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Financial Management

Financial Management. Introductions. Your name Where you work Your job responsibilities How long you have been in the industry What you hope to get from this class. Agenda. Investments Adding Value to the Investment Economic Analysis of a Property Budgets Property Valuation.

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Financial Management

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  1. Financial Management

  2. Introductions • Your name • Where you work • Your job responsibilities • How long you have been in the industry • What you hope to get from this class Course 8: Financial Mgmt

  3. Agenda • Investments • Adding Value to the Investment • Economic Analysis of a Property • Budgets • Property Valuation Course 8: Financial Mgmt

  4. Chapter 1: Investments We will discuss: • What are investments and whether to make them • Advantages and disadvantages of investing in multifamily housing • Different types of ownership and methods of financing Course 8: Financial Management

  5. Definition: Investment • An investment is the use of funds to earn a profit. Course 8: Financial Mgmt Chapter 1

  6. Four (4) Factors in Investment • Risk – low risk = low return high risk = high return • Income – may depend on risk involved • Growth – means a potential to increase in value >NOI = greater value • Liquidity - ability to convert to cash Module 8: Financial Mgmt Chapter 1

  7. Owner’s Objectives Why is it important to know the owner’s investment objectives for the property you manage?

  8. Performance Measures • Rate of return on investment (ROI) • Cash-on-cash return • Capitalization rate • Internal rate of return (IRR) Course 8: Financial Mgmt Chapter 1

  9. ROI • Rate of return on investment = percentage of return on each dollar invested Cash flow/Investment = ROI Module 8: Financial Management

  10. Capitalization Rate • NOI/Purchase Price = Cap Rate • NOI/Cap Rate = Value Course 8: Financial Management

  11. Exercise • We paid $7,000,000 for a property and the NOI is $500,000. What is the cap rate? • Divide NOI by 6% Course 8: Financial Management

  12. Remember • Lower cap rate = higher value • Higher cap rate = lower value

  13. Advantages of Investments • Advantages include: • Periodic cash payments • Potential for increase in value • Reduction in income taxes due to depreciation • Ability to invest using borrowed funds Course 8: Financial Mgmt Chapter 1

  14. Disadvantages of Investments • Disadvantages include: • Real estate is not a liquid asset • Active participation is often required • Potential for risk (natural disasters, changes in market conditions) Course 8: Financial Mgmt Chapter 1

  15. Forms of ownership • Direct ownership • Partnership • Limited liability partnership • Limited liability corporation • S corporation • Joint venture • Real Estate Investment Trusts (REITs) • Tenants in Common (TICs) Course 8: Financial Mgmt Chapter 1

  16. Types of mortgages • Fixed rate • Variable rate • Balloon • Bullet loan Course 8: Financial Mgmt Chapter 1

  17. Where to obtain a mortgage • Commercial banks • Finance companies • Savings and loan institutions • Insurance companies • Pension funds • Mutual funds • Federal government (Freddie Mac, Fannie Mae) Course 8: Financial Mgmt Chapter 1

  18. Skill Check #1 Chapter 1- Investments Course 8: Financial Mgmt Chapter 1

  19. Chapter 2 Adding Value to the Investment Course 8:Financial Management

  20. Adding Value: CAM Responsibilities • Generating and collecting as much income as possible • Controlling expenses • Meeting the financial goals of the investment Course 8: Financial Mgmt Chapter 2

  21. Additional ways to add value: • Reduced staff turnover and lower personnel costs • Reduced resident turnover with better customer service • Aggressive rental rates set by unit type • New income sources through resident services • Better collection of resident charges Course 8: Financial Mgmt Chapter 2

  22. Rent Administrative Fees Parking/Garage fees Pet fees Laundry room/Vending Late fees/collection fees Clubhouse rental/video rental Car wash Cable/Internet/ Phone Sources of Income Course 8: Financial Mgmt Chapter 2

  23. Maintenance Administrative Salaries/Personnel Taxes Insurance Utilities Contract services Advertising and Marketing Types of Expenses Course 8: Financial Mgmt Chapter 2

  24. 3 Factors That Affect Rental Income • Competitive rental rents • Physical occupancy • Collection percent or economic occupancy Course 8: Financial Mgmt Chapter 2

  25. Concession Impact Market rent = $700 Concession = one month rent What is the Effective Rent? Course 8: Financial Management

