Apartment Market Digital Fall 2013

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Fall 2013

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Apartment Outlook

2013 The Draw between Renting and Owning in Today’s Market Planning Ahead for Earthquakes and Other Natural Disasters How to Encourage A Healthier Apartment Community

ALSO IN THIS ISSUE: • Is Past Performance a Good Predictor of Future Performance For an Apartment Complex? • Things to Remember Before Purchasing an Apartment Complex • How to make Move-In Day Pleasant for Renters • How to Appeal to Possible Tenants in an Apartment Tour • Common Areas and Amenities for Student Housing • Amenities that are Underutilized • Products and Services for Apartment Owners

The Draw between Renting and Owning in Today’s Market Whether to rent or own a place to live is one of the hardest decisions to make for people in the market for finding a new home. When you take into consideration the expenses and responsibilities of renting versus owning, you can understand why it is often preferable to rent! Consider the following aspects of renting: Taxes included: Home owners pay property taxes yearly. Taxes are included in the rental payment for renters. Insurance included: Home owners must pay dwelling insurance, disaster insurance, wind and hail insurance, and flood insurance as well as personal possession insurance. Renting affords the renter to only pay personal possession insurance.


Maintenance included: Maintenance is included in the rental payment. Home owners must pay for maintenance such as an air conditioner not functioning in the dead heat of the summer!

Amenities included: Amenities such as swimming pools, tennis courts, fitness centers, playgrounds, club rooms for parties, and more are available for residents to use. These amenities are usually part of the rent and are not an additional cost Management available: Management is available 24/7 to solve emergencies for renters.

ment that is offered to renters which contains rules and regulations that all residents must follow and protects renters from many hardships that owners must face with little or no legal recourse. One of the biggest advantages in today’s market to renting over owning is that renters are not stuck with a huge mortgage payment when dire circumstances arise. They are free to downsize or just move with little hassle if circumstances demand, with little or no stress over ruining their credit because they cannot sell! For apartment investors, it is a great time to take advantage of this trend towards renting. p

Legal agreement for problems: The lease agreement is a legal agree-

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Is Past Performance a Good Predictor of Future Performance For an Apartment Commplex? Past performance is one of many indicators that may determine the future performance of an apartment community. However, it should not be considered the only indicator, as past performance is dependent upon a number of determinants. Market conditions are some of the most important aspects when determining future performance. Real estate, including multi-family housing, tends to be cyclical and is dependent upon the local economy. Below is a list of indicators to pay attention to when attempting to determine future performance of your apartment complex in the community. • Economy: The economy of the area in which the apartment community is located is an indicator of future performance. For example, if jobs are not available in the area because companies have left, the odds of future performance equaling past performance are small. Even in an excellent economy, the apartment owner faces the dilemma of residents earning a salary good enough to afford a single family dwelling. • Management: The management staff of an apartment community is a good indicator of future performance of an apartment community because if the management has not met current financial goals, the odds of meeting future financial goals are slim.


• Market area: If the marketing area becomes saturated with newer and better apartment communities, the odds of maintaining and meeting previous performance are limited. • Owner investment: When owner investment/reinvestment in the apartment community is non-existent in a declining market, or even in a good and stable market, it is not likely that previous performance will be met. Apartments must be maintained in order to operate at peak performance! Past performance is an indicator, but must be used as part of a long list of other indicators when determining future performance of an apartment community. p

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888-441-7355 Publisher Darrel Dickson Graphic Designer Andrea Coulter The statements and representations made in the news articles contained in this publication are those of the authors and as such do not necessarily reflect the views or opinions of PPI Creative. The Apartment Market - Digital is produced monthly and is published by PPI Creative An Oregon Corporation. PO Box 30327 Portland, OR 97294-3327. (503) 221-1260 • (800) 398-6751 Copyright 2013. All rights reserved.

