Mike’s Apartment Blog

We have nearly completed the top half of the units in Cirese Court.  There was a delay as we ran into plumbing issues we hadn’t anticipated.  This put us about 1 month behind schedule, however we are well on our way to leasing the building up.

Expectation is to fill the rent-ready units by beginning of the next month.  Construction costs appear to have increased due to these mechanical issues, but we are still far under fair market value for what we have into it.  This little building should turn out to be a very good move.

Check out the management team, www.reboundllc.com.

It’s no secret the housing market has been hammered.  Prices are down and inventory are up – the worst its been in decades.  Add to it the lending standard and apprehension banks have in giving anyone a loan, sales have come to a grinding halt.  Foreclosures and bank owned properties dot neighborhoods all over the USA, and few areas have been unaffected.

But what about commercial real estate.  Apartment buildings in particular?  Depends on the area, but most areas are starting to feel the pinch.  Check out this articlefrom Bloomberg.

Basically, the worst is yet to come – at least for banks.  A rash of unprepared buyers, lofty proformas, and lax underwriting led to many building being over leveraged.  These over-leveraged buildings now present a huge issue for banks, for as the asset value comes down, owners walk away.  Defaults to the tune of 5.5% of all mortgages are anticipated in 2010.

So what does this mean for investors? 

Well, if you own buildings you are probably already feeling the pressure.  Increased vacancy and decreased collections are apparent due to job loss, while increased energy costs can pinch cash flow.  Many loans are expecting to go variable or hit their balloon payment terms within the next couple years and those owners will be unable to sell their property or refinance their loans.  Banks will be staring at an inordinate amount of REOs.  They will have to change their standards just like they are doing with home loans.

If you are a buyer, this in an incredible opportunity.  There will be many properties stuck at the banks looking for owners.  Whether it is discounted price, killer terms, or extra leverage opportunities, it will be time to capitalize.

I am in the unique situation that I will be in both camps.  I intend on negotiating with any of our current buildings to take advantage of any leniency the banks offer while attempting to pick up additional assets in the downturn.  No doubt, it will be a interesting time to be an apartment investor!

Capital improvements.

In the value add investment strategy, capital improvements often drive value into the building.  Therefore, it behooves you to make them ASAP. 

Let me explain.  Imagine you bought a 19-unit building with a laundry in one of the units.  Through your due diligence, you have determined residents would like to have their own laundry machine and would be willing to pay $25/month extra to have washer/dryer hookups in their unit.  You decide to add the W/D hookups and turn the laundry room into a serviceable unit.  Doing it sooner rather than later benefits you for two reasons:

1. You get to start collecting the increased money sooner.
2. You start building a pattern of increased income – you need a two year documented increase to take full advantage of the capital increase for sale/refinance purposes.

Remember, in a value play you want to reduce the timeline for purchase and resale/refi.  Making your changes earlier rather than later will aid you in speeding up the turnover process.  Time = Money!

It’s a question a lot of folks ask themselves in all sorts of situations.  In business, this question becomes key.

Sure, we all want to be valuable.  But, how valuable?  Not enough value and you wont be successful.  Too much value and you can’t leave without hurting the business.

In any entrepreneurial endeavour, you want to provide value enough to make the business successful without it becoming dependant on you.  Add to this the ability to delegate and create a self-sustaining operation without training your future competition. 

It’s a tough balance, but understanding what value you bring to the table and how it is brought is a key element to entrepreneurial success.