  26. Law of Supply and Demand • If the demand is high and the supply is low, higher prices can be obtained. • If demand is low and the supply is high, rents must be made competitive to attract residents. Course 8: Financial Mgmt Chapter 2

  27. Economic conditions • Population growth • Household formation • Job creation Course 8: Financial Mgmt Chapter 2

  28. Balancing rental rates and vacancies • The goal is to maximize income not occupancy • Pricing too high may cause longer vacancy • Pricing too low means you are losing money while the unit is occupied Course 8: Financial Mgmt Chapter 2

  29. Increasing rental rate Market value = $800 Raise rent 10% = $880 Vacancy = 15 days What is the cost of the vacancy? At the new rate, how long before you recover the vacancy loss? Course 8: Financial Management

  30. Lowering rental rate • Market value = $800 • Lower rent 10% = $720 • Loss per month = $80 • Loss per year = $960 What would you lose if you did not lower the price and the apartment sat vacant for a month? Course 8: Financial Management

  31. Before adjusting rent, analyze the 4 P’s: • People • Product • Promotion • Price Course 8: Financial Management

  32. Determining pricing • Conduct a market analysis • Use an automated revenue management system Course 8: Financial Mgmt Chapter 2

  33. When to consider a rent increase • When any floor plan remains 95% or more occupied or that remains full even when the community turnover ratio averages below 55% • When rents fall below levels indicated by a comparative rent analysis • Anytime a community is full • Upon owner request Course 8: Financial Mgmt Chapter 2

  34. Rental increases: Current residents • Increase rent as leases expire, OR • Increase rent selectively on expired leases using a quantifiable, non-discriminatory standard (years of residence or number of previous renewals) • Consider a renewal rate that is slightly lower than the new market rate as an incentive to stay • Provide 60 days notice prior to the effective date of the increase Course 8: Financial Mgmt Chapter 2

  35. Managing Occupancy: Reports • Occupancy reports • Rent roll • Delinquency report • Deposit/Income reports • Concession report • Demographics report Course 8: Financial Mgmt Chapter 2

  36. Managing Occupancy: Methods • Calculate occupancy trend • Manage lease expirations • Calculate turnover ratio Course 8: Financial Mgmt Chapter 2

  37. Expenses • Fixed – property taxes, insurance • Variable –utilities, turnover costs, etc. • Capital- appliances, HVAC, etc. • Replacement Reserve Account • Debt service Course 8: Financial Mgmt Chapter 2

  38. Cost Benefit Analysis • Potential Expense • Dollars • Time • Image • Potential Benefit • Income • Time • Employee satisfaction • Market position Course 8: Financial Mgmt Chapter 2

  39. Accounting Practices • Budget control log • Invoices • Purchase discounts • Check request or payment vouchers • Petty cash • Resident records • Resident security deposit • Collection of former resident accounts Course 8: Financial Mgmt Chapter 2

  40. Skill Check #2 Chapter 2: Adding Value to the Investment Course 8 Financial Mgmt Chapter 2

  41. Chapter 3 Economic Analysis of a Property Course 8: Financial Management

  42. Economic Analysis When analyzing a property, ask • How well has a property performed over a specific time period? • Where does a property stand at a given date in time? Course 8: Financial Management

  43. Course 8: Financial Mgmt Chapter 2

  44. Course 4: Fair Housing

  45. Accounting methods • Accrual- records all income and expenses in period they were earned or incurred, regardless of when received or paid • Cash- records all income and expenses when they are actually received or paid Course 8: Financial Mgmt Chapter 3

  46. Cash Flow • The amount of money left after all sources of income are collected and operating expenses, capital expenses and debt service have been paid • Often referred to as the operating statement Course 8: Financial Mgmt Chapter 3

  47. Gross Potential Rent (GPR) • Current rent charged at 100% occupancy- combines the sum of occupied units at current lease rents plus vacant units at market rents • 100% of possible income • All other income and expenses measured and evaluated as % of GPR

  48. Market Rent • Total annual income received if 100% of all units were occupied and paying market rents

  49. Loss to Lease • Variance between market rent and lease rent • Market rent that is “lost” due to lease rents at rates lower than the market rate • For many companies it is a separate line item on the operating statement

  50. Loss to Lease Example • Annual market rent of $1,375,025 with a loss to lease of $125,700 has a loss to lease of 9.1% • 125,700/ 1,375,025= .0914 or 9.1% • GPR of $1,249,325; market rent of $1,375,025 less “loss of $125,700

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