The two times when profitablity managing a property is important are when you want to keep, it and when you want to sell it.  Property managers need training to perform at their best.  This opportunity for FREE training should not be missed.  Grace Hill Property Management Training does a great job…here’s a no cost way to give them a try:
Dealing with Difficult People
PRESENTED BY: Jackie Ramstedt, Deb Bronson & Terri Norvell
COST: Spherexx.com is sponsoring this event…there will be no cost to you. Thanks Spherexx.com!

DATE/TIME: Friday, May15, 2009 – 1pm PT

SESSION DESCRIPTION: Can you remember the last time you had to deal with difficult people or an event where someone was negative?  Never fear!  Our positive panelists will chat about what you can do in the future to get through these tough situations with harmony and grace.

 

RSVP: Visit Gracehill Taining at: 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, log into Grace Hill about 10 minutes prior to the event and click on the Chat Room link, under the chat description, to be delivered to their Chat Room. 

* Please note that space is limited to 350 attendees in our chat room.  Be sure to log-in to the chat room 10 – 15 minutes prior to the event.  
 

What else is free?  Call contact me at 503.577.1034 or rick@rosecitycre.com for an equity redeployment assessment.

Look at current and future job growth as key factors when evaluating a market for multifamily purchases.  To research opportunities I have traveled to  Reno, Albuquerque, Phoenix, Seattle,  and Los Vegas.  Without exception job creation/population growth seemed to be the common fundamentals that told the tale.  It seems that folks would move to hell if they could get a job.

That’s why I’m so strong on Portland.  We’ve seen good job growth on a consistent basis here for years and the promise of the future is for the pattern to continue or accelerate. 

For those that are dour about the current multifamily market…remember that while Cap Rates are decompressing currently, there are many properties that were purchased at the average 8.3 Cap in 2002. They would now  trade at a 6.50 Cap.  Do the math: 8.3 divided by 6.5 equals a 28% increase in value even if NOI only stayed constant.  The truth is that this market enjoyed significant increases over that period and many Portland multifamily investors have huge sums of redeployable equity, and this is the time to act.

Contact me for equity redeployment information now at: rick@rosecitycre.com

There are over three dozen metrics for commercial properties that we use to evaluate assets as potential acquisitions, and to gauge their operational performance. Some are relatively intuitive: Rent/Sq. Ft., Cost per Door, Expense Ratio, Gross Income, etc. Commercial investors eschew using GRM (Gross Rent Multiplier) as that measures the income side only.

The first measurement investors look at to see if a potential investment warrants further investigation, is the Capitalization Rate Derivative, or Cap. The Cap is simply the percentage of Net Operating Income to the Purchase Price.

Cap %= Net Operating Income/Price.

As an example, an asset selling for $1,500,000 with $75,000 NOI is at a 5-Cap. ($75,000/$1,500,000 = 5%.) Understanding this ratio and its implications are key to informed investing, as well as managing operations. If you know that assets in a particular area are trading at 7-Caps you have a pretty good idea of what a property is worth if you know its NOI. Before we proceed further it’s important to clarify what NOI is.

Net Operating Income is: Ordinary Revenue – Ordinary Expenses.

The intent with NOI is to evaluate the efficiency of operations exclusive of other factors. On the income side we want to include actual rent, pet rent, late fees and other day to day items. On the expense side we want to include water, sewer, etc…the day to day operation expenses.

Exclude extraordinaryitems from NOI calcs. Examples include revenue (+) from selling timber rights, or the expense (-) of replacing a roof. These are still material when we look at a property in total…but they are not relevant in computing NOI. Also excluded from NOI are finance charges. Why? Because we use NOI to measure the effectiveness of operations. Example: A 3.87% loan with a 35-year amortization would make a poorly managed property look pretty good. Conversely, a well run property with a high interest loan might appear to be poorly operated.

I’ll discuss Net Operating Income Multipliers, the reciprocal of Cap in my next post.

Investors are risk adverse…and “unknown” is synonomous with “high risk.”  Being aware of this, The Client Centric Solution is to reduce the unknowns, reducing the risk…which delivers an increase in value to the client.  (If there are too many unknowns, the potential buyer will make a very low offer…or not bid at all.)

The Problem…

A colleague had a client that was looking to invest in quads and smaller commercial multifamily properties. One opportunity that caught the investors’s eye was a fully occupied plex that had upgraded units and an assumable loan with stated payments and interest rate.  The owner of the property was loathe to have multiple agents and investors traipse through the units on short notice and upset the tenants.  He was so concerned about losing tenants, that he instructed his agent that potential buyers could only view the inside of a unit after the owner had accepted their offer.  While this is somewhat common, without being able to view the property the investor could not verify the condition of the units, if they had a desirable layout, if they were upgraded, or if they were “repositionable” for increased income.  The potential buyer didn’t know how much time was remaining on the loan.  If it was a 30-year amortization loan with only 1-year left of the 10 year term he wasn’t interested.

The Solution…

I suggested to my friend that he contact the Listing Agent to find out how much time was left on the loan. He did, and found out that there was over 7-years left on the term and the bank was amenable to extending it on a qualifying assumption.  That eliminated one form of risk for the buyer.

Second, I suggested giving the tenants a weeks notice that each unit would be filmed for insurance reduction reasons.  About 1 minute is sufficient per unit. (I would also used that video to see if the insurance company would reduce premiums, so it is not a lie.)  Being able to view the video permitted the potential client to make an informed offer with far fewer unknowns, and less risk.  Should his offer not be sufficient, the owner had something to show future offerers.  

I think my buddy owes me a lunch!  What do you think?

The concept of eliminating unknowns to improve results applies to many aspects of business and life.  I learned this years ago when I watched a co-worker answer the President’s question with:  “I don’t know, and I don’t know when I will know.”  That co-worker was permitted to seek opportunities elsewhere.

If you would prefer Client Centric Service, you can contact me at rick@rosecitycre.com

Residential Multifamily (RM) definition:  Typically regarded as 2 to 4 units, or “doors”, with 5 units and up being considered Commercial Multifamily (CM).  Many multifamily investors start by purchasing a duplex, triplex or quad; living in one unit and renting out the balance.

Residential Multifamily Pluses and Minuses: One advantage of a plex investment strategy is that lower downpayments are permitted by banks…sometimes as low as 5-10%.  RM loans close much more quickly with fewer requirements than CM loans.  It’s easier to keep a watch on your renters when they’re next door, too.  Prices per door are lower than single family homes…an area where starter homes are $225,000 is likely to have duplexes and even triplexes for not much more.

The inherent nature of plexes is that their pluses are also a source of their weakness:  living next to your renters means they always know when you’re home.  From the renter’s perspective you are always available to discuss their maintenance problems and “wish list” of improvements they would like you to make (without compensation.) You are more likely to become “friends” rather than business associates.  It’s harder for most to enforce rent timeliness on friends.

Plexes tend to produce low Cash Flow, a reason they are eschewed by some investors.  Cash Flow is simply the monthly amount remaining from:  (All Income) – (All Expenses, including taxes, insurance and debt service).  With fewer units to amortize expenses over, plexes can’t compete with the functional efficiency of commercial complexes.  As a result, the plex investor focuses primarily on returns gained over time from appreciation.  Those gains are that are reaped at resale or refinancing of the property.  Contrast this with the investor of larger investments that expects to make a higher downpayment (20 to 40%) and recieve monthly distributions from profitable operations.  (In addition to appreciation.) Read more