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Where Do You Find Great Deals in Apartments?

Mar 14, 2019 by

BONUS REPORT: Where do you find great deals on Apartments?

by Anthony Chara

I get this question a lot, especially, during or just after a presentation showing an apartment complex illustrating a ‘cash on cash’ return in excess of 20%.

If you went to a Commercial Broker and told them you were looking for properties with a 20% COCR, they’d do one of two things; 1-They’d tell you they would buy the property themselves if they ever found one with a 20% COCR or 2-They’d hang up on you because they’d think your expectations are unrealistic.

You probably won’t find an Apartment complex advertised with a 20% COCR. Just like the broker said, if it fell into their lap, they’d buy it. However, you can increase your chances of finding some great deals by doing a few things differently.

First off, there’s no big secret in ‘finding’ Apartment complexes for sale. Start by using the same vehicles most investors use. For instance, you can search through Loopnet.com or go to any of the major or regional Commercial Brokerage web sites such as Marcus & Millichap (MarcusMillichap.com), CB Richard Ellis (CBRE.com) or Sperry Van Ness (SVN.com) just to name a few. There are many many more out there.

You can also peruse local newspapers in the market you’re interested in. Remember that not all papers are created equal. Some newspapers will advertise commercial properties in the business section, not the classifieds. Another paper no one thinks about is the Wall Street Journal. They have both national and local properties advertised for sale.

Another way to find Apartments for sale is to ask Property Managers or Commercial Financiers that work in the area you’re looking to purchase in. Often times, they know owners who are looking for another property and have to sell their first one to move on or they know someone who’s just ready to retire.

These are just a few of the sources I use. More are given in my workshops and boot camps. The key to getting great Apartment deals may start with the information above, but it ends with the information below.

Like I stated already, there’s no big secret in finding Apartment complexes for sale. The key is to find a great deal and here’s how I do it. The first thing I decide upon is a market in which I want to purchase. I may determine the market based on economic factors such as job growth or an expanding economy in that area. I may decide upon the market just because it’s a place I’d like to visit on a regular basis. The next step is to interview at least 3-4 good commercial brokers in that market and create a long-lasting, mutually beneficial relationship with at least one or two of them.

Here’s what I do and how I use my research. Preferably, I want to find a commercial broker that has a CCIM designation. CCIM stands for Certified Commercial Investment Member. Most CCIM’s will list this designation in their internet and newspaper ads. CCIM’s have gone thru extensive training on commercial property, plus, they must have a proven track record of closed deals or consultations showing extensive commercial knowledge and they must pass a comprehensive examination. I consider a CCIM equivalent to a PHD. By the way, you can also find CCIM’s at www.CCIM.com too. It’s estimated that only 6% of the roughly 125,000 commercial brokers out there have a CCIM designation.

Once I find 5-6 brokers in a given market, with or without the CCIM designation, I call them to introduce myself. I ask them about the market conditions, recent sales in the area and their own experience as a commercial broker. It’s amazing how much information you can get when you ask the right questions. You also get a pretty good feel for the person about whether or not you see yourself having a long-term relationship with them.

Once I have a good feel for 3-4 of the agents I’ve spoken with, I give them the criteria I’m searching for in a complex. My criteria will include number of units, unit mix, minimum Cap Rate, price range, the quality of the complex (A, B or C) and area of the city. I may even mention that I’m looking for the owner to do some or all of the financing. I follow-up my phone conversations by emailing or faxing my contact information and criteria to the brokers. Then, I phone or email the brokers every 1-2 weeks to stay in contact with them. Since the brokers know exactly what I’m looking for it makes it easier for them to find something that fits my criteria. The ones that bring me deals I take care of. Obviously, they get their commission, but it’s the extra little things I do that I believe makes a difference such as sending them a restaurant gift card to take their spouse or significant other out for a night on the town at my expense or maybe tickets to a local sporting event or bottle of wine. That way, I am always in the front of their mind anytime a good deal comes across their desk.

You’ve probably heard the term ‘Pocket Listing’. Well, I want to be a ‘Pocket Client’. When the broker gets a new listing, I want to be one of the few clients they call first, sometimes before they even release the details to other brokers in their own office. And that’s the key to finding great deals.

If you think about it, everyone out there has access to the same sources for deals, but it’s the people who have nurtured and cultivated their relationship with the broker that reaps the bumper crop! They will even tend to go to bat for you with the seller if you’re looking to do something other than just put down a traditional 20%-25%. They will be in your corner helping you explain to the seller why it would be better financially for them to carry-back some or the entire purchase price then to just sell the property outright and make you bring in new financing.

Even in the commercial world, it’s about relationships. Once you have those relationships established you have a much greater chance at turning an average deal into a great deal. A 10% COC return into a 20% COC return. That relationship just helped you double your cash flow. How much is that worth to you?

 

Anthony Chara is managing member of Apartment Mentors and founder of Success Classes. He has owned or managed several successful multi-million dollar companies during the last 20+ years. Anthony owns properties in Arizona, Colorado, Florida, Georgia, Iowa, Kansas, Nevada, Ohio, Oklahoma, Pennsylvania and Texas.  Anthony is the Keynote Speaker at the Georgia Real Estate Investors Association (GaREIA) General Meeting on March 11, 2019. He also is teaching a 1-Day Workshop on March 30, and a 4-Day Boot Camp June 6-9, 2019. Visit GaREIA.com for more details!

