Link to Properties - 02-Res Customer Synopsis

208 Sandhill Crane Runin East Orlando. This home is in the Eastwood neighborhoods in the general Waterford Lakes area. Eastwood itself is a large golf course community with planned oak shaded streets, neighborhood grocery center, “A” rated schools and proximity to all of the east Orlando employment centers. 

            The home itself is in excellent condition, needing nothing to put directly on the rental market. Upgrades were throughout the home as well, from the kitchen cabinets, counters, and appliances, to the bathroom vanities, laminated wood and tile flooring all throughout. I give this home an A+. Built in 1996, the home likely has about 5 years left until the roof will need to be re-shingled, but otherwise the home looks nearly new with the advantage of being in an established mature neighborhood. Rents between 1200-1300 with the higher end being likely, provides up to 5.5% cash return without financing (based on my ROI estimate including vacancy factor, maintenance, taxes, insurance etc….) with excellent potential for appreciation. Additional pictures available and this home is NOT a short sale or bank owned so a quick and easy closing is available!

13211 Moss Hollow Ctin East Orlando. This home also is an absolute gem with more upgrades than any other I have seen in this neighborhood. On a cul-de-sac, this home is also Move-In ready with nothing needed to put it on the rental market. The kitchen has been entirely professionally re-done with cabinets and stone countertops and stainless steel appliances. The flooring is slate tile and laminate wood throughout the entire home for durability and beauty, only the secondary bedrooms are carpeted. The upgrades continue in the master bathroom and are topped off with a large fenced in back yard.

            Estimated rents for this 4 bedroom home are between $1250-$1325/mo providing up to 6% on cash return with great potential for appreciation. Additional pictures available

9588 Silver Buttonwood Stin the Lake Nona “Medical City” area. This townhome offers the chance to get into the lake nona area for well below 150K…currently asking $129,500, this property will contract quickly. Practically new, built in 2007 this townhome was quality built with lots of upgrades in the kitchens and baths as well as laminate wood flooring downstairs. A short sale that is likely to go relatively quickly as well, this home can be rent ready with just adding a washer and dryer. The only downside to the property is that it does back to a brick sound wall to which the other side is Narcoosee Rd. Additional pictures available.

            Other than that, rents estimated to be $1200-1300/mo for this home as well, providing potential returns of up to 5.5% for cash purchases; and the appreciation potential of Lake Nona

30 N Lawsonais a diamond in the rough in Downtown Orlando. An amazing property in one of the best parts of Downtown, the interior is modern with upgraded kitchen cabinets and solid surface counters, a Jacuzzi garden tub with separate shower in the bathroom, and vaulted ceilings with recessed lighting throughout. This property is physically a detached single home with 1 bed, 1 bath, and plenty of room, the property is legally a condo…which is where the rough part comes in. The other detached single family home in the condo (just the 2 properties) is also in distress, not paying for any association dues or the upkeep of the common area’s (lawn and reserves for roof/painting), showing on the MLS as the HOA dues are $400/mo. This property will require legal legwork to get the association in order and to provide additional upside and ability for the new owner to get first crack at the other unit in the condo. This property is not for the casual investor and will require professional assistance to maximize. VERY worth the effort. Additional pictures available.

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Your Orlando Home Expert

Direct: 407-222-7281

GregMTraub@gmail.com

The market has been moving to quick too write up to much about my DOW on the best properties. So all I can send out nowadays is a quick blurb on the best ones I come across. If interested contact me ASAP for additional information and pictures if available.  

Link to the Deals of the Week - 02-Res Customer Synopsis

First up, Three in the Suburbs:

10065 Oak Quarry Dr @ 220K asking price is definitely the #1 deal of the week! Go in with a strong offer and quickly because this one is not going to last. This HUGE 5/4 3157 Square foot home with tile roof and quality construction also has no rear neighbors backing to a pond with fountain. Right in the Lake Nona “Medical City” area these properties have great potential as real growth happens in the area. For now rents only support a 3.8-4.8% all cash return but with lots of appreciation potential at this price point on this level of home! A Short sale so prepare to wait for the banks approval, but WHAT A DEAL. Contact me immediately about this one.

