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Finding the Right Multi-Family Property Investment

In many ways, the current economic climate makes for a great time to purchase a multi-family investment property. The prominence of short sales and foreclosures has given way to good purchase prices in many areas of the country. Add to this the fact that there are some incredible interest rates out there right now (even for investors) and the fact that many former homeowners have now found themselves back in the rental market, and there’s a very valid argument that this is a good time to get into the multi-family market. If you are considering making a multi-family property investment of your own, following are a few things to consider before taking the leap. Know what you’re looking for Before you even begin to look at properties, have a clear idea of what you’re looking for and what you’re willing to put into a property, both financially and in terms of your time. Of course, this is always subject to change if you find just the right place, but that doesn’t mean that you shouldn’t go into the house-hunting process without a fairly narrow baseline in mind. Aside from basics like location and size, you also want to have know whether you’re looking for a “fixer-upper” or a “as-is” property. Look at the whole package Looking for a multi-family investment property is different from looking for a single-family home and requires a bit more of a discerning eye. Remember that you will be renting multiple units out to different tenants. To......
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10 Property Management Pitfalls

A few weeks ago, we talked about 10 Signs of Property Management Success. This week, we’re going to take a look at the flip side of that coin, reviewing some indicators that it may be time to make some changes (after all, the time for New Years’ resolutions is just around the corner!). Following are a few red flags to keep an eye out for in your property management business. 1. Lack of referrals – This applies to both tenants and property owners. In an ideal scenario, you should be creating a web of referrals that expands year after year. If you’re not, it may mean that: 1) existing tenants and clients aren’t confident enough in your work to refer you or 2) business-building incentive programs are not in place. 2. Haphazard organizational systems – If your office doesn’t have an organizational system in place for things like accounting, rent payment tracking, and maintenance requests, your efficiency and accuracy may be taking a hit. An investment in property management software will pay off big in the long-run. 3. Sporadic maintenance schedule – Staying on top of regular maintenance (like winterizing) and repairs will keep your property value up and your tenants happy. Creating and sticking to an annual maintenance check-list is the most sure-fire way to stay on track. 4. High turn-over – This applies not only to your tenants, but also to your property management staff. While people move on for any number of reasons (both personal and professional) ,......
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3 Questions to Ask Yourself Before Renovating

Determining when the time has come to do renovations on your rental property is a process that requires good judgment and a careful analysis of your goals. Depending upon your situation, renovation time may occur before you ever even move tenants into your property or, alternatively, it may be one of the final things you do before selling your investment property. Following are a few key questions to consider when contemplating a renovation. Would I want to live here myself?While you don’t have to outfit every rental you manage like a luxury penthouse complete with every amenity imaginable, it is important to make your rental units as comfortable and livable as possible for tenants. Upon purchasing a rental property (and every few years thereafter), look around your rental unit and ask yourself: Is this somewhere I would want to live? If the answer is no, it’s time to start taking a serious look around at what features could stand changes or improvements. The better condition your rental units are in, the more quality tenants you will attract. And the better quality tenants you attract, the better care they will take of your units. Good tenants are a key element to consistently maintaining the value of your rental property. How do I stack up with the competition?If you are looking to sell your investment property at any point in the near future, you should make yourself familiar with comparable properties in your area. In real estate, sale prices are determined in large......
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Green Up Your Property Management Company

Gone are the days when going green was a cutting-edge, leftist notion. With environmental issues at the forefront of the media, going green is now firmly in the mainstream, quickly becoming the norm rather than the exception. Even with all of these new, more eco-friendly options on the market, the truth of the matter is that completely greening your properties and your business in one fell swoop can be an expensive endeavor up-front (though most green measures will likely save you money in the long-run). Our suggestion? Take small measures over time that won’t break the bank in the short-run, will save you money in the long run, and will make you feel great about doing your part in the process. AppliancesInstalling energy-efficient appliances in your properties (dishwashers, refrigerators, washing machines, etc.) is a great way of incorporating greener, more energy-efficient elements into your properties. Not only will your property be more energy efficient by using less water and producing fewer greenhouse gas emissions, but you can also cut down significantly on utility bills by using water and energy more efficiently. Speaking of saving money, you can save some cash up front with energy efficient appliances as well. Rebates are often available for ENERGY STAR certified products, of which there are many. Not only do energy efficient appliances offer you the chance to be greener and save on utilities, but they’re also something that (sooner or later) you need to purchase anyway. You don’t have to break the bank by going out and......
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How to Decide on a Remodeling Project

