What is the average annual per unit expense for an apartment building investment? Great reader question answered.

Mike in Milwaukee, WI, that is a great question. Answer: $3,000- 5,000/unit/year. How’s that for an accurate but relatively useless answer? The real question is what is the annual expense per unit of the property you are looking at? If you are a large institutional investor like a REIT looking at national or regional averages like those published in the NAA Annual Survey (See the included charts for results from the 2011 survey) can give you an indication but you can bet the institutional players know their own costs to the penny.

Apartment Building Operating Expenses Per Unit 2011 — Source: NAA 2011 Survey of Operating and Income Expenses in Rental Apartment Communities

In most larger metros there are also companies who collect and publish apartment surveys showing the areas average rents, occupancy, expenses, etc. One thing to make sure of is that the survey is based on properties similar to yours. There are a number of national companies doing multifamily research but they tend to focus on institutional sized properties 100 units and up so their numbers wouldn’t be comparable for a smaller property. For instance the average property in the NAA survey has about 250 units.

The most important number is the actual Continue reading What is the average annual per unit expense for an apartment building investment? Great reader question answered.

The Cult of Stocks is dying, and at 0% rates bonds have nowhere to go but down Says Bill Gross. Time for apartment building investments?

Bill ‘The Bond King’ Gross, founder of PIMCO says that the long run of stocks outperforming the overall economy is done and that the only policy option left for the ‘advanced’ economies in the world is inflating their way out of debt. Since Inflation = Higher Interest Rates and rising rates reduces the value of existing bonds issued at lower (currently near zero) rates, they don’t look to good as a long term investment either. See his letter here PIMCO Investment Outlook

So what’s a saver or investor to do, especially those nearing or at retirement? Chase yields in emerging market bonds? Who would you trust for information about those issues? Have those economies really decoupled from the US and Europe? Where could you find a decent stream of income with inflation protection build in and appreciation potential on top of that?

Apartment building investments. As we’ve laid out previously apartment owners can benefit from even small increases in rents, have demographics and social trends on their side and new supply has been quite limited over the last decade (see here, here and here for the details). Does the prospect of high single digit current income with inflation protection and even appreciation potential warm your retirement spreadsheet?

In this example, raising rents $25 or about 3% increases the value and owner’s equity $190,000 or almost 12% plus the income goes up more than 9%. That is the power of apartment building investment. Notice that in this example that the building is nearly full, if we were to buy a building that had more vacancies we could have paid a lower price based on the lower Net Operating Income and we would have the opportunity to create even more value by improving the management to bring in more renters. That is why we like apartments.

When I talk about investing in apartments I am not talking about being in the landlord business, I am talking about being in the property owning business and one of the expenses we gladly pay is for professional property management. We’re not in the tenants, toilets and trash business; we hire the pros to handle that and our job is to manage the managers…. And reap the rewards. Find out how we invest in apartments and how you can too by contacting me at giovanni@ashworthpartners.com.

Top 10 best and worst places to rent an apartment/ Top 10 worst and best places to own #multifamily?

Forbes put out a piece with a slide show of the best and worst places to rent an apartment; my question is wouldn’t you want to own an apartment building investment in one of the top 10 cities? How about in any of the other cities listed?

Are the top 10 worst cities to rent in the best cities to own an apartment building investment?

One of the factors they used was the cost of renting vs. owning but the ownership cost is lowballed because it only includes the house payment (mortgage, taxes, insurance), ignoring the true cost which also includes maintenance, repairs and reserves for capital improvements… not to mention coming up with 20% down payment and qualifying for a loan. Even still renting comes out looking pretty good in those places.

Then in a WSJ piece in their Smart Money section there’s this: “On the national level, it is cheaper to buy than rent, according to a March 2012 report by Deutsche Bank – even after taking into account the down payment and property taxes. But in some areas, including California and the Northeast, renting remains more affordable than buying. The report identified 13 cities where renting costs less than the after-tax mortgage payment (that’s the mortgage expenses the owner incurs, along with the mortgage interest deduction they get come tax season).”

