TAC-Analyzing Apartments ABCs

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HOW TO ANALYZE APARTMENT DEALS 101
Evaluating Investments!
with The Apartment Consultant!
TheApartmentConsultant.com
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EVALUATING APARTMENT DEALS
Our #1 Goal when evaluating is:
Does it put $$$ in your pocket??
$$$ = spendable cash
TheApartmentConsultant.com
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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.
TheApartmentConsultant.com
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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!!
The Apartment Consultant.com
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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
TheApartmentConsultant.com
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LET’S ANALYZE A 20 UNIT APARTMENT
Asking price: $700,000
TheApartmentConsultant.com
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LET’S 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
TheApartmentConsultant.com
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LET’S 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!
 It’ll 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
TheApartmentConsultant.com
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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
TheApartmentConsultant.com
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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
TheApartmentConsultant.com
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EVALUATING APARTMENT DEALS
Now, let’s put it all together using all of the
terms in a simple analysis of the 20 unit
apartment building!
TheApartmentConsultant.com
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ANALYZING A 20 UNIT APARTMENT DEAL
Asking price: $700,000
TheApartmentConsultant.com
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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.
TheApartmentConsultant.com
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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
TheApartmentConsultant.com
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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
TheApartmentConsultant.com
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ANALYZING A 20 UNIT APARTMENT DEAL
Step 1 cont’d: 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
TheApartmentConsultant.com
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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.
TheApartmentConsultant.com
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ANALYZING A 20 UNIT APARTMENT DEAL
Ins
Taxes
Elec
Water
Repairs
Maint person
Property mgmt
Garbage
Gardener
Supplies
$4500
$8610
$1300
$7400
$7900
$6000
$6210
$1150
$1400
$2700
TheApartmentConsultant.com
Expenses Table
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
TheApartmentConsultant.com
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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
TheApartmentConsultant.com
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ANALYZING A 20 UNIT APARTMENT DEAL
Let’s 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%
TheApartmentConsultant.com
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ANALYZING A 20 UNIT APARTMENT DEAL
In summary,
Cash flow = $24,752/yr
Cash-on-cash = 17.7%
Cap rate = 9.6%
Guiding Principles
positive cash flow √
greater than 10% √
greater than 8% √
Guiding Principles are met on this deal!
Would you make an offer based upon your number
crunching and evaluation??
TheApartmentConsultant.com
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5 DEAL-SAVING TIP$ ON INCOME & EXPENSE$
#1: The number one mistake new investors make
is underestimating expenses. Don’t 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 pain…later on!
#5 Know when and how property taxes re-assess.
TheApartmentConsultant.com
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CONTACT US
[email protected]
Or go to the website:
www.TheApartmentConsultant.com
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