Physical Copy:
By: Pierre Mouchette
Rating: C+
This book was essentially a bullet point list of the acquisition and management process. There wasn’t a ton of substance. Good definitions of key terms and concepts. But the goal in reading industry specific books is looking for any nugget to improve your business. There were a few in here.
Below are the nuggets I liked. Good rules of thumb, checklists, and definitions.
Employment Trends: The US Bureau of the Census has a valuable report called the Local Employment Dynamics (LED). This report is made up of:
- Characteristics and geographic distribution of workers and employers in an area of town, county, or region of a state
- Where workers live for employers located in an area
- The commute shed (workplace destinations) for workers living in a particular area
- How different employment areas compare in terms of industries represented, wages paid, worker demographics and recent employment growth patterns
- The number of jobs within one, three, or five miles of a particular location along with the industries found in these areas, the ages of employees, wages paid, and whether employment levels are increasing
- The number of workers that live along a transit corridor and work downtown , as well as an indication of worker ages and wage levels
Key Terms:
Net Operating Income (NOI) = Total Revenue – Total Operating Expenses
Property Value = NOI / Capitalization Rate
Value-Added Strategy (Improve the value of a commercial multifamily property):
- Increase rents
- Convert excess storage into rentable living space
- Install timers on common area lighting; motion detectors in laundry rooms and storage areas
- Install water saving devices in kitchen sink faucets, water closets, lavatories, and showerheads
- Replace current appliances with energy efficient ones as required
- Convert central heating systems to a Geothermal Heating System, or Geothermal Heating and Air Conditioning System
- Install a hydronic lawn irrigation system
- Convert domestic hot water to on-demand (tankless) hot water system
- Protest assessed tax valuation to have it lowered
Ancillary Revenue Strategy:
- Convert a master-metered property to a sub-metered property
- Add vending services including laundry, pay phones, soft drinks, and candy
- Add dry cleaning services
- Offer exclusive rights to cable TV companies with revenue sharing
- Provide access to building rooftops for cellular companies
Software Program Features (minimum requirements):
| Property / Unit Management | Bank Deposits | Work Orders |
| Client / Tenant Management | Bank Reconciliation | Job Costs |
| Management Fees | Late Fee Processing | Purchase Orders |
| General Ledger | Past Due Letters | Custom Reports |
| Accounts Receivable | Calendar/Reminders | Reminders |
| Accounts Payable | ACH and Direct Payment | Special Assignments |
| Budgeting | Track Credit Card Transactions and Balances | Complete transaction history for each resident |
| Inventory | Email Capabilities | Built-in Word processor |
| Vendors | Attach pictures, files, documents, and notes | User Defined Fields |
| Security Management | Download Lockbox transactions |
Offers:
Note: Always make your initial offer 5-10 % less than the asking price.
Reserves and Replacement:
If the Lender does not give you an amount to be held for Reserves and Replacements, use the following as a guide:
| Number of Units | Reserve / Unit | Minimum Amount |
| < 100 | $250.00 | $25,000.00 |
| 101 – 250 | $200.00 | $50,000.00 |
| > 250 | $180.00 | $100,000.00 |
Lenders Interview:
The metrics below are the Gold Standard for lenders when they are interviewing a Borrower.
- Management: 3 years of direct management experience in Apartment Buildings.
- Repayment Ability: DSC of 1.5:1 or better for 2 years plus interim, with positive or stable trends.
- Collateral: 75% LTV
- Credit: Clean credit, no present or past derogatory items, and “Beacon Score” of 760 or more.
- Net Worth: D/W of 2:1 or less.
- Equity Injection: At least 30% injection with proforma D/W of 2:1 or less.
Bad Advice:
“As a prudent investor, we recommend that you invest in properties fewer than 125 units. Purchasing larger complexes (over 150 units) will put you in direct competition with institutional buyers and their deep pockets.”
Wrong. Wrong. Wrong.
Property Depreciation:
Definition: a reduction in the value of an asset with the passage of time, due in particular to wear and tear. Applied to larger capital items like HVAC systems. When you replace a system you do not get to expense it in the year you purchase it but rather you depreciate it over its useful life.
Cost Basis: The Cost Basis or the amount paid for the property.
Amount Paid + Settlement Cost + Closing Costs = Cost Basis
Improvement Value and Depreciation:
You can calculate your depreciation basis as follows:
Depreciation = Improvement Value / 27.5
Recaptured Depreciation and Capital Gains Taxes:
Original Investment + Capitalized Improvements – Depreciation = Adjusted Basis + Purchase Expenses
When properties are sold for more than the adjusted basis, a capital gain occurs. The depreciation taken over the years assumed the property was being “used up” in the course of business.The increased value at the time of sale (capital gain) triggers the need to recover depreciation because the value of the property did not decrease. The 25% depreciation recapture tax is applied to the total depreciation allowed on the property or the total gain from the sale if it is less than the depreciation taken.
Conservation Upgrades:
Solar-powered, roof-mounted exhaust fan: The unit is completely powered by the sun and will help remove excess heat and moisture from your attic to protect your roofing system from premature deterioration. The solar-powered unit requires no wiring, uses no electricity, and works well with existing intake vents to help lower the temperature in the attic.
Solar-powered daylighting systems: These are an energy-efficient way to provide natural light during the daytime to common-use areas. Systems are engineered to work with all roof types and to go around rafters and joists so they require no structural changes. The circular design allows rain and debris to bypass the rooftop dome, making them virtually maintenance-free.
Retrofit existing lighting fixtures with energy-efficient LED fixtures. (Outdoor: standard floods, area floods, wall packs, and canopy fixtures. Indoor: flat panel, troffer, motion-sensor, and LED bulbs). LED lights are extremely energy efficient and consume up to 90% less power than incandescent bulbs. Also, due to the long life of the LEDs (ten times longer than fluorescent and 133 times longer than incandescent bulbs), there is substantial saving in maintenance and replacement costs.
Next Actions:
Go to my “Lists” page and make your way through my recommended books.
Review your business plan and see if you are missing any of the items above.
I am looking into the roof exhaust fans, tankless water heaters, geothermal HVAC systems, and hydronic irrigation.