The Apartment Consultant

The Best Way To Do Apartment Deals…No Real Estate Agents Needed…or wanted!

admin — Tue, 16 Nov 2010 18:55:08 +0000

That pesky real state agent is in my way of making a great and creative deal with the seller! How do I get around him or her?
This is a very good question and a very necessary skill to have in your tool belt of knowledge. I face this constantly when pursuing these types of deals. Getting around the agent to deal with the seller directly can be quite tricky. But it can be overcome. Here’s how you do it. First, you need to get the trust of the agent. You want to make sure he or she knows that you’re not going to steal away the seller or the listing away or go behind his back unknowingly. However long it takes, work on developing this trust and rapport. While you are asking the agent questions about the property, also start asking questions about the seller (you’re slowly opening the door). I would start by asking these three to the agent: “why is the owner selling?” “how long has he been investing?” “what does the owner do for a living?” Next, start looking for and asking questions that the agent can’t answer on his own. He’ll go ask the seller directly as he should. Once you get the answers, ask the same questions again, seeking further explanation. Give the appearance that you’re not satisfied with the answer. Wait a day, then call up the agent and ask if you can speak with the seller directly with him (the agent) on the phone too. If the agent senses that you are sincerely interested in the property, odds are he’ll set the call up. Once on the phone with the seller and agent, come prepared with good questions as well as compliments. The next step is critical. Before the phone call ends, say the following: “Mr. Seller, I appreciate the time very much. As we get closer to finalizing this deal and head for a closing, is it possible that I could meet you at the property? For example, it would be great if you could squeeze in your schedule to meet me there during my walk-through inspection for a few minutes. That would be very helpful. Would that be possible Mr. Seller? I’m assuming he says “yes” to your request. In the next few days, arrange a walk-through of the property with the agent and of course ask if the owner can “drop by”. Only schedule this if the seller is free to visit with you. Once you have the seller there, exchange contact info with one another. You are now free to call him directly. Remember not to abuse it. There you have it folks…a sure-fire way to get by the real estate agent to the seller directly in an honorable fashion.

Til next time, Peter Harris, TheApartmentConsultant.com

5 Ways To Get Lucky On Your First Apartment Deal

admin — Wed, 20 Oct 2010 23:27:47 +0000

Some people always seem to get lucky in finding and getting perfect apartment deals. Don’t you wish you were like them? Don’t they drive you crazy at times? How do you become like them or make yourself luckier? What are you missing? What can you do that’s different? You’re ready for it, right?
Wouldn’t you love to get lucky and not only find your first deal, but actually close on it? Well, read on my friend…
I got this email the other day from a leadership trainer and in it was something I believe is profound, yet so simple. His email spoke on five ways to make you luckier. As I read though the email, I pondered on these 5 things and I looked at my life successes and agreed 100% of what he says. Here’s what he says and I break it down for you further as it applies to us real estate investors.

-5 Ways to Make Yourself Luckier-

Flow - Be in the moment. Be spontaneous. And stay there! You ever get into the flow of something and everything is going super well, then just like that, you talk yourself out of the flow? This is letting your “head trash” rule your life’s flow. So, next time you’re in the flow, pay attention to the negative words that enter your thoughts. Thoughts rule. Say no to stinking thinking! In other words, when a smoking deal comes into your life, don’t push it away with unbelief and doubt. Follow up no matter what and flow with the deal and let it takes its course – this could be “the one”!
Come from Love - There are only two ways to go through life: coming from fear, or coming from love. Coming from love means you are coming from “more than enough” - and that’s a vibration that people can feel. Therefore, approach your deals and sellers with love and understanding and watch the magic happen. People don’t care what you know until you show that you care. If you take on this attitude, I guarantee deals and opportunities will show up! Guaranteed!
Come from Service - Most people are stuck in WIIFM: “What’s In It for Me?” truly successful people are service-minded people who are tuned to WCIDFU: “What Can I Do for You?” This is the key to achieving phenomenal success in real estate. Come with this mindset when you’re trying to get the seller’s motivation or during negotiations and you’ll increase your chances of a successful outcome by 10 times.

