The Apartment Consultant

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

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

I’d rather have lower but steady cash flow than potentially higher cash flow, but it be inconsistent. Right? Let’s discuss this a little further. It’s a tough world out there for apartment owners right now. Even if you’re not an owner yet, you should pay attention to this as well. Even though we apartment owners are surviving the recession better than the average investor of other commercial real estate property types, we still are admittedly struggling with keeping tenants anchored in our apartments long term. There’s so much competition and so many choices out there. What I am discovering are that apartment amenities are key to attracting targeted tenants and keeping them long-term. Amenities include things such as: parking, storage, pools, laundry, clubhouses, on-site management, playground areas, fitness centers, gated access, and internet services, just to name a few. These “little” things are more important than you think.
Research indicated that at least 8 out of 10 individuals wanted internet services in their apartment complex. About 85% preferred having both on-site-management and maintenance available at their apartment complex. When asked about the issue of parking, about 65% agreed that parking spaces maybe a deciding factor on which apartment complex was chosen.
Less than 10% was interested in having a clubhouse as part of the apartment complex, which left an astounding 80% that did not care for such amenities. Isn’t this interesting? Laundry received a 65% “Must Have”.
When asked about storage spaces, only 35% believed that this would pose an issue for them.
The pool received high remarks with over 85% agreeing that the question about a pool will surface. Fitness center and a playground area both received about 45% of the surveyed audience who agreed that having these amenities would persuade their rental decision. 20% was interested in having a gated community and believe that this would be a top priority for them. This should be taken all into consideration even when thinking of adding an apartment investment into your portfolio.

Here are the Top 10 Apartment Must-Have Amenities:

1. Pools
2. Dishwashers
3. Covered parking
4. Washers and dryers
5. Pet-friendly community
6. Gated access
7. In-unit security
8. Fitness center
9. Guest bathrooms
10. Club house
And here’s an interesting thing about these amenities that may surprise you: Even though the tenants want things such as a pool and a fitness center, it is used rarely by them. Incredible, huh? But in order to attract them, you gotta have it. Just crazy if you ask me.
So there you have it. Money-making information straight from the tenants themselves. They are telling us something aren’t they? Are we going to listen? I sure have been. Steady cash flow, even if it’s a little lower is better than none.
Til next time my friends….Peter, The Apartment Consultant.com

Can you imagine if Warren Buffett was your investment advisor? Wow, that would be awesome wouldn’t it? Getting advice from the most successful investor in the world would be incredible, huh?

A few years ago, myself and bunch of other real estate investors gathered from around the country to study the man, the legend, the Oracle of Omaha, Warren Buffett himself. We studied in-depth a book called “Buffettology”, a book that embodies Warren’s investing principles and techniques throughout his decades of making billions of dollars for himself and his shareholders. And our goal was to take from that book how Warren approached investments, how he bought them, how he made money from them, and lastly, how we could take what we learned and apply it to our own real estate investing lives. There are 4 what I call, Buffett Nuggets. I will discuss 2 this week and the other 2 next week.

I’ll take each one and show you how to use them in your apartment investing to be just as successful as Warren. Guaranteed!

Buffett Nugget #1: Warren wants and gets predictability of CASH FLOW!

When Warren invests in any company, he demands that it has reliable, consistent, and reproducible cash flow. Cash is KING to him! He does this by extensively researching the company’s financial history and where the company sells its products or services. Once his research is complete, he can more or less tell if the company is reliably liquid or not.

As an apartment investor, you should do no different. After all, you are in the income-producing business and therefore, you should confirm the property’s income, right? You do this by getting a hold of the seller’s three years of the property’s financial records, a current-month rent roll, a six-month report of income collection, a rent delinquency report for all the tenants, and last but not least, the seller’s income tax returns for the property’s last three years. The reason you want to get the seller’s tax returns is to compare the tax return’s reported income amount to the amount given to you on the seller’s “computer generated” financial records. You see where I’m going here? Which do you believe most – a computer generated report or an amount reported on an income tax return? Easy answer…

Buffett Nugget #2: Warren demands CONTROL of the company (6 controls he always gets!)