Apartment Market Digital • Fall 2013


Things to Remember Before Purchasing an Apartment Complex If you are considering purchasing an apartment complex, here are some things to help you evaluate the purchase. First, remember that the underlying reason to own an apartment complex is to make money in the process. That comes in two ways: • An ongoing cash flow from the rental income • A capital gain from the increased value of the property Cash Flow When considering purchasing an apartment complex, getting an accurate forecast of the cash flowing from the project is absolutely critical. Things that go into that consideration include: • The rent role and the likelihood of va-


cancies in the future as well as the potential for increases in the rent rates • The overall market rates for rental units in the local market • A history of maintenance costs and any significant near term expenses that may be required to keep the complex fully functional • The cost of managing the complex

you ultimately sell the property or simply use it as collateral to borrow, a complex should add to your personal net worth.

Make certain that the overall project has a positive cash flow and calculate the “cap” rate – the equivalent of the interest you would earn by investing your money in CD’s.

Here is what to look for: • Are the demographics in the neighborhood changing, and how will that affect the market for rental units and the rent rates that you can charge • Will there be long term costs for renovation or rehabbing the entire property • Are there plans for other developments in area – check with the local planning department of your town or county

Capital Gains The long term objective of any apartment complex purchase is to own a property that increases in value. Whether

Summary Purchasing an apartment complex can be a very effective way to enhance your personal finances.

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How to make Move-In Day Pleasant for Renters Moving into a new apartment can be very exciting, as well very hectic. Renters have to deal with unpacking, having utilities transferred, and also having mail forwarded to their new address. You, as the apartment manager, can make the move-in day for many renters a more pleasant experience. One idea is to make sure that the new renter has a welcome package on their move-in day. One item in the package would be a map of the apart-


ment complex. The map would show the new renter where the apartment complex’s amenities are located, such as the office, laundry room, gym, and playground. Another great idea is to provide the new tenants with information, such as a list of addresses and phone numbers of utility companies, doctor’s offices, and local restaurants. You can also include any other local business information that you feel would make their mov-

ing into the new apartment facilitated. This information would not only be useful for the move-in day, but would be a handy list to keep for as long as they stay in the apartment. The information that you, as the apartment manager, provide will be greatly appreciated by the new renter. Taking a little extra effort will ensure that the renter feels welcomed and has a pleasant move-in day experience. p

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How to Appeal to Possible Tenants in an Apartment Tour Generally speaking, the apartment tour begins when the possible tenant calls for information about the apartment community. The following is a compilation of how to handle the apartment tour from the time of the telephone call: • Answer with a smile: Thank the future resident for calling XYZ apartments. • Ask the caller’s name: Use the name frequently in the conversation. • Determine wants and needs: Sell benefits of the wants and needs of the future resident. If the caller is looking for a downstairs apartment, there is no need to describe the vaulted ceiling of an upstairs apartment! • Take notes: Write down details so you can hone in on key elements of wants


and needs in future meetings with the possible resident. • Set an appointment: Set a specific time to meet with the future resident. People generally show up for specific appointments. • Ask for a number: Get a call back number of the future resident in case something happens and the appointment is not met. • Follow up: Follow up with a call if the appointment is set for after a 24 hour period by reiterating the appointment! Exterior curb appeal will ensure future residents want to enter your apartment community for a tour. Interior curb appeal from the office to the

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pathway taken to the model apartment you are showing will enhance the desire of the future resident wanting to live in your apartment community. Professional but friendly people greeting future residents and attending to their wants and needs will usually seal the deal. Remember to sell to their wants and needs. And finally, when the community tour of the future resident ends, do not forget to ask for the deposit to secure the lease! Would you like to go ahead and leave that deposit today so we can hold your apartment home for you? p


Common Areas and Amenities for Student Housing For the duration of the years of studies, student housing is needed by college students. Finding the perfect housing situation isn’t always easy, but there are common areas and amenities for student housing that will attract students to your apartment complex. Choosing the right area - The best areas for student housing are right on campus. Choosing an apartment within walking distance can help students save time and money. Apartment communities close to the highway and major cross roads that lead to the college campus are also great choices. Apartment amenities - There are apartment amenities that students find attractive.


