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How To analyze Apartment deals 101

Evaluating Investments! with The Apartment Consultant!. How To analyze Apartment deals 101 . Our #1 Goal when evaluating is : Does it put $$$ in your pocket?? $$$ = spendable cash. Evaluating Apartment deals . Our #1 Goal when evaluating : How much $$$ in your pocket??

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How To analyze Apartment deals 101

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  1. Evaluating Investments! with The Apartment Consultant! TheApartmentConsultant.com How To analyze Apartment deals 101

  2. Our #1 Goal when evaluating is: Does it put $$$ in your pocket?? $$$ = spendable cash TheApartmentConsultant.com Evaluating Apartment deals

  3. 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 Evaluating apartment deals

  4. The3Golden Rulesof 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 Evaluating apartment deals

  5. The 3 Guiding Principlesof Evaluating Apartments #1 Cash flowpositive #2 Cash-on-cash return10% or higher #3 Capitalization rate8% or higher TheApartmentConsultant.com Evaluating apartment deals

  6. TheApartmentConsultant.com Let’s Analyze a 20 unit apartment Asking price: $700,000

  7. 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 Let’s Analyze a 20 unit apartment

  8. Key Investment Terms - continued:  Cash flow*  Cash-on-cash return*  Cap rate* *denotes our Guiding Principles TheApartmentConsultant.com Let’s Analyze a 20 unit apartment

  9. Why do we need Guiding Principles?  To buy the best performingproperties!  And to keep out the “money-pit” properties!  It gives you an investing planto begin with!  It’ll keep you from wanderingin your search! TheApartmentConsultant.com Guiding principles of investment

  10. What are they again?  Cash flowpositive  Cash-on-cash return10% or higher  Capitalization rate8% or higher TheApartmentConsultant.com Guiding principles

  11. Definition of Cash flow is Net operating income – debt service = Cash flow TheApartmentConsultant.com Guiding principles

  12. 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 Guiding principles

  13. Definition of Cap rate is Return on investment if you paid all cash (no mortgage) Net income / Sales price = % Cap rate TheApartmentConsultant.com Guiding principles

  14. Now, let’s put it all together using all of the terms in a simple analysis of the 20 unit apartment building! TheApartmentConsultant.com Evaluating apartment deals

  15. TheApartmentConsultant.com Analyzing a 20 unit apartment deal Asking price: $700,000

  16. 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 Analyzing a 20 unit apartment deal

  17. 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 Analyzing a 20 unit apartment deal

  18. 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 Analyzing a 20 unit apartment deal

  19. 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 Analyzing a 20 unit apartment deal

  20. Step 2: get the expenses per year See next page for breakdown of typical categories of operating expenses for apartments. TheApartmentConsultant.com Analyzing a 20 unit apartment deal

  21. TheApartmentConsultant.com 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

  22. 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 Analyzing a 20 unit apartment deal

  23. 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 Analyzing a 20 unit apartment deal

  24. 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 Analyzing a 20 unit apartment deal

  25. In summary, Guiding Principles Cash flow = $24,752/yr positive cash flow √ Cash-on-cash = 17.7%greater than 10% √ Cap rate = 9.6%greater than 8% √ Guiding Principles are met on this deal! Would you make an offer based upon your number crunching and evaluation?? TheApartmentConsultant.com Analyzing a 20 unit apartment deal

  26. #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 5 Deal-saving Tip$ on Income & Expense$

  27. Info@TheApartmentConsultant.com Or go to the website: www.TheApartmentConsultant.com Contact Us

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