Sooner or later every owner of an apartment complex is faced with a remodeling dilemma. Should I upgrade the flooring to wood laminate?  Should I replace a broken appliance with stainless steel? Should I add a ceiling fan in every bedroom?  With each decision, an owner must weigh the cost of the remodeling against the amount of time it takes to recoup the expenses. While most owners realize apartments are classified as income-producing assets, many fail to realize the connection between remodeling and the value of the property. Understanding how apartments are valued is the key to making a wise decision.  While a rental house is based on the historical sales of similar homes, the value of an apartment complex is entirely dependent on its income it produces. For example, an apartment complex that produces $25,000 a year in net income is worth far less than a complex producing $250,000. The amount of money an investor pays to get that income depends on what other investments exist and the money those competing investments could generate. For example, every bank offers certificates of deposit, of CD’s.  Today, CD’s pay a paltry amount of about 2% on a multiyear CD, but in boom years, it’s not uncommon to find CD’s paying 5% or 6% or more.  So a $500,000 pile of cash invested in a CD paying 5% a year would generate $25,000 of income a year.  An investor with $500,000 cash who is trying to decide between investing in an apartment complex that makes $25,000 a year or a CD with a 5% interest rate would be a fool to pay $500,000 for the apartment complex, if the bank down the street offers a CD, fully insured by the FDIC, that provides exactly the same amount of income with virtually no risk. On the other hand, if the investor can negotiate the price down and only pay $250,000 for the complex, the investor would now make a 10% return on the investment.  That is, a $250,000 investment that generates $25,000 a year in income is equivalent to a $250,000 CD paying 10% a year. Good luck finding a bank offering a CD with that kind of interest rate. The rate of return that an apartment investment would pay if bought with all cash is known in the industry as the Capitalization Rate, or Cap Rate.

“Okay, so what does this have to do with determining whether to do a remodeling project?” you ask.  Well, let’s suppose an investor determines that adding wood laminate flooring to an apartment would enable the property manager to charge an extra $100 a month in rent, but it will cost $5,000 per apartment, and you got ten apartments.  Many investors would simply take the cost of the remodeling divided by the extra rental income to see how long it would take to “get back” their money. In this example, an investor would have to wait 50 months, or 4.17 years.  At that point, many investors would stop thinking about the problem and decide against installing the wood laminate.  However, investors should also look at the increase in value of the property. If this 10 unit property is generating $25,000 a year, and an investor spends $50,000 to install flooring that allows the rent to increase by $100 per unit per month, or $12,000 per year, then the investment now makes $37,000 a year.  If buyers in this area of town are trying to make a 10% cash return on their investment, then ask yourself what is the highest sales price you could put on this building that would still enable an investor to make a 10% cash return?  Or put another way, if you somehow had a CD with a 10% interest rate that was generating $37,000 a year in income, what is the value of the CD? The answer to both questions is $370,000. So in this example, an investor can take their original $250,000 apartment investment, spend $50,000 remodeling the floors, and wind up with an investment worth $370,000.  This is a profit of $70,000.  At this point, deciding to invest in the flooring is the obvious choice. Of course, an investor will only see this $70,000 gain when the property is sold, or, more shrewdly, refinanced. The gain that is possible depends on the rate of return that apartment investors are trying to earn. In this example, we used a cap rate of 10%. The cap rate has a multiplicative effect on the value of the apartment property. So any remodeling that allows higher rents increases the value of the property in a multiplied fashion. Conversely, remodeling efforts that result in little or no change in rents, has no effect on the value of the property. And what happens if an investor refuses to do basic maintenance?  When the neglected maintenance results in lower rents, the value of the property drops precipitously.  For example, supposes an investor tries to increase their cash flow by choosing never to replace the carpet or clean up the apartment between tenants? Aka, a slum lord in the making. Over time, the rents the property manager can charge will go down, as the manager must effectively put the apartments “on sale” to find someone willing to move in.  Investors only focusing on cash flow might figure a $50 drop in the monthly rent might be better than paying $2,500 to replace the carpet, but at a 10% cap rate and 10 apartments, that $50 drop in rent results in a $60,000 drop in the value of the property. Neglecting maintenance can be extremely expensive, but many apartment investors never realize this, because when the property is eventually sold, they only see its current sales price, rather than the price it could have sold for had the slum lord investor performed basic maintenance all along.

So when you contemplate a remodeling project, ask what the effect will be on the rents and consider its effect on the property’s value.  Renovations that allow you to increase or maintain rents are often worth a surprising amount of money, while renovations that have little or no effect on rents are probably a poor choice. At Red Door Management, we can help you determine if a remodeling project is worth the expense and the effect a renovation project could have on your rents and property value.