• Washer and Dryer - The ability to do laundry easily is great for those with a busy schedule. An in-unit washer and dryer, or line to hook up to, is a major bonus for a busy student or young professional just starting a new job. A community with washers and dryers on each floor is also convenient for students. • Garage or carport - Keeping a vehicle out of inclement weather is a definite bonus to someone on the go. • Swimming pool - A swimming pool is a great way to relax after a long day of studying. • Clubhouse - A club house or recreation room is attractive to students who like to entertain guests or are a

part of social groups. • Dishwasher - Keeping an apartment tidy is important. Busy students like to be able to wash dishes without using a lot of time and energy. • Storage closets - Some students are traveling from other states and other countries. Extra storage can help them manage and share space with roommates. Students should choose the best location, amenities and price point that fits their budget. This makes college life a lot easier and studies can take priority. p

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Amenities that are Underutilized Apartment amenities are important tools to attract good tenants and build a community. There are many amenities that go underused. Here are a list of amenities that many people forget about or list as a lower priority when choosing an apartment community. Outdoor Green Space Everybody loves green space, right? Some consumers will cross this item off the list in exchange for a swimming pool and carport.


On Site Management This may seem unimportant to potential residents until they have a problem. This attractive yet understated feature requires more marketing than a washer and dryer. Complimentary Internet Many consumers have high tech packages from their cable provider that includes internet. Sometimes this amenity can get overlooked. Like many other features, it requires more marketing to

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help the consumer see how important this feature is. No matter what amenities are being offered, consumers need to know all the features and benefits of living in an apartment community. One understated feature could help the consumer miss an opportunity to enjoy a great living experience. p


How to Encourage A Healthier Apartment Community Every apartment community can benefit from being healthier and happier. It’s extremely hard to make lazy, overweight people exercise and eat better. The apartment manager really shouldn’t have much say over how healthy one of the tenants chooses to live. However, there are many things that can be done to suggest that tenants take better care of themselves. Your first option is to plant a community garden. Any unused space on the property can be used. A good idea is to use available roof space, where plants can get plenty of sunlight and fresh air. Encourage residents to reserve their own plots and let them grow fresh veg-


etables to add to their diets. You could also host cooking classes for the people of the apartment community. Many of the people who live in an apartment community don’t know how to cook very well. They will be interested in learning and spending a little time getting to know their neighbors. You can center the class around making healthier foods. Start a running team. Many people who would not run by themselves may be interested in running with a group. The social aspect can get them interested. The health benefits will just be a side effect. They may even find they enjoy running so much that they want

to start running on their own. Start an apartment community weight loss contest. Competition is a strong motivator. Some people will want to win the prize. Others will want to show off. Still others will want to beat their neighbors. A contest is a great way to get people serious about taking action and losing weight. Just make sure you offer desirable prizes and set a reasonable timetable. There are many ways that you can motivate the people in the complex to live healthy lifestyles. p

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Planning Ahead for Earthquakes and Other Natural Disasters

Natural disasters can affect anyone in any area of the world. They may come in the form of floods, volcanic eruptions, earthquakes, tsunamis, and other geologic processes. Natural disasters can damage possessions and buildings and result in the loss of life. Many areas across the U.S. have a proclivity towards earthquakes, and taking some advance precautions may mean the difference between life or death. There were 905 natural disasters in 2012; 7% were geophysical events like earthquakes and volcanic eruptions. In North America, Alaska and California have had the highest number of earthquakes. If you live in an area such as the San Andreas fault in California, you


should have an earthquake plan in place to insure that you and your apartment complex are as safe as possible in case of natural disasters.

Here are some tips: • Make sure that all shelving units are secured to the walls with brackets attached to the wall studs; make sure that the heaviest items reside on the lowest shelves. • Keep heavy pictures and mirrors away from beds, couches and chairs where they could injure someone, should they fall off the wall. • Make sure that windows have shattersafe window films installed to protect yourself from breaking glass.

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• Place breakable items in cabinets that have latches that can be securely locked. • Repair any cracks in ceilings or foundations. • Reduce fire hazards by making sure electrical wiring, gas connections and appliances are fitted properly and secured. • Make sure that all important documents are kept in a safe location offsite, like a bank safe-deposit box. Natural disasters are potentially lifethreatening occurrences, but having a plan in place should help you and your possessions stay safe. p


