owners to sell, encumber, or convey their interest without permission of their co-tenants. Depending on the structure of the Operating Agreement, TICs may permit General Partners to run the asset, allowing investors to have the benefits of owning an asset without having to be involved in routine operations.

WEAKNESSES INCLUDE: Litigation is more likely. Closings are more cumbersome. Coordinating items that require input from the co-tenants is more involved.  People ask me if its really important to have a lawyer draw up docs for a TIC.  I respond by telling them that, yes the first time they create a TIC they should consult an attorney…and every time thereafter.  It is important to understand the actions you are required to take…and those you may not take…to avoid the creation of a security.

Note: The information contained herein is deemed accurate and reliable, but is not guaranteed. To assess applicability to individual situations please consult your legal professional.  For the additional information about a highly respected Real Estate Law Practice contact me at:  503.577.1034 or rick@rosecitycre.com.

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My friend Doug Foley, CCIM was kind enough to permit me to co-host a portion of the Northwest Real Estate Investor’s Association (NWREIA) August Multifamily Focus Group on August 18th. I thought that a review of the basics might be a good start…so I included a brief overview of NOI, CAP Rate, and NOI, CAP, and NOI Multiplier.

What is NOI?: Net Operating income

What does it measure?: Measures the revenue generating capacity from operations.

When is it important?: Two times: When you is sellin’…and when you aint. On a more serious note, NOI is the source of payment for debt service, and cash flow distributions to the owners.

What’s the formula?: Current Revenue – Current Expenses (Exclude debt service, capital expenses.)

Example: Current Revenue, June 2009: $100,000.
Current Expenses, June 2009: $ 35,000.
NOI, June 2009 $65,000.

What is Cap Rate?

The capitalization rate is what the yield as a percentage of the initial investment would be in year one if you acquired the property all cash.

Why it is important: First “sniff test” investors use to check out an available commercial property.

What is the formula? NOI/Sale Price = Cap Rate
Example: $65,000/$812,500= 8%.

What is NOI Multiplier?

How much each dollar of NOI would contribute to value if property was for sale.

Why we care: Knowing how much each dollar on NOI is worth helps us evaluate the impact of incremental increases in revenue and expense. (Great for rehab/repositioning!)

What’s the formula? Sale Price/NOI = NOI Multiplier
Example: $812,500/$65,000= 12.50 (Each dollar of NOI creates $12.50 of value.)

NOI, CAP, and NOI Multiplier Problems

Property X had the following revenues in 2008:
• Rent $122,500.
• Extraordinary gain: harvest lumber on property $25,000.
• Pet rent $300.

Property X had the paid the following in 2008:
• Utilities, taxes, management fees, etc. $48,000.
• Cap Ex: Completely rebuild lower parking lot $19,000.
• Re-stripe upper parking lot $125.

QUESTIONS 1 & 2 are based on the information above.

1. What was NOI?    ANSWER:  $74,675  Note: The lumber revenue and parking lot expense were not operating related and were thus excluded from NOI.

2. What is the asset worth if we assume a 6.9 Cap% ?   ANSWER: $74,675 / .069 =  $1,082,246

QUESTIONS 3 – 4 are based on repositioning an 18 unit property we are buying for $1,200,000 at an 8 cap with a 5.9 % loan. Current Annual NOI is $96,000:

3. How much is each dollar of NOI worth? ANSWER: $1,200,000/$96,000 = $12.50.

4. How much more would the property be worth if we could raise the rents in 10 of the units $10/month? (Assume that a year has 12 months, all the units are increased at the same time for the full year…and that we could do this without increasing expenses…without any change in turnover.)  Answer: 10 units X $10 X 12 months equals a $1,200 increase in Annual NOI. Multiply by $12.50 = $15,000 increase in value!

 

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The Northwest Real Estate Investor’s Association has a Multifamily Focus Group that meets the third Tuesday of each month.  I’ll be co-moderating this month’s meeting with Doug Foley of the Pro Real Estate Team.  Check out the video for details!  See you there!

Many thanks-

Rick Bean, Rose City Commercial Real Estate.  503.577.1034 or, rick@rosecitycre.com

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