Questions to Ask When Evaluating an Apartment Building Deal

Let's discuss how to quickly evaluate an apartment building deal. With so many deals available, it's crucial to determine which ones are worth your time. Here are five essential questions you should always ask:

1. What is the net operating income (NOI)?
2. What is the asking price?
3. What is the upside potential?
4. What is the deferred maintenance?
5. Why is the seller looking to sell?

Let's delve into a bit more detail about these questions:

First, it's important to find out the NOI. This is crucial information because it helps determine what type of income the property generates and what expenses are being incurred. You will need to verify their income and expenses later, but for now, use the figures they provide.

Next, take the NOI and divide it by the asking price to determine the cap rate (the financial return of the property if you paid all cash).

For example, if the NOI is $35,935 and the asking price is $650,000, then the cap rate is 5.5%. This is a good rate for a property located in a desirable area.

If you don't know the asking price or are attempting to determine what you should offer, then you will need to find the market cap rate for similar properties in that area. One option is to ask brokers or property management companies.

For example, if the NOI is $550,000 and the market cap rate is 9%, then a fair price would be $6,111,111.

Here are some rule-of-thumb assumptions that can help you run some numbers if you don't have all the information:

• Assume between $3,000-$3,500 expense per unit per year if no expenses are given.
• Assume a 25% down payment, 5.5% interest rate, amortized over 25 years with a 10-year balloon payment if you have no idea about debt service.

NOTE: these assumptions are not always accurate, and should be used initially to run some numbers and determine if the deal meets your buying guidelines. To truly analyze the deal, you will need to obtain concrete information from the seller.

Now that you know the basic financials of the property, it's time to dig deeper. Here are the top three questions that you must always ask about the property:

• What is the upside potential?
• What is the deferred maintenance?
• What is the seller's motivation?

Here's what we didn't cover in this post: Market fundamentals. Investing in the right market is the most important variable for success. Buying in a bad market can result in failure. This is a longer conversation for another day, but it's important to know that the above post assumes that your market is performing well.

Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.

5 Signs That You Should Walk Away From a Property Deal

Real estate investing can be a lucrative business, but it's not without its challenges. One of the biggest challenges is knowing when to walk away from a property deal. It's important to recognize the signs that a deal may not be worth pursuing before investing your time and money. Here are five signs that you should walk away from a property deal.

1. The Property Has Serious Issues

If the property you're considering has serious issues like structural damage, mold, or a faulty foundation, it's best to walk away. These issues can be costly to repair and may make the property difficult to sell in the future. Unless you're prepared to take on a major renovation project, it's best to look for a property that's in better condition.

2. The Numbers Don't Add Up

Before investing in a property, it's important to crunch the numbers and make sure the deal makes financial sense. If the numbers don't add up, it's best to walk away. This could mean that the property is overpriced, the repairs are more expensive than anticipated, or the rental income won't cover the expenses. It's important to be realistic about the potential profit and make sure the deal is worth your investment.

3. The Seller Isn't Cooperative

If the seller isn't willing to provide the information you need, won't allow you to inspect the property, or is unresponsive, it's best to walk away. A lack of cooperation from the seller can be a red flag and may indicate that they're hiding something or aren't serious about selling the property. It's important to work with a seller who is transparent and willing to work with you.

4. The Property Is In a Bad Location

Location is key when it comes to real estate investing. If the property is in a bad location, it may be difficult to find tenants or sell the property in the future. Factors like high crime rates, poor school districts, and a lack of amenities can all make a property less desirable. It's important to consider the location carefully before investing in a property.

5. You Have a Bad Feeling About the Deal

Sometimes, your intuition can be a powerful tool in real estate investing. If you have a bad feeling about a deal, it's best to trust your instincts and walk away. This could be a sign that the deal is too good to be true, the seller isn't trustworthy, or there are hidden issues with the property. It's always better to err on the side of caution and avoid a deal that doesn't feel right.

Conclusion

Walking away from a property deal can be difficult, especially if you've invested time and money into the process. However, it's important to recognize the signs that a deal may not be worth pursuing and to trust your instincts. By avoiding bad deals, you can save yourself time, money, and headaches in the long run.

Isn't Real Estate Investing Risky

I recently went out to eat with an old friend and was asked about my job. I shared that I work as a real estate investor, where I raise capital from investors to buy apartments. My friend asked if it was risky, and I agreed that it can be a lot of responsibility and carry some risk. However, upon reflection, I realized that I had not fully answered the question.

When it comes to risk, it's natural to focus on the potential negatives. But it's important to also consider the potential benefits and opportunities that may arise. In fact, taking risks can lead to great rewards and positive outcomes.

In my daily decision-making process, I weigh the pros and cons of each option and assess the potential outcomes. For instance, when deciding whether to indulge in a Snickers bar, I consider the fact that it's unhealthy but also that it tastes good and is free.

Similarly, when considering whether to pursue a business venture that involves raising funding from investors to purchase apartments, I evaluate the potential risks and rewards. While there is always a chance of failure, there are also great opportunities to provide investors with a conservative opportunity to earn more money, establish strong relationships with investors and team members, educate others about the real estate investment process, and have more time with my family. To mitigate risks, I ensure that I am surrounded by an experienced team and continue my education in the field.

When asked about the risks involved in my job, I emphasize that there is always a degree of risk, but there is also the potential for significant rewards.

10 Questions to Ask Before Purchasing An Apartment

When assessing an apartment complex, it's crucial to have access to details regarding income, expenses, and debt service. Furthermore, during a tour of the apartment, you should inquire about the following 10 items:

Why is the seller selling?

So, why are people selling their homes? Well, it really depends on the seller. Someone who's doing a 1031 exchange might have a different level of motivation than someone who's just "entertaining offers." And estate sales are different from those of someone who's retiring and moving to Florida. Make sure to ask this question a few times (at least three) because the answer could always change.

How long has it been on the market?

This can give insight into the motivation factor and potentially reveal any issues.

Will the owner do seller financing?

Seller financing can be a valuable option for both parties when negotiating a deal. It allows the seller to finance part or all of the purchase price, enabling the buyer to make payments over time. This option is beneficial for buyers who may not qualify for traditional financing or may have difficulty securing a loan. It can also help sellers sell their property more quickly and potentially receive a higher return on investment.

When considering seller financing, make sure the terms are clear and mutually beneficial. Agree on the interest rate, payment schedule, and other relevant details.

Overall, "seller financing" is a useful tool that can lead to better terms and outcomes for both parties.

What is the screening process for new residents?

Do they take people out of homeless shelters or purchase with parking situations and give them an apartment? Make sure you know what you're getting into beforehand. Do they have rental history, house rules, co-ops, Cincinnati meetup groups, mortgage payment, down payment, income requirements, work history, credit score, criminal background, and sublet policy? Check qualifications.

What is occupancy?

Knowing the number of residents in an apartment building isn't enough. You need to know the effective occupancy, which tells you how many residents are paying.

What is the market rent for an apartment?

What is the rental rate for similar apartments in the area?

What is market occupancy?

The property management company or real estate broker can provide this information.

What type of work is needed on the property?

Take this information with a grain of salt. There will likely be more issues that you discover during due diligence.

When was the last time the AC units were cleaned?

This question is best asked in person. If they don't have an answer, it may indicate that regular maintenance isn't a priority, which means more money may need to be allocated for deferred maintenance.

When did they buy the property and what did they pay?

Ask your broker or co-op reserve fund. This information can tell you what the vendor is thinking in terms of what they will get out of a great deal.