Products and Services

for Apartment Owners

Real estate investors, especially those that invest in residential apartment buildings or entire complexes, have a wide range of products and services at their disposal to help ensure they keep their units filled and properly maintained. As we all know, each time an apartment turns-over it costs money in order to prepare the apartment for the next resident. It must be cleaned, often updates may be necessary, such as replacing counter tops, appliances, carpeting and tiles. The better resident you can place and the longer they stay, the more money you save. One of the main


ways to maintain residents is to provide a wide range of amenities and keep the property well maintained. Not just the interior, but the exterior and the surrounding grounds like fountains, playgrounds, pools, gym-facilities and dog areas. There are several products and services that can help building management find the right residents. Other than screening and conducting the proper credit procedures, having a company in place to take care of the maintenance is another key area of importance. Hiring the right property management firm can be instrumental in help-

ing apartment building owners keep their properties attractive to the right kind of renters and maintain the property inside and out in order to maintain the integrity of the asset. Many property management companies offer a wide range of products and services that will keep a property wellmaintained. They can create a schedule of services to make sure that all units get seasonal maintenance several times a year. If you’d like more information about available apartments or other helpful information, visit: http://apartmentsforsale.com/contact_us.cfm. p

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Buying leverage multi-family properties Darrel Dickson of ApartmentForSale.com and Preferred Capital Management, Inc.

Fannie Mae will allow secondary financing behind an 80% loan to value on a multifamily purchase. If the seller is willing to provide secondary financing of an additional 15% of the purchase price behind the Fannie Mae loan you may be able to obtain a total of a 95% loan-to-purchase price. That means there is a way to purchase a large multi-family apartment complex with only a 5% down payment! If you are a real estate broker and are working directly with the seller and obtain a 5% commission plus obtain the 95% financing, there is a way to purchase a large multi-family apartment complex with nothing down! Keep in mind that these properties have to have excellent cash flow to cover the debt service, so you need to be careful in doing your underwriting. Make sure that there is plenty of cash flow to meet the operating expenses as well as the debt service on highly leveraged deals prior to a purchase. We still have historically low interest rates. If you are purchas-

ing a multi -family property that has restrictions under section 42 of the Internal Revenue Service for the next thirty years, it is possible to obtain a thirty year fixed rate fully amortizing loan from Fannie Mae’s affordable housing loan program. Obtaining a fixed rate fully amortized loan over thirty years can save a substantial amount of money over time by limiting refinancing costs, and also eliminates the risk of higher future interest rates States have low interest rate affordable housing loans available through community and economic development departments. The loans are overseen by the federal housing trust program. There are opportunities to assume these low interest rate loans on multi -family properties that are administered by the housing trust program. These loans may be subordinated to new Fannie Mae multi- family loans. The state loans are at rates as low as 2% and are also fully amortizing loans. This is an opportunity for multi -family apartment complex investors to obtain extreme leveraging multifamily properties with

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fully amortizing loans at low interest rates. The time to call on sellers is after the 15th year of the original funding of the community economic loan. Often times the developers have operating agreements that call for the sale of these assets after the 15th year. Keep in mind these deals are very difficult and take a lot of time to execute and usually the lenders want to get paid off, and do a new loan versus keeping their funding in the existing project. Also there are risks associated with owning section 42 properties. Do your home -work, and hire professional attorneys, CPA’s and brokers that specialize in section 42 properties to get the best advice. Another advantage of obtaining fully amortizing financing is to avoid the difficulty of closing on a loan that has yield maintenance burning off and the loan has requirements to close on a specific date. Failure to close by the exact date will throw you into default on your existing loan. Your existing lender may try to


Buying leverage multi-family properties... continued start charging you default interest rates around 4 percent monthly. Your loan may automatically be thrown into default even though that you haven’t you haven’t missed a payment. Please do your home-work. Read your loan documents and hire professional CPA’s, attorneys, and loan brokers specializing in multi-family investments and seek their advice. A reason to seek fully amortized fixed-rate financing is to avoid the risks associated with yield maintenance loans that have loans coming due after a certain period of time.


I consider multi -family investments as generational investments. I’m happy with the principal reduction and depreciation and the cash flow from these investments. By obtaining fixed rate fully amortized loans on apartment buildings and keeping them for the full term will assure the properties are paid off, and that you can pass them on to who you choose free and clear of any loans.

Darrel Dickson ApartmentsForSale.com September 17, 2013

Look to obtain highly leverage cash flowing apartment buildings that have long term fixed rate financing, and then hold for the long term.

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