12210 Upstream Ct @130K asking in The Waterford Lakes Area of East Orlando. Just about move in condition, great fenced in yard, very well maintained. Just a bit outdated cabinets in good condition for rental, should be re-faced for re-sale. Offering a 5-6% All cash return. Financing is available for this single family home offering positive leverage to raise cash on cash returns to 7-9%. Pictures Available

14222 Sonco Ave @160K asking in Windermere. This3/2 townhome offers the uniqueness of an additional rental apartment above the garage making the property a total of 4 bedrooms and 3 baths with second kitchen in the rental apartment. Property is rare in the neighborhood so rent comps aren’t available, but other 3/2’s rent for $1200-$1300, and the previous owner rented the separate apartment for 600-800. Estimated total rental income at 1500-1700/mo Cash returns of 5-6.5%. Financing possible for cash on cash returns up to 6%-10.5%. Pictures available.

Now to Downtown Gems:

The Vue Unit 6S-11 @129,900 these studio lake side units always sell quickly and rent VERY quickly at 1100-1200/mo. For those that don’t know of or haven’t toured the VUE with me before, this is one of the top 2 premier high rise condos in downtown. Call for more information. Cash returns of 4-5% currently, financing is also available (rare for condos) for 3-6.2% possible returns.

Lowball Specials:

1409 Minnesota St @250K Asking is likely overpriced for this single family home in downtown Orlando. But offers amazing potential with huge 2000+ sq ft, and additional lot to expand. No HOA to pay for this property. @ 230K however the cash returns on 1950-$2000/mo rent estimated at 5-5.25% financing is of course available to increase returns, with possible under-estimated rent

101 Eola #808 @ 146K Asking price, currently in line with what these units sell for from the developer “as new”. Meaning This property as a short sale should go for a good discount. A larger true 1 bedroom condo in downtown Orlando’s High end Thornton Park District, this unit should sell closer to 125K-130K. Cash returns between 4-5% and FINANCING IS AVAILABLE in this building.

          Ever wonder how someone is able to purchase that skyscraper office building downtown, or the 300+ unit apartment complex down the street for multi millions of dollars? Well, I can tell you, it’s not typically someONE that purchases these properties it is usually a group. It’s an age old concept, if something costs $200,000 but you only have $100,000; then find another person with $100,000 and partner. When it comes to large properties that require say, $1,000,000 to purchase, and you partner with several others in a group investment it is called syndication.  

            Syndication can add some complexities but also offers some huge advantages that can far surpass the minor hassles of some additional paperwork. After all there is a reason why 95% of large properties are owned in some kind of a group structure, in fact some of the largest real estate tycoons you may know of (like Trump) made most of their wealth by being involved with and leading investment syndications.

The Advantages:

Bigger Property, Bigger Profits

            The larger a property, the more efficient the property can be managed, income maximized, and expenses minimized. A 300 unit apartment complex is only going to need 2-3 managers that can be located on site and be paid a wage, a few maintenance personnel on staff, one roof to worry about ( well maybe several, but much fewer than 300), one insurance policy, one property tax bill, and one marketing budget. Contrast that against the prospect of managing 300 individual homes spread throughout a county or state, and the economies of scale become apparent.

            Add to that, the fact that most large multi-family and commercial properties are purchased by professional investors looking to make a profit, and you will notice that cash flow and returns are typically higher. With individual homes the competition from inexperienced investors, speculators and homeowners themselves can drive investment returns as low as 0% or negative in a hot market as these part-time investors are happy just “breaking even” while they chase unpredictable and uncontrollable market appreciation.

            With a group investment you may be “splitting the pie” with your partners, but the partnership itself allows everyone to split a much larger pie, creating a win-win for all.

Multiple Exit Strategies

            With individual properties, your strategy is limited to some combination of buy low, sell high. And in the middle there are either renovations done to the home to appeal to an end user (in the case of a short-term flip) or a period where the property is rented until such time as the market has increased the value of the property.

            With syndication into larger multi-family and commercial properties you have several additional options and more control over your returns.

            There is the traditional strategy of single families; Buy, renovate, and Sell, though slightly modified. Buy, reposition/renovate (like updating a property and marketing to a different demographic of people), increase your rents (which has a direct relation to the value of the property…see article on “Advantages of Multi-Family Investing”), then re-sell to another investor. An added bonus with multi-family is that since your property can be big enough to essentially “be the neighborhood” in some sense, you may be able to move a property from being a class “C” to a “B” or “B+”. Take a distressed property with some repairs needed, higher vacancy, or a complicated deal; and turn it around into a stabilized property that now may fit into an institutional investor’s guidelines and you can re-sell the property to them.  Institutional investors can and will purchase properties at lower CAP rates than most other investors, which directly correlates to a higher selling price. (See “Adv of Multi-Family” for an example)

