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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 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 value of the investment this office. When small investors set out to increase beyond what it would be because of values, the steps are in inflation alone. In This Issue upgrading , duplexes, triplexes, 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 , 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 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 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 . 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 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 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 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 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. they often stay in motels that may be located close One large motel was converted to 64 condominium to the action - the beach, the lake, or the ski slopes. units several years ago. There were 7 one-bedroom Usually there are condo units also available. For units, 25 studio apartments, and 32 bedroom-bath some vacationers, the motel may be too small for (but no kitchen) units. The one-bedrooms have a an entire vacation, but the full size condo apartment kitchen and were priced at $76,000 with monthly would be too large. maintenance charges of $575. The 25 studio units Now, in some parts of the country, motel units are were priced from $51,000 to $66,000 with monthly being converted to condo vacation units. The south maintenance charges of $399 to $525. The 32 shore of Long Island, New York, is an area of scarce bedroom-bath units were priced from $49,000 to and extremely expensive rental homes. Rents for one $51,000 with maintenance of $378 per month. season often exceed $100,000. A second motel was converted to 40 identical units, Even Condo Rooftops each with a bedroom, a bath, a kitchen and dining We said anything that can be rented can be a condo. room. The price was $87,000 to $96,000, depend- The New York State Attorney General’s office ac- ing on the view from the unit. Monthly maintenance cepted a plan which was the first in the state, where charges were set at $520 to $577. owners in a 65 unit co-op would be eligible to buy Each of these motels had both tennis courts and space on the roof of the building. Only owners in swimming pools. The condo owners have access to the building could purchase the space. A patch of these when they are using the units. Prices in both the roof 15 feet 4 inches square would sell for about units would be higher today. $13,000, plus a monthly maintenance fee of $43.00. Aircraft Hangar A larger piece of roof 25 feet square would sell for $36,000 with a monthly maintenance charge of In a community in the mid west, a residential airport $128.00. community was built. There are approximately 135 homes custom-built on one-acre or larger lots. Each Vacation Houses house has an attached hangar in which the homeown- Currently, the practice is to lease a house to a group er parks his or her own airplane. The homeowners of young, single professionals from New York City, are able to taxi the aircraft to the 3,400-foot runway who split the total cost into shares that can cost owned by the community. The runway is owned and $10,000 to $15,000 each. Then the group of 25 to maintained by the homeowner’s association ($100 30 individuals decide who can use the house on per month charge to each homeowner). The associa- which weekends and weekday vacation periods. In tion also sells fuel to the homeowners at cost. this way, the house is occupied about every day of The developer planned an additional second-phase the season, but never has to accommodate the whole development of 225 town houses and 50 single- group who have purchased shares at the same time. family houses built on less than one-acre lots. There This has worked well for the renters. also will be 270 condominium hangars to accom- The of the property receives the full rental modate those residents. The hangars, priced at about price at the beginning of the summer season and $50,000, are located across the runway, with the does not have to rent the house to different lessees homeowner’s association offering full maintenance for short periods of a week or two during the season. and repair services. o Investment Planning – What is Right For You? A prospective investor may have a problem getting started long-range estate building or for current cash flow? Would with a real estate investment because of the great variety they be more willing to take chances with a marginal of properties that are out there. They may be fearful that investment that might bring big returns later? someone will “sell” them something – something that is These answers must be decided by each investor for wrong for them. himself or herself. But, only after enough information has An answer to these problems can be an interview with an been furnished so that an intelligent decision can be made. interested professional real estate broker who can act as a When a new investor has a better idea of the type of prop- real estate investment counselor. Each prospective investor erty that will do the right job for him/her, or them, then can be interviewed in depth to find out specific needs in an and only then should they be exposed to the market place income property. At the same time their needs are being and shown specific properties. Now the investor or inves- evaluated, the broker will also communicate what benefits tors can evaluate the various benefits and risks for the are available in various properties and how to identify information shown on each property and apply the infor- them. mation to their own situation. Some considerations should be given to the risk of loss What is right for you? A new rental unit? A strip center? for each age bracket of investor. Should an older investor A one-hundred unit apartment property? An Outlet purchase a property with the smallest down payment and Center? Perhaps you should have five or six apartments or highest leverage position? This will limit cash flow and commercial properties in scattered locations. Real estate may cause the property to have a “negative” cash flow. Is counseling can show you that you can choose which is this what they want – or do they want cash flow from the right for you and know the reasons why it is right! o property? How about the younger couple? Are their objectives for

Real Estate Investment Consultants When you need professional advice and help in commer- real estate cial real estate you must come to our office. We are More investors are turning to real estate consultants as a experts in values and knowledge of the entire market in means of providing a sounding board for their ideas as this area. If you have been looking for a certain type of well as expertise in the planning and construction stages property we probably have the full information on several for their projects. like it already. Feasibility studies are essential for commercial office, Today’s investor in real estate must have a grasp of industrial, resort and hotel investors. With this kind of market conditions and potential that is usually beyond information, planning is better and there is less chance for their own available time to attain. Investors need assur- error. ance about the true condition of the market. With increased competition, the market place is becoming is not just the structure and the land. more complicated. As your professional commercial real It is investing in the type of property that you want at the estate advisors, we are in the position to represent you price and terms that suit you at the time you want to make in real estate transactions by setting up sales, exchanges, the purchase. leases, purchase and sales of options, and management of We can be your consultants. o

530 Woodlake Circle, Suite 100 Chesapeake, VA 23320 (757) 523-1900

Robert “Robb” Riddle, CCIM

A CCIM is a professional real estate practitioner with proven technical expertise in . A CCIM is a person truly committed to the fundamentals of effective commercial-investment brokerage. The CCIM has completed a full sched- ule of Post Graduate Level Courses in investments, taxation, development and marketing all types of commercial-investment properties. The designation of Certified Commercial-Investment Member is unquestionably the highest degree awarded in the commercial-investment real estate practice. “This publication is designed to provide accurate and authoritative information in regard to the subject covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice is required, the services of a competent professional person should be sought.” - From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations. © 2019 All Rights Reserved