Trust - Realize that you don’t have to know everything before you start. Just do it.
Action - Just do SOMETHING. Taking no action is the greatest danger of them all. Remember, inaction is a form of action, and has its own consequences. If you don’t take action, events will control you, you will be constantly reacting instead of acting. Life rewards action is the bottom line.
These are 5 traits of truly wealthy people. And the wealth I’m referring to has everything to do with money, relationships, family, and health. So, if you want to put yourself into position to “get lucky” and experience life to the full (the way it was meant to be!), take a good look at these 5 traits and ask yourself if that’s what you’re being. It’s just a matter of time before your perfect deal shows up because of it. If not, then it’s not too late. Be intentional in making the changes necessary to Be.

Til next time, Peter Harris, TheApartmentConsultant.com

Killer Deal for Jill - $8K for 40 Units!!

admin — Sat, 18 Sep 2010 18:59:59 +0000

Those were the profound words spoken by former commercial passenger jet pilot Jill. For the last 17 years, Jill has flown large jetliners and most recently flew for a major airline until she decided to leave and work for herself.
Recently, Jill, one my clients, closed on her first commercial deal, a 41 unit apartment building. I was amazed how she juggled flying across the US, investing in SFRs and fixing them up, making offers on large apartment buildings, playing with three grandkids, training horses, and riding dirt bikes. Whatever she was on, I wanted some!
I managed to catch up (and stop her!) with Jill the other day and sat her down for an interview. Here it is:
Me: Hi Jill.
Jill: Hi Peter!
Me: Really? Why did you leave such a job?
Jill: Desire to sleep in own bed every night for the first time in 17 years. For several years since 9/11 when the entire aviation industry changed for worse I have been trying to find something that got me as excited about going to work as flying used to and I think I found it! I love the whole quest from finding the perfect deal or not so perfect, going through negotiations, planning, etc. It exercises my mind. I like the detective part of due diligence and speaking with people in different professions. I truly enjoy meeting with the local professionals and learning what is happening in their community. Maybe it all boils down to me being basically nosey and asking people questions with a purpose, I have found most will try to help.
Me: So real estate, particularly apartments?
Jill: Yes! Great returns for my effort!
Me: I understand you just closed your first deal. Tell me something about it if you don’t mind.
Jill: Yes, I found a 41 unit apartment for $975,000. The brochure struck all the right caveats so I did what you told me Peter and I made an offer sight unseen. Negotiations took quite awhile, I think I used every tip you offered, and darn if you weren’t spot on. Unfortunately when the offer finally got accepted the whole banking industry went panic room on me, my line of credit evaporated overnight and there went my down payment! So that left allot of learning to be done. I stuck with it though and now am on the easy side of the learning curve….I hope!
Me: What attracted you to the deal?
Jill: The listing had a picture and cap rate that fit the profile that I was looking for i.e. 10% cap or better and good mix building.
Me: How many units, location, class?
Jill: First bldg has 23 1/bed units and second bldg has 17 2/bed units & 1 1/bed unit. It is a class B, location is in a working class neighborhood. Many of the tenants have lived in bldg for more than 2 yrs and consider it home. Very stable area, it is known as an economically disadvantaged area but they did not experience the highs or lows of this recent cycle.
Me: How did the negotiations go? What were some of the challenges and how did you overcome them?
Jill: Negotiations took awhile, mostly due to my being up in the air and in different time zones. It was hard to get anything done fast mostly via email, the seller did not speak English as a first language. I worked through the listing agent, fortunately I had a good one, but the single biggest stumbling block was the bank that held the assumable mortgage. On initial discovery by the bank they rejected me based on “I am out-of-state” so I had to break through that barrier of not being from there. Once I got them past that it was kinda like dealing with the FAA, one piece of info at a time. Then they would reject or demand another document, never the whole thing at one time. It now is clear they were changing their rules every contact I had with them as the whole banking industry imploded. Or maybe they ran my DNA and I came out alien or something. Anyway, finally it came together. I started April and I closed Nov. Oh, and I ended up negotiating $60,000 off the asking price thanks to my dear coach, you!
Me: So, what did your financing end up looking like?
Jill: I assumed owner’s existing plus added $30,000 in escrow for roof/parking lot repairs, owner carried $100K for 5 yrs at 6.5%interest-only and I raised $140,000 down payment from private investors to be paid 8%, quarterly payments. Plus, I’ll give my investors 20% of the profits when I sell in 7 yrs.
Me: How did you raise the $140,000 down payment?
Jill: My family members.
Me: Were you able to negotiate credits? How?
Jill: I got a $15,000 cash credit at closing back from seller. I got it because I asked for it Peter! Also, initially the bank did not want the owner to carry back more than 5% but when the banks started to lose ground the bank decided that having owner carry a second mortgage of $100,000 wasn’t too bad after all.
Me: What were your personal out-of-pocket costs to close this deal?
Jill: About $8,000 of my own. The rest was from cash credits, owner-carry, and family members.
Me: No way.
Jill: Yes, way!
Me: What are you personally cash-flowing per month?
Jill: The property managers are sending me $2,000 per month. So far so good!
Me: What’s your exit strategy Jill?
Jill: I plan on selling in 5 years, investors have agreed to stay in until property appraises at $1.5M in which case they will make a better than 56% return on their money. The sellers note is due in 5 yrs but I will have enough paid down so I should be able to refi that amount if need be.
Me: Congratulations Jill on a job well done on your first deal! You are awesome! Let’s get the next one closed too!