            The next strategy involves the long-term holding of a property. Buy, increase rents either through repositioning or a gradual market rise, and then simply re-finance the property at its now higher value, pulling out all or most of your original investment. Then continue to collect the income the property produces indefinitely. You can do this over and over again, and because proceeds from a loan are not taxable, you are in effect receiving this money tax free (or at least deferred until the eventual sale). This strategy works best with Multi-Family and Commercial properties because the financing you would use with this strategy would be non-recourse financing, meaning you have no liability to personally pay back the loan on the property should anything go wrong (see limited liability below). What this essentially adds up to is that you can have your original investment only tied up for a short period of time before you get it back. And on top of that you would still be receiving an income from the property without your money still being tied up.

One more possible strategy (and there are many more not mentioned here), is “Buy, Split, Sell”. Certain properties are more suited to this strategy than others, but you may be able to purchase a Multi-Family property with many units as one, split up each unit into individual properties (condos), and re-sell the condo’s to end users. Essentially buying in bulk, then selling off each piece in smaller increments at a much higher total price. These properties are called condo-conversions, during the last real estate bust this term took on some negative connotation (rightly so) as properties were hastily and poorly converted leaving the end buyers with a bad property, but with the right property or the right market, this strategy can prove to be very successful.  

Smaller Investment Lower Risk

            There is a reason even those people with $1,000,000 don’t invest it all in one property all at once. Diversification is a powerful risk mitigation strategy that is one of the most powerful reasons why large property purchases are typically structured as a group investment, as no one person will typically have the risk tolerance to put $1,5,10, or 100 million into one investment all at once. Even banks won’t do this on larger loans, they bring in several other banks to “participate” so they don’t have to put too much of their assets at risk in one loan.

Group Investment, Limited Liability

            When investing in an individual property alone, there are of course ways to limit your liability, from as simple as purchasing it in a corporate name or land trust (no financing possible this way though), to insurance policies and overall asset protection strategies. However, as long as you are the sole owner of that property and are the operator, if something bad enough happens you may have some liability. Plus if you ever want to finance or re-finance an individual property, the only attractive financing available is going to require you to personally sign on the loan, putting liability on your personal wealth to ensure that loan is paid.

            With a group investment however, when set up properly, as an investor your liability is limited to the amount of money you have invested. Similar to if you own shares of IBM; if someone sues IBM you wouldn’t be personally responsible to pay that person. Plus on commercial and multi-family properties, there is attractive financing available without anyone having to sign personally on the mortgage, and if personally liable financing is needed, typically only the sponsor signs for the mortgage, and not the other partners in the group (meaning they are not personally liable for the debt, only the sponsor).

Limited Time Investment

            When investing with a group, typically the groups’ sponsor is the one that finds the property and performs due diligence on the property for presentation to the members of the potential group. An investor’s time can be limited to the amount of time it takes to review the property proposal. There is no interviewing realtors, searching for properties, endlessly making offers until something is accepted, negotiating with sellers, arranging financing, inspections, insurance, property repairs or finding and overseeing a property manager. All of these tasks (each of which can make or break an investment) is taken care of and usually paid for upfront by the sponsor of the group.

            Again similar to purchasing stock in a company, you can think of the sponsor as the CEO of the syndication. They take care of running the property and making sure the original strategy stays on track and stays relevant in a changing market.

Professional Involvement/Ownership

            You may have noticed by now I’ve mentioned that there is a “sponsor” and that they are at the center of a group investment. A sponsor basically takes on the leadership role of the group as well as takes on the main liability of the investment and the property. A sponsor by definition should be a professional with the experience and the resources to pull together a successful deal and operate the business profitably (make no mistake, owning an income property is a BUSINESS!)

            In the corporate world CEO’s of course make quite a bit of money running a profitable company. They are motivated internally to excel (hopefully) and more importantly they have their interests aligned with those that own the company (shareholders) because their compensation is tied to the performance of the company, and in many cases the CEO is also a partial owner of the company. The same is true for the sponsor, but even more so. In most group investment structures the sponsor isn’t compensated at all unless the property performs at or above expectations and the best sponsors will invest their own money into the property alongside their investors. This ensures the alignment of the interests of the group with that of the sponsor. If the group loses money, the sponsor loses money…and in some cases, more money than the investors.

