True Cash Flow to Value Apartment & Multifamily Investments http://www.karenhanover.com Successful apartment & multifamily investors are well aware of the importance of cash flow. It's not just the great monthly bank deposits. Cash flow, and the resultant cap rate and DSCR (Debt Service Coverage Ratio) determine whether a lender will originate a mortgage, and for how much. Cash flow is critical in due diligence at purchase, and the pricesetter at sale time. So, it's pretty important to catch any problems with cash flow, and to recognize items that can be improved or omitted in order to improve cash flow. Whether it's something that will allow an increase in rents, or an expense item that can be reduced or eliminated, cash flow will improve, cap rate will go up, and value is greater. The trick, whether buying or selling, is to get to the root of all expenses, and to analyze income for ways to improve it. Particularly when doing due diligence for a purchase, getting as much information in the financial reports as possible is critical. There are usually ways to eliminate or reduce some expenses after purchase. And, there could be rent adjustments on the income side as well. Income Side Cash Flow for Apartment & Multifamily Investment Are the rents really the rents? This seems like a silly question, but sometimes it brings out hidden rent problems. There are owners and managers out there who hate the marketing, application and interview process required to replace a tenant. There are also others who make rent decisions that avoid the cost of cleaning, painting and other work when a unit is vacated. Basically, the rent is reduced to keep the tenant in place. Over time, some units are generating far less than the market dictates. Locating these in due diligence allows for a plan to increase rents as soon as possible, and cash flow gets a boost. Expense Side Cash Flow Improvements There are a great many line items on the expense side of the chart of accounts for apartment & multifamily properties. With so many areas to analyze in due diligence, it can take some time and effort. But, the more line items, the more opportunity there is to cut expenses and increase cash flow. Is the current owner writing off perks of ownership, above normal vehicle expense, or paying a family member to do work? There are expense items of this type that can be eliminated altogether in some cases. Is it time to renegotiate subcontracted services? Would a financed replacement of heating or air conditioning units result in a payment that's well below the repair expenses for the old units? Whether it's due diligence for purchase, or valuation to list for sale, cash flow is the valuation factor, and apartment & multifamily projects can yield various areas for improvement.
True Cash Flow to Value Apartment & Multifamily Investments, Copyright 2010 by http://www.karenhanover.com
Published on Apr 23, 2010
Published on Apr 23, 2010
Successful apartment & multifamily investors are well aware of the importance of cash flow. It's not just the great monthly bank deposits....