Till next time,

Peter Harris, TheApartmentConsultant.com

Apartment REO Secrets…Don’t Tell Anyone…

admin — Fri, 03 Sep 2010 20:58:02 +0000

Here are 3 secrets you NEVER knew about large apartment REOs:

Secret #1: Banks can hold apartment REO assets on their books for a period up to five years.

Secret #2: Not all apartment REO assets are sold for pennies on the dollar just because they are REOs.

Secret #3: Asset managers will not take your call.

You probably have a little familiarity with single family REOs and how they work. Commercial REOs have very little in common with residential REOs. An asset manager for an REO division is typically in charge of hundreds of properties at a time. A commercial division REO asset manager is in charge of a specific region, an asset type, a loan type or a combination of all. Since the assets they are managing are more operationally intense, they manage a much smaller pool of properties. This means they typically will know their assets intimately. Remember, they are not a production line (like a residential asset manager), but instead are handling specialty products that are unique. Thus, you’ll need to approach them differently as well.

Here’s what you should know about banks. Since banks are very heavily regulated, given the current economic environment, and being bank regulators are looking at all transactions with a fine-toothed comb, means that you probably won’t be getting many deals from them or asset managers. It is the job of the bank to show they are making every attempt to get the highest payback on every REO they sell. (I know sometime it doesn’t seem like it, huh?) The best way for them to do this is to take the property to market (using a r/e broker) and see how much the marketplace (you and I) is willing to pay for that property. By doing this, if there is ever a regulator auditing a discounted sale price of an REO property, they can answer by saying they did everything they could to sell the property. The price was merely what the market said the property was worth.

There a couple of exceptions, however. One could be if the banks is a small local bank, it may sell some of their REOs to local investors they have strong relationships with. There’s that word “relationship” again folks!

Banks may also be willing to sell their “bad loans”, loans that they call “non-performing” loans to investors that can perform. This would relieve the bank of going through the entire process of foreclosure on a property they want nothing to do with. Basically, the buyer of the loan would become the new note holder of the property, giving him rights to foreclose and taking physical possession of the property.