Once again ignoring the true cost of owning which includes keeping the place up, yardwork, painting plus fixing things that break like appliances, furnaces, hot water tanks, and setting aside something for things that wear out like the roof and the driveway. They list five markets where even lowballing the cost of owning it is still cheaper to rent:

Northern NJ
Long Island, NY
California
Honolulu
Seattle

Cheaper to rent than own in Seattle, good for apartment building investments

In my hometown of Seattle they picked some interesting neighborhoods for examples but found on average that even without factoring in repairs, maintenance and capital improvements renting averaged $377 per month less than owning.

Net, net renting is a better deal in many places even if you could afford the downpayment and qualify for a loan.

The 3 Most Important Things You Need To Get an Apartment Building Investment Loan

ALB Commercial Capital has a nice guide for small balance (<$5 million) apartment building investment loans. In it they cover the three most important ratios investors have to clear in order to get a deal funded:

Loan-To-Value Ratio (LTV) = Total loan balances (1st mtg + 2nd mtg) / Fair market value (as determined by appraisal). For Multifamily mortgages, LTVs seldom exceed 80%.
Debt Service Coverage Ratio (DSCR, aka DCR, DSR) = Net Operating Income / Debt Service. Most lenders insist that this ratio exceed 1.2 with a few a allowing 1.15.
Personal Debt Coverage Ratio (PDCR) = Monthly Personal Debt / Monthly Personal Income. The Personal Debt Ratio compares the amount of bills that the borrower must pay each month to the amount of income they earn. Personal Debt Ratios seldom are allowed to exceed 50% in practice.

In addition the guide covers other items that need to be addressed such as Continue reading The 3 Most Important Things You Need To Get an Apartment Building Investment Loan

Local banks, S&Ls and Credit Unions lining up for small apartment building investment loans.

Local and regional banks are working hard to fund ‘small’ apartment building investments in their local markets. Small loans in the $1-3 million dollar range are the ‘sweet spot’ for these lenders and investors looking for loans in the $3-5 million range are finding even more choices. For loans under $1 million the market is still pretty fragmented with lenders there averaging only five loans of that size.

“Banks are trying to create more aggressive lending programs in the small-balance multifamily financing space.”

In the West, banks like Sterling, KeyBank and Bank of The West are Continue reading Local banks, S&Ls and Credit Unions lining up for small apartment building investment loans.

Happy Flash Crash 2nd Anniversary. Lack of trust in stock markets is scaring away investors…

… small and Large. Sunday was the 2nd anniversary of the May 6th Flash Crash of 2010. High Frequency Trading (HFT) insiders have hacked the stock markets so they get a sneak peak at your, and everyone’s trades before they’re executed. Think of it like one player at the poker table can secretly see your cards, and everyone else’s before they bet- Want to play in that casino?

When the HFT trading robots all lock onto the same pattern they can take a major market like the Dow Jones Industrial Average down 700 points in 10 minutes and thus we all remember the Flash Crash. Now it so happened that that time the market recovered about 70% of the loss shortly after but the damage to confidence was done.

Once bitten, twice shy. Or as Joe Saluzzi and Sal Arnuk at Themis Trading (a specialty company that trades equities for large institutions and hedge funds- stock traders not OWS supporters) put it: ” traditional retail and institutional buyers and sellers of stock have been steadily waking up to the dangers of drinking at the increasingly dangerous ”stock market watering hole”. Like the animals on the Serengeti, who for years were accustomed to sipping long and heartily at their favorite spot, retail and institutional investors now see what’s beneath the surface. And they are deciding that the drink they crave is just not worth the risk.