For more on the structure of a Syndicated Group Investment check out “Structuring a Group Investment” and "Participating in a Group Investment"

           By now hopefully you’ve read “Intro to Group Investment in Real Estate” and have additional interest. By now you are likely wondering how it is actually structured, how you make your money, and when. Be sure to read on to “Participating in a Group Investment” as well.

            Every group investment (Syndication) is structured a bit differently. How profits, losses and management are handled is always determined and agreed to before the group is ever formed, so be sure to read the Private Placement Memorandum (PPM - basically a business plan for the property) and operating agreement of the Syndication to fully understand the specific opportunity being offered. However, below is the most typical way everything is set up. For this example we will assume the group is investing in a specific property instead of an opportunity fund where only the criteria of what the group will invest in is known.

Corporate Structure

            The investment property being purchased is not typically held in the individual names of those in the group but held in the name of some form of corporation or trust. The individual investors own the interests of that corporation. There are several corporation statuses that can be chosen, but for all intensive purposes, the most common structure is that of a Limited Liability Company (LLC) as it offers limited liability to investors, as well as being treated as a pass-through entity for taxes. Meaning the profits of the company are NOT taxed, then whatever is left over distributed to investors, which is again taxed on the individuals tax return (double taxation). With the LLC the deductions, losses, and profits are passed straight through to the investor’s individual tax statement.

Minimum Investment

            A property has been found by the group’s sponsor, it is under contract, and due diligence has been completed; you have reviewed the PPM and determined you would like to be a part of the investment. To participate with the group there is almost always a minimum investment with the ability to invest in any specified increment above that as the investor desires. The total amount one invests determines the percentage ownership in the group they have.

Minimum (Preferred) Return

            Not all Syndications have a provision like this, but the one’s I would invest in would. As mentioned in the Intro the sponsor of the group is basically the CEO of the investment, and they share in the profits as incentive to make as much profit as possible for the group. However, I personally think it is best to set a minimum standard for the sponsor to further ensure they don’t get complacent with mediocre or underperforming returns. This is where a minimum (technical word is preferred) return comes into play. It sets the minimum returns the investors will receive before the sponsor can participate in any of the profits….then not only does the sponsor not make money unless the investors make money, but they don’t make money unless the investors make at least a minimum return on their money. This preferred return is typically a negotiation between the sponsor and the investor, and based on the potential a particular property may provide. Preferred returns are typically between 5% and 8% for smaller syndications. There are NO MAXIMUMS however, if the property ends up yielding 50%+ over time, the investor will collect their entire share of the profits.

Percentage Ownership

            An investor’s ownership stake in the property will be determined by the total percentage of their investment divided by the total amount of funds raised in the syndication.

Sponsor Profit Share

            The better Syndications have a preferred return to investors; the amount of profit generated over this return however, is split with the group’s sponsor. It is their compensation for finding, evaluating and managing the property on behalf of the group. These splits are typically between a 70/30 (70% of profits to investors, 30% to the sponsor) up to 50/50 or more. The split can be further segregated to profits generated out of on-going cash flow, and capital gain when the property sells for a profit; and may not be the same split for each. Generally, the better the deal the sponsor finds, the higher the profit split will be.

Lifetime of the Syndication (Exit Strategy)

            A purchase of an interest in a Syndication is not liquid. In fact most of the time Securities and Exchange Commission rules prohibit anyone from selling their interest for at LEAST one full year. Add to that there is a very limited pool of buyers that would be interested or able to purchase your ownership interest, and the possibility of being able to liquidate your investment becomes difficult. This is why the Private Placement Memorandum (PPM) will outline exactly how long the group’s lifetime is, specifying under what conditions the sale or refinance of the property will happen and/or setting a specific time period the property must be liquidated by. Typically an investment of this sort will be a minimum of 5 to 10 years, usually with provisions to extend every 1-2 years by vote depending on what the investors and sponsor believe is best for the investment.

            There usually are provisions that will allow early withdrawal with limitations. Limitations typical are the ability to only withdrawal during a certain window of time each year, the requirement to first offer the ownership to other owners in the group and the sponsor based on a current valuation of the property and its income, and typically a fee to arrange for the transfer. So it is possible, if the need of the investor is dire enough, but in general, only invest with a group with funds you know you will not need access to for the lifetime of the Syndication.