If you live in an area or know of an area where a bank is holding a portfolio of commercial REOs, to become an “insider”, doing a little detective could pay off big. Find out what brokers they are using to liquidate their properties and build a relationship with those brokers. Also, study the sales prices and the properties that they have sold and determine their hot buttons. What made the lender sell one property for less than another property? Different banks are afraid of different issues you’ll discover. By determining what those circumstances are, it will help you negotiate better deals.

Till next time,

Peter Harris, TheApartmentConsultant.com

Getting Investors to Say Yes! Give Me The Check!

admin — Wed, 25 Aug 2010 16:48:10 +0000

$100,000 is what you need to close your deal. And it’s a good one at that. Suppose you’re at the point now, where you have enough information on your deal and you have a few prospects of who you could approach as investors for your deal. What’s next is getting your investors to write you the check?

The Trust Factor

Again, it all goes back to the trust issue. Do the investors trust you with their money? Let’s look at trust for a second. Do you trust someone yourself? Maybe a spouse, a parent, or a best friend? Why do you trust them? I bet it’s because you know them well and they know you well. The intentions of both sides are for good, right? Well, how did you get to this point in the relationship?

You’ve done several things. You spent quality time together even in the short amount of time you may have known each other. One of you or both of you are probably good listeners. There is also mutual respect for one another.

Well, to get investors to invest with you, you must establish the same rapport and trust in each other.

Selling versus Counseling

Since you probably don’t have years to develop this with all the potential investors you have in mind, you’ll need to act and develop quickly. Here’s how: don’t sell to them. Counsel them instead. Recall the old saying, “People don’t care what you know until they know that you care.” Every successful money-raiser is a practicing counselor.

How do you react when someone attempts to sell you something before they know if you need what they’re selling? You put up an automatic guard, right? To overcome this, if they asked you a few questions first, they probably would have been a little more successful. Take a counselor’s approach instead.

5 Tips to Becoming a Better Money-Raiser Counselor

#1 Build Rapport First And Foremost.

#2 Investor Needs. Ask questions such as do they need monthly or quarterly pay-outs or can they wait until the investment is at the end?

#3 Investment Objectives. Ask questions about why they want to invest. Is it for their kid’s college fund? For retirement? To establish a trust fund for charity or the poor?

#4 Risk Tolerances and Return Expectations. Ask questions pertaining to their previous investments, such as stock or other real estate. Ask how risky it was to them. Next, ask what their expectations are for returns on the investment. Are they expecting a 5%, 8%, 10%, or 50% return on the investment? Get a feel for this. And don’t forget to relay to them that you’re number one priority is to protect and preserve their investment with you.

#5 Life Goals with Investments. Ask what their ultimate goal in life is. Is it to retire and move to Hawaii? Become a missionary in Africa and live there for the next 20 years? Is it building a school for at-risk kids in poor neighborhoods?

Till next time,

Peter Harris, TheApartmentConsultant.com

The One Key to Creative Financing Your Deals

admin — Tue, 17 Aug 2010 00:01:15 +0000

Many apartment or would-be investors have come to me to learn how to do creative financing for their various reasons. Nearly all the reasons why a person would need creative financing are because:

• you have little cash

• you cannot obtain a loan due to poor credit or lack thereof

• you desire to leverage what cash or resources you have

• you need short-term seller-financing prior to permanent bank financing

If you do fit into one of those categories, then you’ll be joining a very populous club today. But don’t fret because today’s market is ripe for creative financing.
First of all, how do you find those creative apartment deals? Below, I have listed 5 “owner situations” that are prime for a type of creative financing. If you spot an apartment owner in any these situations, odds are they are ready for someone creative like yourself to come along and help them with their situation.
Here are 5 owner “situations” that you should always look for to find creative financing deal opportunities. They’re everywhere!