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What is Operating Ratio?

Mar 13, 2019 by

REPORT #3: What is Operating Ratio?

by Anthony Chara

Operating Ratio is a calculation that will tell you how efficiently or inefficiently an Apartment Complex is being operated.

Calculating the Operating Ratio is simple as long as you have all the correct figures to use. The two figures you need to calculate the ‘OR’ are the OE or Operating Expenses (TIMMUR), except your debt service/mortgage payments, and the EGI or Effective Gross Income.

In order to find the OR, you take the Operating Expenses (OE) and divide it by the Effective Gross Income (EGI). Example: OE / EGI = $57,542 / $136,291 = 42.2%. As a rule of thumb, the OR should be between 40%-50%. This will vary depending on several factors such as the age of the building, how recently it was rehabbed and the area of the country where the building is located.

We’ve found that buildings further north tend to have higher OR’s and buildings further south have lower OR’s. The more recently the building has been rehabbed or the newer it is the lower the OR will be too. Of course, that will also depend on how extensive the rehab was. If all someone did was throw on some new paint, replace an appliance and put in new carpet, your expenses will be higher. Now, if they put in all new appliances, new windows, new roof, new mechanicals (AC, boiler/chiller, elevator), new fixtures and/or new kitchens/baths, then your expenses will be lower.

How do you find out what the average OR is for the area in which you want to purchase? One way is to speak with several commercial brokers in that market that specialize in Apartments. We prefer brokers with a CCIM designation. You can find them at www.CCIM.com The second way is to speak with several Property Managers in that market. Another way is to go to the web site www.IREM.org and purchase the information from them. IREM conducts an annual survey of thousands of Apartment owners/managers nationwide and compiles a plethora of information that is extremely useful. The downside is that the report is several hundred dollars to purchase and it may not even include the market that your potential property is located in. You can also find CPM’s (Certified Property Managers) on the IREM web site that can tell you the average Operating Expenses too.

Once you know what the average Operating Ratio is in your market you can use that for comparison purposes. If the average should be between 40%-50% and you find a complex with an OR of 28%, it usually means that the seller is either hiding information or they are just very efficient. In some cases the owner maybe doing their own management and, therefore, they don’t include a management percentage which you will need to do. In other cases they literally are lying to you and trying to hide expenses which you’ll have to uncover during the due diligence phase if you get that far. We’ve seen several complexes that are over 40 years old with no recent rehab work completed where the OR was as low as 26.9% in one case and around 22% in another case.

On the other hand, if you find a complex with an OR above 50% that can mean some big bucks for you. As an example, if you find a property with an OR of 51% and the market average is 44% in that area, and, if you can get the expenses under control, then every dollar you save will literally go straight to your bottom line. However, we wouldn’t recommend buying the complex unless you can figure out why the expenses are out of whack beforehand. If you buy it first with the hope that you’ll be able to figure it out later, you may be in for a rude awakening.

Another reason I look for properties that have Operating Ratios above the market average is something called ‘Forced Appreciation’. In the example above, if I know prior to closing why the expenses are so high and know I can lower those expenses to or close to the market average, then not only does that produce more cash flow for me, but it also increases the value of the property via Forced Appreciation. Let’s say I lower the expenses by $500 per month. Number one, my NOI (Net Operating Income) will increase $6000 per year. ($500 x 12 months = $6000) That also equates to $6000 more in my pocket. Via Forced Appreciation, if my property is in an area that has an average Cap Rate of 10% and my NOI just increased by $6000, then the value of the property just went up $60,000!!! Here’s why; a $6000 increase in NOI divided by the Cap Rate of 10% equals $60,000. ($6000 / .1 or 10% = $60,000)  What if my property is located in an area with a CR of 8%? $6000 divided by 8% equals $75,000. ($6000 / .08 = $75,000). That’s the power of Forced Appreciation at work. Try doing that with a Single Family Home!

Another great thing about Forced Appreciation is that it’s in effect anytime your NOI increases. What if you had a 30 unit property and increased the rent on each unit a whopping $10 per month? That would equate to an annual increase of $3600. A $3600 increase in NOI, divided by the market Cap Rate in your area, let’s say 10%, equals an increase in value of $36,000. What if your market Cap Rate is 8%? That means your equity just increased to $45,000. (30 units x $10 x 12 months = $3600 / .08 = $45,000)

I love apartment buildings!!!

Anthony Chara is managing member of Apartment Mentors and founder of Success Classes. He has owned or managed several successful multi-million dollar companies during the last 20+ years. Anthony owns properties in Arizona, Colorado, Florida, Georgia, Iowa, Kansas, Nevada, Ohio, Oklahoma, Pennsylvania and Texas.  Anthony is the Keynote Speaker at the Georgia Real Estate Investors Association (GaREIA) General Meeting on March 11, 2019. He also is teaching a 1-Day Workshop on March 30, and a 4-Day Boot Camp June 6-9, 2019. Visit GaREIA.com for more details!

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