          Before reading this article, be sure to first read “Intro to Group Real Estate Investment” and “The Group Investment Structure”

A group investment in real estate (also called a Syndication) typically is considered a security under Securities and Exchange Commission guidelines. Because it is a security many laws govern how such an offering can be offered and who can participate in them. One option that allows anyone and everyone to participate in a group property investment is the full registration as a public offering with the SEC, unfortunately this involves months if not years and HUNDREDS of thousands of dollars just to register, and is expensive to maintain (think of Real Estate Investment Trusts on public stock exchanges). Obviously this prohibitive cost causes most group investment opportunities to not register for public sale; so most are set up as a private offering with the SEC under specific exemptions to public registration allowed under law.

“Private registration” usually requires that these opportunities are never advertised to the public and only offered privately directly to “friends, family, and business associates” that already have an established relationship with the sponsor before the opportunity is presented to the investor (So don't expect a sponsor to meet you, and in the same day discuss any specific opportunity they are working on, they have to establish a relationship with you first). In addition to this restriction, those that invest in the syndication must meet certain accreditation or sophistication requirements to make sure they are qualified and knowledgeable enough to evaluate a private offering themselves. So when inquiring about such opportunities, be prepared to fill out a simple form that asks about your financial status and expect the group sponsor to talk with you about your investment experience and general financial condition….They are required to do so under the law!

Once a sponsor has qualified you are an “accredited” or “sophisticated” investor, you can then start discussing the opportunities the sponsor has available and cal receive the Private Placement Memorandum (PPM) and subscription agreement. These documents basically amount to the business plan of the investment. What the property or properties are that the group is going to purchase, the financials, the operating plan, the risks, the expected profits, and all other information that could affect the investment are included in the PPM. The subscription agreement will outline how the group is structured (profit distributions/splits, lifetime of group, etc). These documents should be reviewed thoroughly before making your investment. Once you are ready, you simply fill out how much you would like to invest and send it to the sponsor.

Depending if the group is going after an already identified property under contract or if it is an opportunity fund where only the criteria of the properties that will be purchased is known, will determine when your full or partial investment will be wired to the group bank account, held in an escrow account until a property is identified, or if it is just a commitment to fund once property is identified (or some combination of the three).

Once you are part of the syndication, expect at least quarterly reports of income, expenses, market challenges, opportunities and the general performance of the investment. The better sponsors will also have the ongoing financials and anything else an investor may want to see available and open for the group to view at any time they wish….the more open the better! 

9763 Doriath - 02-Res Customer Synopsis

This home is located in the 32825 zip code, right between the Waterford Lakes and UCF retail and employment centers and the new Lake Nona Medical Center. In an excellent, quiet community that rents very quickly. This short sale may take some time to close once we get it under contract but would be well worth the wait. In EXCELLENT condition, all this home needs to be ready for rental is a carpet clean and washer/dryer. Huge backyard, tiled throughout the common area’s for easy maintenance, and fenced for tenant privacy in there large backyard. Priced under market value currently at $135,000 with likely rental between 1300-1400/mo. Additional pictures available by emailing me @ GregMTraub@gmail.com .

546 Hardwood - 02-Res Customer Synopsis

You can’t get in a better neighborhood than this one. In the heart of Waterford lakes in a well kept, low distressed neighborhood. This short sale is move-in ready, nothing needed. Showing as a 3/2, the master bedroom has an attached office/nursery for making a practical 4^th bedroom. Laminate floors are throughout for easy maintenance and on a rarely sold premium lot that backs to the community pond. Currently priced a bit high at $157,000 it may go for as low as $145-150K, and rents for between $1300-1400/mo. Additional pictures available.

2733 Wild Tamarind - 02-Res Customer Synopsis

Avalon Park townhome with lots of room. In great condition only needing some appliances, carpets to be cleaned and light touchup paint. The home has lots of upgrades throughout, from the higher end carpeting, higher quality wood laminate flooring, granite counter tops, and a professionally converted garage into a theatre/recreation room! All in a short sale that is being worked under a special program that likely ensures approval and a relatively quick process. Excellent returns as well with rental rates likely to be $1200-1250/mo. Additional pictures available.

          Following up on my previous post “Advantages of Multi-Family Property Investing”, nothing is ever risk free and there are two sides to EVERY investment. How each investor overcomes or mitigates a disadvantage is what separates the mediocre from the great investments. The following are some things to consider before investing in Multifamily Property.

1.     Investment amount:   

Although the per unit cost is typically small, apartments are only sold as a whole, making the entry cost to purchase a building higher than some are willing or able to meet. Since the larger the property the more economies of scale there are, for an investor to reap the highest returns the larger the property they should purchase.