If you come across a property owner who:

#1 wants to avoid capital gains taxes on profits after a sale

#2 would have to pay a large pre-pay loan penalty if he sells

#3 is ill or has personal circumstances that hinder him from operating the property, causing it to be in poor operating and physical condition

#4 needs to sell the property for whatever reason, but there is no equity in the property

#5 is tired and burnt out and/or if the property is under-performing

These are all potential cases for creative financing to take place.

On the other hand, if you see in a property listing or hear the following words from brokers or owners, this is an indication that a creatively financed deal can take place: “owner motivated”, “seller financing”, “owner will carry”, “master lease option”, “creative offers welcome”, “distressed property”, “bring all offers”, “JV partner wanted”, or “investor wanted”.

A simple way to go online and find hundreds of these deals is to go onto Loopnet and enter those key words above into their key word search window.

But when you really get down to it, here is the secret to doing creatively financed deals, no matter how large or small: You must ASK! That is the secret!!

If you didn’t ask your wife to marry you, you would be married to her. If you didn’t ask your boss for that raise or promotion, you’d be stuck where you were before. You see? That’s where it starts. Therefore, the key to getting and achieving anything greater than what you are today is to…ASK!

How do you apply this to creative financing you say? Easy. First, get the owner’s motivation for selling his or her property. Then, construct a creatively financed offer that meets some or all of his or her needs. Then ask the owner by communicating your offer. That’s where it all begins my friend. If you don’t ask, you’ll never know. And if you never know, you’ll never grow.

So get out there and ask, ask a lot!

Till next time,

Peter Harris, TheApartmentConsultant.com

Leaving Your Job To Do RE Investing Full Time - Yikes!!

admin — Fri, 23 Jul 2010 18:27:21 +0000

When is the perfect time to leave my job to do real estate investing full time? That is a question for the ages (and for the brave!). Now that I am approaching a decade of leaving the corporate world to pursue a life as a full-time real estate investor, I can look back and honestly answer that question. I wish I had more space and time to write about this, but I don’t, so I’ll cover enough to get you thinking and in the right direction hopefully.

But first, let me recommend probably the two most important things for you to do: number one, keep your full-time job until you build up enough cash flow from your real estate investments to pay your basic living expenses. In fact, it is wise to do this for at least six months. At the six month point, you have hard proof that it can be done. As your portfolio grows, you’ll find that your job will start to get in the way of your investing. Although you won’t find a perfect time to leave your job, you’ll know when it’s time. Secondly, in those six months, save up six months of living expenses. This will be your reserves during the “tight” months – and there will be tight months, I guarantee you.

Before you leave your job, you’ll have to work on being somebody you’re not right now. Do you remember the concept of “Be-Have-Do”? Well, that concept is incorrect. The correct concept is “Be-Do-Have”. In order to have something, you first have to Be that person, then the Have comes by Doing. Okay, sorry if I confused you (it’s early morning!), but to get straight to the point, you’ll need to develop an entrepreneur’s mindset. Going from an employee way of thinking to an entrepreneur’s way of thinking is key to successfully leaving your job (and staying away!).

Once I left my job to do real estate investing full time, I realized that in order to have freedom, I need to let go of security. So, what I did was to let go of my security (my pay check) a little at a time by spending my free time working on my real estate business and then transitioning my job to a part-time basis. It was a four year (yes, 4 years!) period of uncertainty, constant planning, investing, and hard work (and raising a teenager).

At the four year point, my job was getting in the way of my real estate business that had grown pretty well. At that point, I had to make a decision. I had a great job with benefits plus I had enough real estate income to live off of. Life was great. But was it really? Was I living a purposeful life? Could I realize the potential my real estate business had? On Dec 31st of that fourth year, I handed in my resignation. Life has never been the same. Now it seems like I was destined to do this full time. But had I not planned this carefully, worked on my character, and took the leap, I never would have discovered that the grass is actually greener on the other side.

