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Other Income is a Gold Mine

Ancillary Income for Apartment CommunitiesAre you unconcerned by those ‘inconsequential’ miscellaneous income lines?  Well, “there’s gold in them thar hills.” Frequently in our multifamily property evaluations, we see money left on the table. IREM’s Income and Expense Analysis shows a downward trend in Other Income from 2006-2010 perhaps following the recessionary decline in rents during that time. That needn’t be the case. For example, in the category of Low Rise Buildings of 24 units or more, IREM reports for 2010 medians of $.30 per square foot, 2.7% of Gross Potential Income and $266 per unit, down from $.47, 4.2% and $406 in 2006. How about $1.03 per square foot, 9% of GPI and $931 per unit? There may be differences in terminology but we count the following as Other Income: Termination fees Late and NSF Fees Application fees Pet rent and pet fees Parking fees Vending income Telephone, data and cable TV commissions Administrative fees Short term premiums and amenity surcharges (often considered “rent”) When rents are soft, Other Income can generally be collected with regularity. But you need to make sure that they are clearly provided for in your lease documents. There are many more areas that provide opportunities for ancillary income, particularly in data technology. However, you must provide value to the residents.  Jim Carrillo, portfolio director of the Towbes Group who manages 2,200 units concludes that, “Residents may not mind that they are charged for ancillary services as long as they believe they are receiving high-quality service…. If you back it up......
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Can the Security Deposit Convert Into Additional Income?

Note:  This is a conceptual blog that does not account for legal ramifications – please seek legal advice before implementing. Many a shady landlord have tried to unfairly keep security deposits from their residents moving out, which is not only unethical and illegal, but also a guaranteed route to negative ratings and bad word of mouth.  But what if that money could be used for the benefit of the resident, as well as be a profit generator for the community? Ryan Green recently wrote about making the resident move-out experience a positive one, and one of his suggestions was essentially offering cleaning services to residents as a hassle-free option as they move out, allowing them to “pay” for the cleaning using part of their security deposit.  Not only is that a beautifully elegant way to provide value and ensure a clean apartment, but it also uses already spent money.  By allowing residents to use their security deposit, there is no additional cash outlay for that resident.  On the opposite side of the transaction, the community can either have its own housekeeping staff provide the service, or pay a 3rd party at a negotiated lower rate, thus earning the difference between the supplier cost and the amount charged to the resident.  Either way, a portion of that former security deposit gets converted into income. In this way, we stop seeing the deposit as money that is “stuck”, but rather money that can potentially be used on transactions.  And if those transactions can......
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Open The Window of Opportunity with Owner-Financing

By Linda Day Harrison, theBrokerList, Chicago, IL Today more than ever, many people do not have traditional sources of employment income. With the job market shrinking, many of us are working for ourselves and are creating jobs by starting businesses and new ventures. With that being said, how does a self-employed individual purchase a residential or commercial location with the stringent financing requirements currently in place? Simple! Look at properties with owner-financing. What is owner-financing? Owner-financing is when the seller of a property is in a position to act in the capacity of a lender. The seller accepts a down-payment and an agreement for repayment. The advantages are tremendous and can be a win-win for both parties. Advantages include: More favorable rates and terms. Easier qualification process. Able to sell a property in a depressed market. Seller can get a much higher return than other vehicles such as a CD. Seller can receive a substantial down payment. Tenant can now become an owner. Less closing costs. Now like anything, there are many pros and cons depending on each seller and buyer's tax consequences and personal financial situation, including whether or not the property is held free and clear. Owner-financing should definitely be a serious avenue to consider when selling a property and when evaluating your lease vs. purchase decision on residential or commercial property. An attorney is needed to assist in the process and as a buyer, you should still do your homework, via a due diligence period. Whether buying or......
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How to Use Due Diligence to Expose Business Landmines!