Solution 1: Finance

 Because financing is backed by current government programs, mortgaging a part of the property with attractive terms is still very possible in today’s market. However don’t expect the process to be easy, and in the best case you are looking at a maximum loan of 70% of the purchase price. The time it takes to obtain financing can leave many of the best opportunities from distressed sellers out of reach as well. And the more the leverage you use to purchase the property, the higher the risk you take with the additional expense of a mortgage.

Solution 2: Group Ownership

          It’s an age old principal, if something costs $300,000 but you only have $150,000, than get another person with $150,000 and partner. The principal is commonly used in real estate and is called syndication.  There are legal issues to work through when putting together a group to purchase property but with a good attorney, common investor goals, full disclosures, and a bit of pre-planning; group investment can be a huge win-win for everyone involved.

2.     Acquisition:

Apartment buildings are considered closer to a commercial transaction than a residential single family home transaction. For one, it is very “buyers beware”, properties are usually sold as-is so proper due diligence is essential. Plus, there is not a large open market for apartment buildings as there is for homes. Very few properties are openly advertised on the web or in any MLS system (there are some but not many). A lot of properties are listed with brokers but for a variety of reasons the broker doesn’t, or isn’t allowed by the seller to openly market the property for all to see. So you won’t locate the majority of properties on the internet or advertised extensively. A buyer really needs someone “on the ground” contacting building owners directly and networking with local brokers to find the best available deals.

Due Diligence:

     BUYER BE AWARE! There are much fewer if any protections a buyer has in the realm of commercial real estate. A smart buyer has to request and review all kinds of documents that confirm a seller’s “story” on the property, then independently confirm rental  rates, vacancy rates, capital improvements, and a whole host of other things as part of due diligence. Trust but confirm! Again, being on the ground or having someone on the ground, with a vested interest, is the best way to handle due diligence.

Solution 1: Invest locally in what you know

     If you are able to do all the due diligence yourself, this is the best way to go. I’d still recommend working with a local agent that can plug you into the market and assist you with diligence though. This of course limits you to certain areas and requires a larger investment of your time.

Solution 2: Group Investment

     When investing in a group, the group will have a sponsor that acts as the CEO of the investment. The sponsor should of course be local, and be the person on the ground with the experience and connections to find, and properly underwrite a deal on behalf of the investors. Of course making sure the sponsor has a vested interest in the short and long-term prosperity of the investment is crucial to aligning the group’s goals with the sponsors.

3.     Management

With any third party manager there will always be an inherent conflict of interest between the manager wanting to rent and manage the property for the least amount of effort and time and the owners desire to rent the property in the least amount of time, but for the highest amount possible. This conflict should be a very important issue to the owner of an apartment building not only because they are not realizing all of the income possible, but as mentioned in the “Advantages of Apartments…” blog, any potential rental income not realized directly affects the value of the property by a large multiple.

Solutions to this issue are similar to that of acquisitions. Either the investor should be close to the property or invest in a group structure with a local sponsor.

4.     Capitalization Rates

Remember, when buying and when you eventually sell a property the capitalization rate that investors are demanding at any given time will directly impact how much your property will be worth. There is no way to determine exactly what cap rates may be in the future, there are however several ways that an individual can mitigate changing cap rates.

Mitigation Strategy 1: Value Add

By increasing the value of the property through improvements and cutting operating costs, large value gains can be made on mismanaged or ignored property. Fixing up, increasing rents, decreasing vacancy and reducing costs can cause a property’s value to be increased substantially even if cap rates rise. By also jumping property class levels, improving a “C” property to an “B+” property, an investor may perceive the risk of your property to be less, and thus will demand a lower cap rate than someone looking at “B-“ or “C” properties.

Mitigation Strategy 2: Time Exposure

 By limiting the time you hold on to a property you are exposing yourself less to changing cap rates over time. Many people make a very good return by purchasing, improving and re-selling apartment buildings with 2-5 year holding periods for just this reason.

Mitigation Strategy 3: Buy Right!

Historically cap rates for multi-family buildings have been relatively low. During the boom apartments could sell as low as a 2% or 3% cap....but in today’s market where the general public may perceive much higher risk in the apartment market than they should, cap rates can be as high as 8%+ (adding in today’s low cost of leverage these 8% cap rates can translate into double digit cash on cash returns). So buying at a high enough cap rate is critical to mitigating the downside.