The moral of this story is that cannot predict the future, but your future will be determined by what’s going on in your mind, the actions you plan and take, and your desire to stick with it when tough times come and go.

Til next time,

Peter Harris, TheApartmentConsultant.com

Inspiring Words on Coming Back Real Estate Failure…A Must Read (you know who you are:))

admin — Fri, 16 Jul 2010 18:57:07 +0000

“Pain is temporary. It may last a minute, or an hour, or a day, or a year, but eventually it will subside and something else will take its place. If I quit, however, it lasts forever.”

That’s a quote directly from Lance Armstrong, the greatest American road racing cyclist of all time.

I make it a practice to study incredibly successful people and you should make it a habit as well.

As you know, Lance came out of retirement last year and is on his quest for an 8th Tour de France victory this month. But on the way, bad luck hit him this week – untimely flat tires and awful crashes on consecutive days. His hopes and dreams of tour victory gone up in smoke…just like that. Poof! All those months of preparation gone. Lances investment of time, money, and people…all for nothing.

You’ve probably been where Lance is right now too. You’re broken. Beaten up by life. Tired of the same ol’ problems. Can’t seem to get ahead no matter how hard you try. Every day…nothing changes. Are you with me? Sound familiar?

In the game and life of real estate investing, this is where a lot of people that I know are too today. Some of us who’ve been there in the past, have two choices…give up or keep on going. Please make the choice to not give up. You may be three feet from gold!!

Lance has no chance of winning this particular race this month, but he’s not giving up. He’ll finish the race and ride proudly to the end. He knows there will be another day soon to compete. That must be your attitude too. A day is coming soon, if you don’t give up, where you’ll be able to create your own comeback. Yes, you’re down right now, but this is not how it’s going to end…No Way! You may be three feet from gold!

I’m asking you to not give up YOUR race. You can win if you don’t give up. I want you to take a break from your day (or night) and meditate on 6 things that will give you a boost in maintaining your race:

#1 – In your comeback, reject rejection.
#2 – In your comeback, see failure as temporary.
#3 – In your comeback, see your failure as an isolated incident.
#4 – In your comeback, see your upcoming success as a process.
#5 – In your comeback, be willing to try a new approach.
#6 – In your comeback, know that ALL successful people have had to bounce back at some point. You must also.

Lastly, I want to encourage you with a true statement of life…your setback is just a setup for your comeback.
Truly yours,
Peter Harris, TheApartmentConsultant.com

High Quality Tenants + Good Accounting = A Good Night’s Sleep

admin — Tue, 22 Jun 2010 22:54:50 +0000

The last blog, I wrote on two basic yet oh so important things to know like the back of your hand before you buy. In this blog, I want to share with you 2 very important things to watch after you buy. This will save you a lot of heartache and delays of getting paid a monthly check.

There are many “important things” to watch out for right after your acquisition, but what I’m writing about right now comes from what’s happening to me personally. Here are two of them.

The first one is…knowing the quality of your tenant. You’re in the income property business, right? Therefore, doesn’t it make sense to make sure your income source is reliable? Putting in so-called paying tenants out of desperation and hoping they pay is a disaster waiting to happen. In fact, the disaster happened when you decided to approve that tenant to move in. Please realize that buildings don’t cause problems, but the people in them do. I focus daily on the 4Ms of apartment operations – Money, Marketing, Maintenance, and Management. If you examine closely enough, you’ll see that if you have poorly qualified tenants, then you have no chance of succeeding within the 4Ms. You want the best tenant possible for your apartment, no matter what size…2 units or 100 units. Marketing to and placing the ideal tenant leads to steady income, predictable operating expenses and repairs, normal or better than normal tenant turnover, and a good community reputation. These are priceless attributes of an apartment business and lead to quality sleep on a nightly basis! On the other hand, and you’ve probably have seen or heard of properties like this, where the apartment has a bad neighborhood reputation, has a bad appearance from the street view, tenants hanging around outside way too long, and the list goes on. This is all caused by selecting poor quality tenants. And this is not a market problem, but a management problem.