It isn’t hard to blame them. They have witnessed a radical transformation of the best capital allocation market system in the world, into one where:

– 13 stock exchanges cater to hyper traders who game the system, chasing exchange rebates, and leveraging speed for the purpose of a nanosecond scalping dance.
– More than 40 dark pools together trade more than 1/3rd of all shares.
– Conflicts of interest abound as exchanges own stakes in Continue reading Happy Flash Crash 2nd Anniversary. Lack of trust in stock markets is scaring away investors…

M&M Apartment Building Investment call: Opportunities exist in secondary mkts & value add, tertiary still lagging

Marcus & Millichap Q1 call on the apartment building investment climate this morning:

Year over year manufacturing jobs grew 238k. Manufacturing = 20% of GDP but gets no press, where as single family housing < 2% gets all the coverage.
There is a historic % of 18-34 Y/Os still living ‘with the parents’ but they are also getting a larger proportion of the new jobs. (See chart) Good for apartment building investors as these people typically become renters when they do move out.

A props in primary (coastal) markets seeing compressed cap rates; most on the call (including me) thought they were a little frothy.
Nadji feels that if operations and NOI growth keep up, cap rates will remain Continue reading M&M Apartment Building Investment call: Opportunities exist in secondary mkts & value add, tertiary still lagging

Now you can watch the Apartment Building Investing Cycle Unfold In Real Time- Much easier than deciphering technical stock charts!

Successful apartment building investing is about knowing where and when to buy and when to sell. The apartment building investment cycle sends very clear signals to those paying attention and one of the biggest and clearest is when existing properties begin to sell for more than the cost of building new apartments. As I mentioned here this line was crossed about a year ago in the Seattle market and now we can see how the peak is formed, when every developer and their brother starts building new apartments.

From Bloomberg:

The biggest surge of Seattle-area apartment construction in a quarter century is threatening to undercut the growth in rents. Seattle went from “dead last” in rent increases three years ago to 13th out of 88 markets last year. “We went from almost a desert to a big pipeline” in two years, said David Young, the Seattle-based managing director who oversees western U.S. apartments for commercial broker Jones Lang LaSalle Inc.

Apartment building investment in Seattle

Encouraged by hiring at local employers such as Amazon.com, Boeing and Nordstrom, developers are building almost 10,000 apartments in Washington state’s King and Snohomish counties, Three- quarters of the total are in Seattle, with 4,619 of those units in or near downtown.

Dupre + Scott Apartment Advisors Inc. said the building boom may last through 2016.

“If in fact we come to market when there’s excess supply, we’ll just have to be aggressive on rents,” said Continue reading Now you can watch the Apartment Building Investing Cycle Unfold In Real Time- Much easier than deciphering technical stock charts!

National Apartment Building Vacancy Plummets, Defies Fourth-Quarter Seasonal Slowdown says report.

Marcus & Millichap’s latest report on Apartment Building Investment called “The Outlook” is just out today. In it they cover the usual national multifamily trends; rents up, vacancy down, economy slowly recovering, jobs growing but could be better. Then they take it a little deeper with these points (bel0w) then flesh it all out with charts demonstrating that things are really picking up for apartment building investors.

Here’s the exec sum:

Expanding Production Capacity Signals Stronger Job Creation.
Sustained employment growth underscores traction in the economy.
Apartment demand surges, completions sink to new lows, and a sweeping recovery matures into an expansion cycle.
Vacancy rates tighten across markets and asset classes, moving the sector into expansion.
Foreclosed homes and government-sponsored REO-to-Rental program offer rental alternatives to apartments.
Cap rate arbitrage and stabilizing operations create a compelling investment thesis for opportunistic and value-add strategies.
Stronger job growth and household formation will provide a steady source of new entrants to the multifamily rental market. Continue reading National Apartment Building Vacancy Plummets, Defies Fourth-Quarter Seasonal Slowdown says report.

Can you avoid these apartment building investment due diligence nightmares?

Apartment Building Investing Requires Diligent Due Diligence

Nowhere is getting your ducks in a row more important than in apartment building investing. See this quick MFE Mag article for tips from seasoned pros: Diligence Gut Check

The article covers topics like these:

How’s the Weather Out There?

The Case of Misplaced Ownership

Over the Income Threshold

Just an Accounting Mishap