Mitigation Strategy 4: Plan for the Long-Term

By planning or expecting for an extended long-term hold you simply don’t have to worry about short-term cap rate changes, the best defense is to simply hold onto the property, enjoy the monthly cash flow and wait out the market until the next cycle comes around.

         Single Family homes offer good returns and excellent potential for appreciation. As demand for housing raises so does the price of your investment property. So long as your home is in a desirable area for an end user you should see great appreciation as the market recovers from this most recent downturn. Appreciation however, is completely dependent on the subjective desires and financial ability of the “perfect buyer” and directly related to uncontrollable market forces.

          Multi-Family apartment property however, while partially driven by subjective value assessments; is more heavily driven by objective facts that can be counted and quantified. Since this kind of property is almost never purchased by an end user to live in personally, the value of such a property is directly related to the amount of income the property produces after all expenses and a risk premium.

Here’s how the math works:

Apartment building “A” consists of 10 separate rental units. Each unit rents for $500 a month, giving the total amount of rents the building could earn per year of $60,000 (also called Gross Potential Rent - GPR).

Let’s say the cost of running the building however (including maintenance, insurance, management, property tax, leasing fees, vacancy etc…) is about $25,000 a year

$60,000

-$25,000

$35,000

$35,000 represents the Net Operating Income (NOI) of the property, or the cash flow the investor may receive per year by purchasing the property.

To calculate what this means to the value of the property, you simply need to divide the Net Operating Income ($35,000) by the rate of return the investor looking to buy it is going to want in order to justify the risk they perceive in owning this property over other investments. This rate of return is also called a Capitalization or Cap Rate.

For this example let’s assume we would want to make at least an 8% return on this investment. Take $35,000 and divide by 8%.

This gives us the value this particular investor would be willing to pay for the apartment complex: $437,500

This of course is a simplified version of the formula, but it illustrates the concept of Multi-Family valuation, and helps bring us to my first advantage an apartment building can have when it comes to appreciation.

Inflation Multiplier

          Over the long term, Single family homes during normal times appreciate at or about the rate as inflation (excluding peaks and troughs). So a $100,000 home after a year with about 3% inflation would be worth ~$103,000.

Rents also have a direct connection to inflation. So our property “A” with $500/mo rent the first year could raise rents ~3% a year, so after your first year rents might be able to be raised to $515/mo. Plug this new rent into our value formula….and that 3% rise in rents translates to the new value of property “A” to be $460,000, a $22,500 increase in value, or 5.1%; Multiplying the natural dollar increase in market value from year to year.

This multiple increase in value based on rents translates to several creative ways to significantly increase the value of a property; particularly, property repositioning and cost saving.

Value Add

          Absentee owners, bad management, loss of owner interest or complacency, over-leveraging, personal or business need for cash….these are just a few of the reasons an apartment can be ignored, left to degrade, demand less rent or have a higher vacancy than it would otherwise demand.

Let’s build on our previous example, “Property A”, that we just purchased at an 8% capitalization rate for $437,500.

          Units are renting for $500/mo, but just down the street similar sized units rent for $700/mo. We identify that the exterior of the apartment looks bad, needs to be painted, there is trash in the parking lot, and it generally just doesn’t have any curb appeal. The insides of the unit’s have also not been updated in 25 years and could use new counters, cabinet faces and some electrical updates. You decide that investing into the property to fix these issues, and re-position the property to attract higher rents is the best way to improve value.

Over the first year you clean up and update the property for a cost of $100,000 to bring it up to par with the apartment down the street and are able to successfully raise rents up to market at $700/mo. Also during your renovations you were able to decrease your maintenance expenses and found less expensive insurance, decreasing your total cost from $25,000 a year to $20,000.

          Now that the property looks great and is fully rented, you do the math and realize you are now seeing about a 12% return on your investment!

$84,000 GPR

-20,000

$64,000 NOI

But even better, you realize that the investor market is still looking to purchase apartment buildings at an 8% cap rate. You apply our valuation formula and realize your $537,500 total investment is now worth $800,000!!!

          Again, this is a simplified example but the principal is illustrated well and shows the powerful concepts behind making a great return on Value-Add Multifamily Property. It’s not all easy money of course and re-positioning a property requires skill and expertise, so be sure to read my follow up “Disadvantages of Apartment Investing, and How to Overcome Them”.                    