By Jo-Anne Oliveri, ireviloution intelligence, Brisbane, Australia Sadly, when carrying out due diligences many agents buying a rent roll are not sure what they are looking for. This lack of understanding means most pay a hasty glance over files and computer reports. On the surface they all look fine, but it’s a bit like an iceberg, we need to understand what looms below. We are all in the industry because we are good sales people. Ultimately, isn't this industry all about our ability to sell? Yes, we promote the best features and benefits of our products and services, but as selling specialists we also need to understand that whilst it looks good on the surface, there may be landmines below. I’m not saying don’t buy rent rolls, just be aware of what it is you are purchasing. So, the first thing is to understand due diligence. There are two kinds of due diligence – financial and operational. When purchasing rent rolls, financial due diligence is undertaken by a valuer. In many instances, the valuer is engaged by the bank to conduct an evaluation of the business prior to lending. If you are not borrowing for the business, I recommend a financial due diligence be conducted nonetheless. Operational due diligence is the second type. This is just as critical as the financial due diligence. Not having an operational due diligence prepared would be like buying shares in a company that is on the verge of bankruptcy and hoping a healthy bottom line......
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Can Your Rental Property Become a Day Care?

By Salvatore Friscia, San Diego Premier Property Management, San Diego, CA In a recent notice received by our legal counsel addressing this very issue, apparently if you own rental property in California the scary answer is yes! The great state of California is widely known as a pro-tenant state when it comes to tenant-landlord related issues. Many cities such as San Francisco and Los Angeles are saddled with pockets of rent controlled areas making investment opportunities less attractive. They also have unfavorable statewide eviction laws that allow deadbeat tenants to continue residing in properties months after defaulting on rental payments. So this should come as no surprise that according to state law if the tenant is licensed by the California State Department of Social Services (DSS) it only takes a thirty day written notice of their intent to legally start and operate a day care center without the permission of the landlord if the total number of children under care, including the children of the tenant, is limited to six. In fact, permission from the landlord is only necessary if the tenant chooses to increase the total number of children under care to eight. The licensed provider does need to have adequate insurance or be bonded. They must simply provide each parent, in writing, a notice that states the landlord’s insurance will not cover any issues should they arise – how reassuring. In fact, the landlord’s only recourse is that they can require the tenant to increase the security deposit to......
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Do Short-Term Rentals Make Sense for Property Managers?

Short-term rentalsA guest post by Ashley Halligan, Analyst, Property Management Software Guide Short-term rentals, of all natures, have become a hot commodity – and a controversial one at that. Short-term rentals can include vacation rentals and temporary housing, often sought by vacationers, business travelers, or people who have recently relocated while seeking long-term living arrangements. Either way, it’s become an ongoing topic of debate and an attractive investment opportunity for property owners and managers. In comparison to traditional rentals, short-term rentals can charge significantly higher rates given their nightly and weekly availabilities. Some property owners have earned as much as 25% of their mortgage in a single night. And during special events or peak rental periods in a given area, potential rental rates can be very attractive to property owners. Because of the income short-term rentals can procure, the opportunity for profit potential may be exponential – but there are several considerations that should be kept in mind. First and foremost, it’s essential to keep the added costs of maintaining a short-term rental in mind. These rentals can be subject to Hotel Occupancy Taxes in certain cities, while other cities require specific licensures and inspections not required of traditional, long-term rentals. Penalties for not abiding by short-term rental laws in your city may result in hefty fines. There can also be increased insurance costs. Additionally, the cost of regular upkeep and maintenance, including utilities, should be calculated. In order to continually attract tenants, your property must be kept in prime condition, both functionally and cosmetically. F......
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How Much Money Is Your Multifamily Complex Losing? - Part 2

Utility Billing Audit SpreadsheetA Simple Way To Conduct A Utility Billing Audit Here's how to conduct a quick and simple audit: Know the rules of the game. Collect relevant billing data. Build a spreadsheet and graph the data. 1.  Know The Rules Of The Game Before starting an audit, familiarize yourself with the state and local rules that govern how you can bill residents for utilities.  These rules can be found at your state's PUC or at a local National Apartment Association (NAA) Affiliate;  a searchable directory is located here:  http://www.naahq.org/about/join/Pages/AffiliateDirectory.aspx. In Colorado, assuming there's a proper lease in place, owners can charge 100% of the master-meter bill back to residents.  In Texas, however, owners must deduct a portion of the master-meter bill for common areas and other non-resident utility costs such as those for parking lot lighting, pools, hallway heating and air conditioning, etc.  Texas also has specific rules on how much of a service fee can be charged. Understand that the onus is on the owner to ensure that resident bills are calculated correctly, regardless of whether you outsource to a third party billing provider or manage the process yourself. 2.  Collect Relevant Billing Data Gather the following: Master-meter billing data for at least the last 12 months Amounts billed to residents for the same period. A comparison of this data will help you gauge how your utility billing program is performing. 3.  Build A Spreadsheet And Graph The Data A spreadsheet makes it easier to graph the billing data so that......
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Choosing the Right Business Entity for Your Property Management Business

