April 25, 2012

Strategic Decisions When Purchasing Multi-Family Properties

1. "Attractive":

a. Normal "curb appeal" (important to tenants and buyers)

b. Total safety for tenants




c. Income generating capacity that would maintain the asking price Why: Nelsonian theory has it that "Before you buy, shape out how to get out of the asset later"

Ask yourself this question: "If I were offering this asset for sale today, will I get curious mighty buyers at this price?

2. "Strong pride of ownership"

a. Can it be made to reflect a "price of ownership" consistent with the level of rents that I target? Again: Think resale.

b. Long term tenants appreciate pride of occupancy, and will pay decent rent for a safe and clean place to call home.

3. "Well maintained property"

a. Did the prior owner do a good job in maintaining it?

b. If not, there will be a price penalty.

The Financing Decision: The lender will need distinct data with the application. The most leading data is the operating history of the property.

1. "Schedule E's / Form 8824's" and "Year-End Reports":

a. The lender will need the last three years of the owner's operating performance from filed tax returns, and manager's Year-End Reports.

b. The lender and the lender's appraiser will use this data to produce a baseline of rents and expenses.

c. The Target: a normalized Net Operating Income ("Noi") which is the annual cash flow if owned free and clear of debt and before personal Income tax considerations)

d. The lender's allowed Debt Coverage Ratio ("Dcr") when divided into the normalized Net Operating Income ("Noi") will define the lender's conception of the maximum annual essential and interest payment that the asset can safely support.

i. Today's Dcr for apartment complexes: 1.25 to 1.30

ii. Fyi: That has increased from 1.15 two years ago

e. The whole of annualized debt service (P&I) when divided by 12 will define the maximum allowed monthly debt service (P&I only) that the lender would permit for the property.

f. When the monthly maximum debt service is applied to the lender's interest rate (6% to 7% today) and maximum allowed loan term (25 to 30 years today), this will define the maximum whole of loan that the lender will permit for the property.

g. There is no strangeness involved. If you can define the normalized Noi and can obtain the Debt Coverage Ratio (Dcr) that the lender will use, then you can determinate in advance the maximum ready financing for the property. A good market - speculation broker will do this prior to bringing a asset onto the market.

Side-Bar Comments And Strategic Opinions From "The Guru"....

1. Dcr-based Calculations can be misleading.

a. Recently I made such a calculation for a 72 unit apartment complex that I was marketing. Using current lender standards (1.30 Dcr, 6% interest rate, and a 30 year term), the calculation inferred that the lender should be willing to make an 84% Loan to Value Ratio ("Lvr" or "Ltv") loan. My observation: Fat Chance!!

b. Lenders still feel edgy about going past a 75% Lvr, even when the "financial moon and stars" are in excellent alignment. However, do not abandon the data presented above.

2. Interest Rates turn quickly. Never trust old information

a. There are any categorically good and dependable lenders that I look to for current and precise information. I may be able to help.

b. There is nothing that will ruin your day more than tying up a categorically good property, then seeing out that something has changed, and you have to sheepishly step politely out of the "Winner's Circle". Again, maybe I can help If I Am Brought Into The Game Early sufficient To Be Able To Make A stupendous Impact.

3. Use Fixed Rate Long Term Financing.

a. I will try to remain "Politically Neutral" here (I am a registered "Independent" and have been since 1964), but in my conception what the current administration is doing will lead to super inflation in the fairly near future.

i. Super inflation leads to super interest rates.

ii. You can't just leave the printing press on at the Treasury without having man notice...Gee, maybe there is a downside to "too much money".

b. categorically avoid a variable rate loan.

i. You will come to be the custodian of the apartment complex for the lender as the variable rate loan indices start to climb.

ii. With a variable rate loan, the lender would have passed the inflation risk through to you.

3. Use the Longest Amortization Term Available.

a. This would need the lowest monthly Pi payment.

i. You can all the time add more to the payment if cash flow is available

ii. But you can back off to the lowest required payment if cash flow turns negative for a period.

4. These are times that build wealth and character!

a. Be cautious, but keep attractive forward!

i. Interest rate are Mega-Cheap

1. The last "Great Recession" (1980-86) first mortgage price was 21.5%!!

2. Today's "Mother of Recessions" has first mortgage prime at around 6%.

3. We have never seen a retreat where prices are "right" and money rates at "right" too.

a. But borrow with an interest rate that can not be adjusted for at least 5 years and preferrabley10 years. You can thank me later.

ii. Prices and speculation yields are getting "more right" every day.

1. If you can borrow at 6% and invest at 8%, you are making money on money you don't even have. What A Country We Live In!!!

Contact me if you:

1. Have questions about this information; or,

2. Are seeing to buy or sell an apartment complex.

I know my "stuff" and can buffer you from distinct dangers.

Strategic Decisions When Purchasing Multi-Family Properties

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