December is the slowest month of the year for buyer traffic. While we are still in a shortage of inventory with a likely increase early in 2012….this lull has yielded some EXCELLENT Deals of the Week!

Deals Details Link: 02-Res Customer Synopsis

 261 Doe Run 

     Located within walking distance to the super center of Winter Garden Village this area is high demand and rents out very quickly (est. $1600-1700/mo). The home itself has been upgraded by the previous owner; marble, travertine and wood flooring on the ground floor and up the stairs. Upstairs is laminate wood in the halls and carpeted bedrooms. Most bathrooms have also been tiled in natural stone and the general condition of the home is excellent. To top it off the estimated ROI is higher than almost every other single family home I’ve come across so far and the comparables suggest the home is worth at least 160-170K…but I think can be purchased for ~150K.

          The catch? The bank selling this home is only accepting cash offers, no financing. Why? The home was previously under contract, but the previous buyers inspector noticed some discoloration around the air conditioning vents and said it was mold…which a later test by the seller confirmed slightly elevated levels in the home (I have a copy of the report and pictures of the vents in question). I have seen this before and last time it was an EXTREMELY MINOR fix that cost less than a few hundred dollars….but the mere mention of “mold” scares off many. This means OPPORTUNITY for the right buyer. Call me for details.

411 Winter Nellis

          Also located walking distance to Winter Garden Village, this large end unit townhome feels like a single family home and offers a much higher than normal ROI at the current asking price. Estimated rental amount between $1250-$1300, the current asking price of this short sale is well below similar sales in the neighborhood, so expect it to go under contract QUICKLY.  

1941 Stone Abbey

          You just don’t find single family homes in “A” areas for this price very often. PLUS it is in great condition and backs to a conservation area! Across the street from the prestigious Stoney Brook East Golf Community in the 32828 Zip code. Close to Waterford Lakes Shopping, employers like University of Central Florida, Lockheed Martin, Siemens, the Technology Parkway, and a quick commute to the new Medical City of Lake Nona. An excellent find for an excellent price.

9998 Oak Quarry

          Located in the Lake Nona “Medical City” area, this home is in the high end gated section of the La Vina Neighborhood. This particular home backs to the private lake in the neighborhood making it very unique and desirable for re-sell once the full medical city has been built and all the higher paying medical jobs come online. At its listing price however, it is well overpriced and what I consider a “low-ball special”. I would put a good investment value on this home of between $215-230K, with rents of between $1950-$2100 this home will yield lower/moderate but steady returns while holding for rental, with excellent potential for appreciation.

5553 Remsen Cay Ln

          In the always in demand Summerport neighborhood, this home offers a great opportunity to take advantage of the selling bank’s mistake. This property is not just a 4 bed 2 bath 2440 square foot home; there is an entire upstairs bonus room and bathroom not reflected in the listing. Making this home truly a 4 bedroom, 3 bath, approximately 2800 square foot home.  This size property in this condition would sell for between $215K-$220K today, so even at its current asking price it is a great deal….if an offer no competing offers are on the table though, a discount from that price may even be possible. Rents are between $1700-1800/mo.

          First let me start off by saying some sites where these listings are have great info. For instance RealtyTrac, there is a reason they have become the leading source of foreclosure data in the country. That being said, the interpretation of their info by the general public is terrible. RealtyTrac as an example has a “learn” button on their site that has some great articles and a good FAQ that explains what NOD, Lis Pendens, and other foreclosure terms mean. Unfortunately,  I suspect these articles and FAQ’s go very much unread by a large portion of their visitors. Plus they syndicate their data to several listing websites (like Trulia) where many people confuse their Lis Pendens information for actual homes for sale.

          So for everyone out there that gets excited when they see a “listing” for a lake front, 5 bedroom, 3 bath, 3,000 square foot home in Windermere for $40,000 make sure to look at the listing description. If the words Lis Pendens are in there, know that the property is NOT for sale at 40K! Just because there is a Lis Pendens for 40K doesn’t mean that is all that is owed on a property or that the bank will be selling the property for pennies of what it’s worth just because there is a small mortgage on it.

My usual answer to questions involving these “Listings”: I am sorry, but the listing you are referencing is not actually for sale (or is for sale for a different amount). The information you pulled is likely just a public court record of pending foreclosure action and the amount indicated is simply the amount owed to the mortgage holder. This amount has little to no bearing on what the home may eventually sell for when/if it becomes available. If it’s too good to be true IT LIKELY IS!