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The Riddle Report Member 530 Woodlake Circle, Suite 100 Chesapeake, VA 23320 (757) 523-1900 Robert L. “Robb” Riddle, CCIM Individual The Riddle Report Member Adding Value Means Increased Cash Flow February 2019 This publication is not Since the value of a rental property is investment, and a solicitation but is an based directly on the cash return, adding Second, profits from increasing information service from value means increasing cash flow. the market value of the investment this office. When small investors set out to increase beyond what it would be because of real estate values, the steps are in inflation alone. In This Issue upgrading houses, duplexes, triplexes, Apartment properties lend them- etc., enhancing the cash flow and there- selves to the second way of making • Adding Value fore increasing equity when the property profits better than many other types Means Increased is sold. of investments. Increasing the market When working with larger commercial value of rental units does require Cash Flow and apartment properties, there are two know-how, absolute understanding • Checklist For major actions: of the market values of this type of property and excellent management. An Apartment • Be aware of the things that have the Investment potential of adding value, taking advan- The Operating Income tage of this knowledge and moving Good management has always • Condos – quickly before another buyer can been the most important point in Developments And purchase or option the property. increasing or maintaining annual Conversions • Do the required homework on the operating profits. Being a skillful property. A feasibility analysis can manager requires intelligent handling • Investment measure the ability to add value. There of the functions of buying and Planning – What is may be many other measures that must selling properties, rent collections, be taken, such as market analyses, maintenance, leasing, controlling Right For You? applications for new zoning, design and expenses, refurbishing, management • Real Estate construction planning and a plan for accounting and more. All of this marketing. requires long “hands-on” experience Investment Making Money in the field with plenty of assistance Consultants from the latest in operational and Investors purchase commercial income administrative hardware and soft- producing real estate to make money. ware. Professional property managers There are two obvious ways of making When ideas in tax and other will do a much better job than most money from a property. legal areas in this publication owners and will more than cover seem to fit your situation, First, the owner takes a share of the their fees. o it is recommended that you annual operating profit generated by the discuss them with your professional advisor before taking action. Checklist For An Apartment Investment When any particular apartment building is under consider- several tenants to check terms of their leases against seller’s ation for purchase, there are a number of factors that should statement. be considered. Here are some of the more important points: C. Have the seller sign an affidavit that the statement reflects • Location is always at the top of every list of consider- the correct rental amounts and terms, that there are no other ations in real estate. Always check not only the building itself lease agreements in existence, and that he is making the state- but also the entire neighborhood. How does this building ments to induce the buyer to purchase, knowing that the buyer compare with others in the area? How do rents compare? is relying on the affidavit. How close is a business area and is there adequate transporta- D. Also look into the possibility of options to cancel leases tion? How close are schools, recreation areas, shopping and and commitments for future improvements to apartments. churches? • Rentals and floor plans. What is the layout of the apart- E. Finally, check whether the amounts that the seller has ments and the average rent per room? How competitive is the reported as tenant’s security deposits are correct. Check rent level and is there any chance for increases? The rent level contracts with any outside company, such as coin-operated may not always be equal to the rental value. An apartment washers and dryers to check for the terms and income. that is rented at a bargain price in a good community may • The Expenses. Examine the expense statements for past have more rental value than high-rent premises in a declining years, not just for a few months or one year. See if there could area. be any under maintenance, which might not be apparent in an • Condition of the property can be the difference between inspection. Maintenance could have been deferred recently profit and loss after purchase. Check the building and the to improve the current net income to facilitate the sale of the grounds. What is the age and type of any equipment used? property. Check the number of employees, their jobs and the Is there any deferred maintenance? If you have checked total payroll, and any requirements of union contracts. Are the other nearby buildings, your building and grounds must there any rent concession agreements with employees? Can compare favorably with the others to get the same rents. you reduce costs by better staff management? • Vacancies. How many currently vacant units? Based on The following items of expense should be carefully comparisons with neighboring buildings and past history of examined: this building, when do you feel that the vacancies will be 1. The loans on the property. Check all of the terms of any filled? existing mortgage that will be assumed. Determine if refi- • Amenities offered to your tenants must be in line with nancing is desirable and feasible. the type of tenant. Singles might be interested in recreational 2. Real estate taxes. Are assessments and tax rates correct? equipment and a pool. Tenants with children might want play What will the recording of the sale do to change the assess- areas. Perhaps the amenities you offer will be compared more ment? Will the property tax change after the purchase? to other apartments by potential tenants than the apartment Determine the percentage of assessed valuation between itself. Does your unit have air conditioning, fireplaces, built- land and improvements to see if a satisfactory corresponding in kitchen appliances and modern bathrooms? allocation of the purchase price can be made to establish a • The Income. As stated, the value of the property is based depreciation base. on the income. While everything should be checked thor- 3. Insurance. Is property properly covered? Can premiums oughly, anything to do with the cash flow and expenses be reduced in any way? Will more insurance be required if should be double-checked. Income can come from many you increase the mortgage? sources, apartments, garages, utilities, parking spaces, coin- 4. Utilities. Check the bills for the costs of heating, gas, operated washers & dryers, or other vendors. You must see if water, and electricity. Check bills on an annual basis, rather there are any pre-paid rentals, rents in arrears, and contractual than a few months. Are there separate sewer charges? If so, rent increases. Find out if there are any free rent concessions how are they computed? and be aware that these concessions may not appear in the rental agreements or leases, but in some side agreement. 5. Check all outside contracts. There may be contracts for maintenance, separate contracts for elevator maintenance, The following may be a way to protect yourself from any cable TV, and exterminating. problems with the income and possible concessions or side All of these checks and investigations are part of the routine agreements: of the real estate professional. Some of the duties of the A. Have the seller state in writing the rent for each unit, broker or brokers representing the buyer and seller in a real the terms and amounts, any concessions or pre-paid rents, estate transaction are to satisfy the buyer that all of the infor- any written or unwritten arrangements between the tenants mation about the property is correct and complete. Normally, and the owner or his agent. A provision can be included that when employing the most professional real estate firms, this these representations will survive the transfer of title and any research will be completed by the brokers before the informa- misrepresentation found before that time will be grounds for tion is presented to the purchaser. rescinding the contract, with the buyer to be entitled to costs After the purchase, continue with the most professional and disbursement incurred. actions by employing a professional real estate management B. Verify the information on the seller’s statement against company. o the leases and against seller’s receipt books. Interview Condos – Developments And Conversions Most anything that can be subdivided to be sold or Family Accommodations rented can be developed or converted to condomini- These shared rentals of a house do not work well for ums. When we say “condo” maybe the apartment a family. They also do not work for individuals who might come to mind first. Then, you may think of want a place available various times during the sum- the commercial office building that was converted mer, such as a week or two at one time, plus every to condominium offices. Less common are the other, weekend. unusual types of condo developments such as condo parking garages, boat marinas, and other properties A motel converted to condo motel units appeal to that are usually rented. Here are examples: families who otherwise cannot afford to vacation in this very expensive area. These units also attract Motel Vacation Units people who want privacy, which is not available in a When Americans go on vacation to resort areas, shared home arrangement.
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