How To analyze Apartment deals 101

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How To analyze Apartment deals 101

• Evaluating Investments!
• with The Apartment Consultant!

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Evaluating Apartment deals

• Our 1 Goal when evaluating is
• Does it put in your pocket??
• spendable cash

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Evaluating apartment deals

• Our 1 Goal when evaluating
• How much in your pocket??
• Note this is a cash flow business, not a hope
  for appreciation business. Appreciation is a
  bonus for buying smartly and being patient.

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Evaluating apartment deals

• The 3 Golden Rules of Evaluating
• Step 1 get the income per year
• Step 2 get the expenses per year
• Step 3 get the debt service per year
• This is all you need to analyze any deal!!

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Evaluating apartment deals

• The 3 Guiding Principles of Evaluating Apartments
• 1 Cash flow ? positive
• 2 Cash-on-cash return ? 10 or higher
• 3 Capitalization rate ? 8 or higher

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Lets Analyze a 20 unit apartment
Asking price 700,000
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Lets Analyze a 20 unit apartment

• Key Investment Terms that experts know and use
• ? Gross income
• ? Vacancy rate
• ? Effective gross income (EGI)
• ? Operating expenses
• ? Net operating income (NOI)
• ? Debt service

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Lets Analyze a 20 unit apartment

• Key Investment Terms - continued
• ? Cash flow
• ? Cash-on-cash return
• ? Cap rate
• denotes our Guiding Principles

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Guiding principles of investment

• Why do we need Guiding Principles?
• ? To buy the best performing properties!
• ? And to keep out the money-pit properties!
• ? It gives you an investing plan to begin with!
• ? Itll keep you from wandering in your search!

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Guiding principles

• What are they again?
• ? Cash flow ? positive
• ? Cash-on-cash return ? 10 or higher
• ? Capitalization rate ? 8 or higher

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Guiding principles

• Definition of Cash flow is
• Net operating income debt service Cash flow

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Guiding principles

• Definition of Cash-on-cash return is your rate of
  return on investment (roi) or how fast am I
  getting my whole investment returned to me?
• Cash flow/Downpayment Cash-on-cash return

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Guiding principles

• Definition of Cap rate is
• Return on investment if you paid all cash (no
  mortgage)
• Net income / Sales price Cap rate

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Evaluating apartment deals

• Now, lets put it all together using all of the
  terms in a simple analysis of the 20 unit
  apartment building!

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Analyzing a 20 unit apartment deal
Asking price 700,000
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Analyzing a 20 unit apartment deal

• Address 6 Joshua Way
• ? Asking price 700,000
• ? 14 2beds/1ba, 6 1bed/1ba
• ? 2beds rent for 550/mo 1beds rent for 425/mo
• ? Tenants pay for elec, gas utilities
• ? Owner pays for ins, taxes, water, repairs,
  maint, property mgmt, garbage, gardener, and
  supplies.

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Analyzing a 20 unit apartment deal

• Recall Golden Rules of Evaluating
• Step 1 get the income per year
• Step 2 get the expenses per year
• Step 3 get the debt service per year

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Analyzing a 20 unit apartment deal

• Step 1 get the income per year
• 2beds 550 x 14 units 7700
• 1beds 425x 6 units 2550
• 10,250 x 12 months 123,000 per year of gross
  income

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Analyzing a 20 unit apartment deal

• Step 1 contd gross income per year is 123,000
• The area has a vacancy rate of 7
• 123,000 x 7 8,610 per year of vacancy
• 123,000 - 8,610 114,390 of effective gross
  income

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Analyzing a 20 unit apartment deal

• Step 2 get the expenses per year
• See next page for breakdown of typical categories
  of operating expenses for apartments.

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Analyzing a 20 unit apartment deal

• Ins
• Taxes
• Elec
• Water
• Repairs
• Maint person
• Property mgmt
• Garbage
• Gardener
• Supplies

• 4500 Expenses Table
• 8610
• 1300
• 7400
• 7900
• 6000
• 6210
• 1150
• 1400
• 2700 Total 47,170/yr

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Analyzing a 20 unit apartment deal

• Step 3 Get the debt service per year
• Assumptions 6.50 int. rate, 20 down
• 3539 /mo. x 12 months 42,468/year
• denotes a conventional commercial loan down
  payment

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Analyzing a 20 unit apartment deal

• Results
• Effective gross income 114,390/year
• Operating expenses 47,170/year
• Net operating income 67,220
• Debt service 42,468/year
• Cash flow 67,220 42,468 24,752

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Analyzing a 20 unit apartment deal

• Lets calculate the other Guiding Principles!
• Cash-on-cash cashflow/downpayment
• 24,752/140,000 17.7
• Cap rate net operating income/sales price
• 67,220/700,000 9.6

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Analyzing a 20 unit apartment deal

• In summary, Guiding Principles
• Cash flow 24,752/yr positive cash
  flow v
• Cash-on-cash 17.7 greater than 10 v
• Cap rate 9.6 greater than 8 v
• Guiding Principles are met on this deal!
• Would you make an offer based upon your number
  crunching and evaluation??

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5 Deal-saving Tip on Income Expense

• 1 The number one mistake new investors make is
  underestimating expenses. Dont believe the
  realtor information! Confirm every detail!
• 2 Have your expenses checked by someone who
  knows e.g. property manager, coach
• 3 Beware of Broker proformas!
• 4 Concessions can cause painlater on!
• 5 Know when and how property taxes re-assess.

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