The second important thing after a purchase is something that probably does not excite you much, but it is oh so important…and that is…bookkeeping. Many new investors want to be wealthy in real estate, but not pay the price of success and riches. The price to pay is to know your cash and payable position at all times, down to the penny. This goes for any business. I personally believe that additional blessing comes upon those who have proven to be good stewards over the things they are in charge of. If you take care of your business, then you deserve more. If you don’t, then you don’t. This is not only a Godly principle, but a universal one. I am in the midst of a small apartment acquisition, performing the financial portion of my due diligence. The owner of the apartment complex has supplied me with hand-written rental income and operating expenses. This is not acceptable and there is no good reason to have ever done so. Pure laziness is what I think happened. Even though I’m still interested in the deal, the price and terms has to be re-negotiated because of this (in my favor). The seller will have to give up hundreds of thousands of dollars in profits just because the property data was never recorded properly. Expensive lesson to learn!

Till next time,
Peter Harris, TheApartmentConsultant.com

Evaluating Apartments Rocket Science

admin — Fri, 04 Jun 2010 20:23:37 +0000

Since apartments are how I make a living, I pretty much look at numbers all day and every day. They’re either my financials or someone else’s. When I’m sitting down with property managers or clients, the focus is on numbers always – income collected, delinquent income, income we’re never going to collect, vacancy percentages, and cash left in the operating account at the end of the month, just to name a few. But after all these years, I am still not a “numbers guy”. That’s not my passion, but to look them over carefully and understand them is a necessary requirement in running a business profitably and responsibly.

I want to share with you 2 very important things when reviewing numbers on your apartment deal BEFORE you buy. Then later, I’ll share with you 2 very important things to watch after you buy.

So, BEFORE you buy any apartments or just when you’re evaluating a deal, take a close look at these 2 things:

Number 1 FINANCIAL thing to look at: the actual income, what I mean by actual income is not the agent’s “proforma” income from his brochure. Proforma income is best-case, perfect world income, this is not realistic income, don’t use it. In fact, completely ignore it. Whenever you receive financial information from the agent or seller, ask where it came from. Did it come from a bookkeeper? Did it come from the property manager’s software? Those two are typical and mostly good places to start. But if it comes to you in a colorful brochure or handwritten, or gives the appearance it was made up, stop right there and ask this one question – does the income shown here match what’s reported on the property’s tax returns? This is a great question! Which one would you tend to believe: an agent’s or seller’s “made-up” income statement or a tax-return showing the income? You know the answer to that one!

Number 2 FINANCIAL thing to look at: the operating expenses over the last 3 years. If you were doing a deal today, obtain expenses for 2008, 2009, and 2010 year-to-date. Compare each year’s expenses and look for the following: consistency in the annual overall expenses, large fluctuations of any one expense (such as plumbing or any utility), and any other expense that you don’t understand. What I have found to be true about 90% of the time (that’s 9 out of 10!) is that the expenses supplied to you are what I consider to be too low for normal operations. They do this to make the property look like it’s performing better than it is actually. So, instead I want to give you a couple rule of thumbs I use to estimate expenses in EVERY deal I look at BEFORE I buy. For 5 units to 20 units, I run my expenses at 35% of the effective gross income. And for 20 units to 50 units, I run my expenses to be 40% of the effective gross income. And finally, from 50 units to 100 units, I run my expenses to be 45-50% of the effective gross income. Over the years, I have found two truths about those two thumb-rules: one, agents always present expenses that are lower than the rules and two, the biggest mistake new investors make is underestimating the expenses.
See? You don’t have to be a genius to evaluate the financials of an apartment deal…you just need common sense…and help.

Til next time my friends….Peter, The Apartment Consultant