The Complete Guide to Buying and Selling Apartment Buildings Chapter 5-6

C H A P T E R 5 Success is not measured by what a man accomplishes, but by the opposition he has encountered and the courage with which he has maintained the struggle against overwhelming odds. —CHARLES LINDBERGH Establishing Your Niche and Locating Properties The preceding chapter discusses the merits of the value play. This chapter examines some important concepts to consider prior to the deployment of your acquisition campaign. You must first determine your niche in the marketplace by analyzing key factors regarding the type of property you are seeking. Once you have defined exactly what type of property you are looking for, you will be ready to embark on locating the property best suited to your needs. 69 THE COMPLETE GUIDE TO BUYING AND SELLING APARTMENT BUILDINGS Establishing Your Niche Before you begin your search for an apartment complex, you must first define your niche in the marketplace. There are four crucial factors to con-sider: 1. The resources available to work with. 2. The size of the property. 3. The age of the property. 4. Your holding period. It goes without saying that there is some crossover among these factors. For instance, the more capital you have to work with, the larger and more expensive a property you can acquire. One is not necessarily a function of the other, though. Just because you have a large pool of capital to draw from does not mean that you have to buy a larger property. Let us examine each factor in more detail. Availability of Resources Obviously, the amount of capital you have available for real estate invest-ments is a key factor in establishing your niche. The more you have to work with, the greater your choices are. In general, loan-to-value (LTV) financ-ing of 80 percent is readily obtainable. If you had $100,000 to invest and procured an 80 percent loan, you could buy a $500,000 apartment building. With that same $100,000, you could acquire a $750,000 complex with an 85 percent loan or a $1 million building with a 90 percent loan. In my expe-rience, “nothing-down deals” do not exist when it comes to buying larger 70 Establishing Your Niche and Locating Properties properties. You may be able to find them for single-family homes, but for multifamily properties, be prepared to come to the closing table with your checkbook. I am not suggesting that it is impossible to find a nothing-down deal for apartments; I am just saying that I have never seen one. I suppose you could structure a deal on an 80/10/10 basis, meaning 80 percent bank financing, 10 percent seller carry-back, and 10 percent from a partner, friend, or relative. The bottom line is that the capital you have to work with will be a constraint and a determining factor in establishing where you will fit into the multifamily marketplace. Define your limits before conducting your search. Property Size While the number of units you can acquire is in part a function of the capi-tal you have to invest, there is a wide range of prices per unit available. Some older apartment complexes may sell for as little as $5,000 per unit, while newer properties may sell for as much as $75,000 to $100,000 per unit or more, depending on the region you choose to invest in. I recommend that newer investors get their feet wet with a smaller property of 50 units or less. A smaller apartment building will provide you with the opportunity to be directly involved in the operations of the property. In short, it will give you some hands-on experience. As your expertise and knowledge grows, so will your confidence. This self-assurance will manifest itself through your ability to graduate to larger and larger multifamily properties. Midsized apartments typically range in size from 50 to 150 units. As you move up the scale in size and magnitude of the properties in your portfolio, you will most assuredly want to employ full-time managers and mainte-nance personnel. Furthermore, unless you plan to keep up with all of the accounting functions, such as the accounts receivables, payables, and col- 71 THE COMPLETE GUIDE TO BUYING AND SELLING APARTMENT BUILDINGS lections, you should seriously consider engaging a reputable property man-agement firm. An effective management company will handle all of the day-to-day operations such as managing the staff, collecting the rents, and paying all of the bills. It will also generate month-end financial reports from its accounting programs, which will provide you with all of the details of rev-enue and expenses. Depending on the size of the company, management firms generally use field supervisors, adding a level of supervision that would not otherwise exist. These supervisors will usually oversee and be responsible for 5 to 10 different apartment complexes. If your on-site man-ager runs into a problem outside of the normal day-to-day operations, he or she can call the field supervisor for help. A competent supervisor should be able to resolve most issues. Larger multifamily complexes are typically those with 150 units or more. Larger properties allow the owner to achieve a higher degree of efficiency through economies of scale. Depending on the size, instead of having one all-purpose maintenance person, you would be able to hire one maintenance person who is also qualified in air-conditioning and another who has plumbing skills, in addition to a groundskeeper and perhaps a porter. Employing individuals with these types of skill sets can be a very effective cost-savings measure because you do not have to call in an outside contrac-tor every time an air-conditioning unit goes out, for example. With mainte-nance personnel on-site and readily available, your tenants will benefit, too. They will appreciate the better service. Satisfied tenants mean lower turnover, resulting in additional cost savings to you. Larger complexes gen-erally mean larger budgets, which can give you greater flexibility in the way you operate your property. You can afford to have a professionally trained sales staff that will ensure that things run as smoothly as possible. A skilled manager will know how to address issues as they arise and how to deal with them effectively. This, too, will result in lower turnover. Trust me: a quali-fied manager can make all the difference in the world in how profitable your apartments are. Don’t be afraid to spend a little more on the individual over- 72 Establishing Your Niche and Locating Properties seeing the day-to-day operations. An increase in salary expense of $5,000 for a competent manager will be more than offset by an increase in revenues. Regardless of the size of apartment building you purchase, the use of a pro-fessional property management company can be extremely important to you as an owner. You and you alone must determine what the best use of your time is. Where do you add the most value to the process? In the early stages of building wealth through real estate, the day-to-day, hands-on involve-ment will give you invaluable experience not available from any other source. As your level of expertise increases, however, it will be time to shift some of those responsibilities to others. Why burden yourself with trying to personally manage and oversee every detail of a 100-unit complex, for example, when you can pay someone $20,000 to $30,000 a year to assume those duties for you? This frees up your time to focus on more important things, such as preparing to implement your exit strategy for your existing building and beginning to identify potential acquisition targets for your next value-play opportunity. If you allow yourself to get bogged down in the day-to-day management, you will soon discover there is little time left for anything else. I am not, of course, suggesting that you remove yourself completely from the process. Your role is to manage the managers by defining your objectives for the property. You provide the leadership, and then get out of the way and let them do their jobs. Do not micromanage. You will continue to maintain close contact and make yourself available for questions. In addition, you will scrutinize every detail of the financial reports every month to ensure that you are on track to meet your stated objectives. In summary, whether you own a small, midsized, or large apartment com-plex, you must decide as the owner what the best use of your time will be and how you personally can add the most value to maximize the return on your investment. 73 ... - tailieumienphi.vn