The business entity you choose for your property management company will affect you in very real ways—especially when it comes to taxation and financial and legal liability. This is a big decision and one that you may want to make with the assistance of your accountant or attorney. Following are the four business entities most commonly used by property management companies and some basic information about each. Sole Proprietor The title of this business designation pretty much says it all—a sole proprietorship is a business owned by one individual. Unlike more complex options, sole proprietorships do not have to be legally registered with the state you do business in. Rather, a sole proprietorship’s existence is solely based on the fact that you’ve gone into business. In other words, it’s simple and free to set up. Sounds too easy, right? Well, there is a drawback. Because you are one and the same with your business, business gains and losses are filed on your personal tax forms and, most notably, you are liable for the business, both financially and legally. Partnership A partnership is much like a sole proprietorship, but it involves two or more owners. As with a sole proprietorship, no paperwork or registration is required—you are simply in business. Again, partners claim their share of business income on personal tax forms and are held liable for the business’ financial and legal claims. Limited Liability Company (LLC) LLCs are a bit more complex to set up than sole proprietorships or partnerships, with......
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5 Financial Ratios Every Property Manager Should Know

Whether numbers are your forte or not, there are certain ratios and calculations every property manager should understand. Following is a look at five key ratios that apply to your property management business, how to obtain them, and what they tell you. 1) Vacancy Rate Your vacancy rate demonstrates the number of units available or unoccupied versus the total number of units available for rent on a property. The lower your vacancy rates, the better. The formula for this is simple: Vacancy rate = Total number of unoccupied units in a property ÷ Total number of units in a property This total can then be converted into a percentage. While average vacancy rates vary from region to region, according to a January 2011 article on MHN Online, “[President of Axiometrics, Inc. Ron] Johnsey’s forecasts call for the average vacancy rate to drop in 2011 to 5.8 percent—a solid statistic considering apartment properties aim for vacancy rates of 5 percent for optimal rent increases.” Note that your occupancy ratecan be easily determined by subtracting your vacancy rate from 100 percent. For example, with a vacancy rate of 7 percent: 100% – 7% (vacancy rate) = 93% (occupancy rate)   2) Depreciation Depreciation helps you determine how much value your property has lost over time due to age and wear and tear. Depreciation is considered an expense and will come into play as a write-off when completing taxes. Note that depreciation is completed over a 27.5 year period and applies only to the actual building on the proper......
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Who Says T.V. isn't Educational?

One of the great benefits of the reality television craze is that distance education no longer has to cost any more than the price of your monthly cable television subscription. Of course this certainly does not apply to all sectors of reality television, but when it comes to house-flipping and home improvement shows on channels such as A&E, HGTV, and TLC  it certainly is possible to mix entertainment and education. Here are a few of our favorite TV shows that offer up some great business-minded take-away. Designed to Sell, HGTV Designed to Sell is perfect for those real estate investors who have done the hard work of renovations and are ready to flip their home. Or, for that matter, for anyone who is looking to sell their property and wants to command the best price possible. This show is inherently budget-friendly, with the premise of providing sellers with a maximum budget of $2,000 to invest in making their home as appealing as possible to would-be buyers (and, thus, maximizing the sale price). Designed to Sell relies on the expertise of interior designers, stagers,  and home improvement gurus, bringing a team of helping hands straight into your living room. Income Property, HGTV Though Income Property is geared toward first-time buyers who are looking to make some money from their homes by renting out rooms within their homes to cover their mortgage, host Scott McGillivray offers up a ton of tips that property managers can apply. With ten years of experience under his......
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