Mark C. Brown
Managing Broker, RDM Realty

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Which Home Appliances Use the Most Energy

Homeowners and business establishments are implementing energy saving initiatives on their own accord. These moves are wise on their part as energy saving activities are a must to conserve valuable resources and should have continuous implementation until the time technology is available that can produce renewable, environmental-friendly and really cheap electricity. Although many have already started energy saving measures such as turning off the computer when not in use or using compact fluorescent lights instead of light bulbs to illuminate their rooms, many are not aware of how much their appliances are actually consuming electricity. While many are probably aware of what the Energy Star label means in their relatively newly purchased appliances, majority of homeowners may not be knowledgeable as to what appliance guzzles the most energy. Knowing this information can help in planning your energy savings program so you can focus your actions in how to control or efficiently use appliances with the biggest energy consumption – resulting in more manageable electrical bills as well as reduced environmental impact. How Much Electricity does Standard Home Appliances Use? The 2007 Buildings Energy Data Book have listed space heating as the highest energy user in a home at 31% followed by space cooling at 12%. The remaining electrical energy usage is consumed by standard home appliances for various household applications. Although each individual appliance may not consume as much as heating or cooling, summing up all the electricity usage by these appliances can be significantly big. These appliances are ranked ......
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Are you up to speed on the new U.S. EPA Renovate, Repair, and Painting Rule

As of today, April 22, 2010, all contractors that work on pre-1978 homes and may disturb paint through their work MUST become a Certified Renovator and the firm they work for must become a Certified Firm through the EPA.

This rule affects painters, carpenters, plumbers, handymen, restoration companies, property management firms that do their own repairs.

The EPA is fining $32,500 per day per violation and they are serious about enforcement.  If a building takes out a permit for work you can bet your are on a list for enforcement personnel to stop by to make sure the RRP Standards are being followed.

[video:http://www.youtube.com/watch?v=wjqcjjrfM0g 433x300]

To learn more visit:   www.PuroCleanChicago.blogspot.com

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Quick Fixes

When it comes to tiny property repairs, a molehill can very easily become a mountain if it’s not resolved quickly. Whether you’re a DIY kind of person or would prefer to have a contractor or handyman take care of your property’s repairs, time is of the essence. Not only is it important to take care of repairs and maintenance quickly for your tenants’ sakes, but also for your bank account’s. In so many cases, a little problem that goes unaddressed can turn into a big, expensive problem not so far down the line. Budget for the unexpected. As we’ve discussed before, setting money aside for those unexpected repairs that always come up sooner or later is one of the smartest moves you can make as a landlord. No matter how good your intentions are, it’s almost impossible to move on any repair quickly if the funding simply isn’t there. Move quickly, no matter how innocent an issue appears. Cracked plaster? Leaking roof? Chipped window? All of these are examples of “little” issues that are easy to set aside, but will only grow with time. Cracked plaster can easily begin to crumble, resulting in a much bigger mess. A leak can expand and run rampant, causing significant water damage. A tiny window chip can quickly spread, leaving no other option than a complete window replacement. Maintenance and small repairs go hand-in-hand. There are some maintenance duties that count just as much as repairs, and should be performed just as efficiently. Cleaning gutters......
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People change when the pain of changing is less than the pain of not changing... True or false?

leaky bucketThis statement was made on a call I was on and at first I agreed. Something did not ring right though... Here are my thoughts and I would love to hear yours. No doubt this economy is impacting all of us in some way and it is safe to say that many are now looking at change as a necessary evil. It is human nature to be content with status quo in most cases. So here is the question that came to mind; have we changed over the last 200 hundred years because we had to or because we felt we could make things better? I strongly believe that most changes have come from the possibility of a better way to do things and not from the pain that could be caused by not changing.   In fact most inventions may have been looked at unnecessary by many and are now "indispensable". Do you believe that Thomas Edison thought that electricity was a need or did he see opportunity for a better and more comfortable life? I know my great grandmother did not let electricity be connected to her home until 1974 because she was just fine that way it was... What does that have to do with you?... Everything! Today's challenges are tomorrow's opportunities. By embracing change as a new and better way to do things you will gain a source of excitement rather than a feeling of beating beaten up. The key word that I see tied to cha......
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No Immunity to Change; New RRP Rule Takes Effect this April

New EPA Rule Affects All Levels of Apartment Management, Not Just MaintenanceTimes, as they say, they are a changing... and in our world in the multifamily industry, we are definitely not immune to the changes around us. Apartment industry professionals are expected to stay on top of federal, state and local laws and regulations.One big change is coming on April 22, 2010, when the U.S. Environmental Protection Agency (EPA) will require employees and contractors who perform any renovations, repairs, and painting in homes built before 1978 to be certified as part of the new Lead-Based Paint Renovation, Repair and Painting (RRP) Rule. And, guess what? That includes multifamily properties.Every day, maintenance technicians must work consistently in all areas of interior and exterior building maintenance and repairs. This type of work involves maintaining, repairing, and replacing windows, doors, trim, walls and flooring, all of which can disturb the paint job in work areas and can create a dusty environment; an environment that could prove to be hazardous not only to residents and their families, but to the maintenance technicians who work on the property. For this reason, maintenance technicians and all onsite personnel who work in apartment communities built before 1978 need to be aware of this new EPA rule that provides regulations and guidelines on how to work safely with lead-based painted surfaces. The impact on onsite maintenance personnel as well as contractors, who will also work on the property, will require extra training through an EPA-accredited training provider. It is......
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