The reason why Warren is considered to be the best investor in the world is because he’s a control freak where it matters most. Do you think you could be successful if you controlled the income, the expenses, the asset itself, the debt, the management, and you had insurance just in case something went horribly wrong? I bet you could! Well, that’s exactly what Warren sets out to do when he makes a substantial investment into a company. They either let him do that or he walks. It’s that simple.

As apartment investors, if you get the right education and sound advice, you should construct your deals the same way…nothing less. Please don’t settle for less! If done right and without being too over-enthusiastic, you too, should these 6 investor controls in your next apartment deal – income, expense, asset, debt, management, and insurance. If you don’t, call me, stop your deal, or call someone who’s an expert in apartments. Anything less and you’re putting yourself at above normal risk.

I could go on forever, but then a blog wouldn’t be a blog wouldn’t it? So, I’ll stop here. Next week, I’ll share with you the 2 remaining Warren Buffett Nuggets I learned and how to apply them to your apartment investing.

Til next week,

Peter Harris, The Apartment Consultant

First of all let me make it clear that there are other significant causes of apartment investment failures such as making a bad deal, investing in a declining market area, having too much debt, and incurring lawsuits, but the number one cause is, by far, poor property management. Now this goes for apartments being managed by its owners or by professional management companies.

Here are four of seven of the most common mistakes that poor property managers make. I will include the other three next week. Here’s some good advice to being successful in the apartment business: don’t make these same mistakes!

Mistake #1: Have none or very little property management skills. You can see here I used the word “skills” and not “experience”. I know a few property managers who have years of experience but lack the skills to manage their property most profitably. The skills I am referring to can be obtained through supervised training and education. Poor skills lead to poor choices which lead to poor results. And failure is the inevitable outcome.

Mistake#2: Lack of market knowledge. Not knowing levels of rents for the area and vacancy rates will guarantee subpar results for your apartment investment. Not having an aggressive marketing plan or not targeting your ideal tenant profile is a very common mistake. You can’t just hang a sign outside and expect to have your 50-unit apartment building at 100% occupancy with a waiting list – it’s not going to happen. Know your market and its demographics like the back of your hand.

Mistake #3: Not watching the flow of money like a hawk. Human nature says to the property manager, “money is available and I can surely spend it, so I will”. Poor cash control is a property killer. It’s like giving your ten year-old his college education savings in advance and asking him to make sure he takes care of it. Human nature will take over and he will look for opportunities to spend it unwisely and/or foolishly. Know the cash position of the property on at least a weekly basis. Make an effort to understand monthly financial reports of the property. How can you make sound business decisions concerning the direction of the property if you don’t know how much money is in the bank or is due to come in?

Mistake #4: Now knowing the ins and outs of the property, literally. If you don’t know the strengths and weaknesses of your property, how do you then go against your competition? You should easily know the rents and square footages of your one and two bedrooms, what makes them appealing, what amenities (pools, laundry, club house, internet, etc.) are on the premises, highlights of the surrounding area, and so on. You should also have a grasp of the property’s incoming rent amounts on a monthly basis and a deeper grasp of its operating expenses. The more you know, the better the decisions that can be made.

First of all let me make it clear that there are other significant causes of apartment investment failures such as making a bad deal, investing in a declining market area, having too much debt, and incurring lawsuits, but the number one cause is, by far, poor property management. Now this goes for apartments being managed by its owners or by professional management companies.

Here are four of seven of the most common mistakes that poor property managers make. I will include the other three next week. Here’s some good advice to being successful in the apartment business: don’t make these same mistakes!

Mistake #1: Have none or very little property management skills. You can see here I used the word “skills” and not “experience”. I know a few property managers who have years of experience but lack the skills to manage their property most profitably. The skills I am referring to can be obtained through supervised training and education. Poor skills lead to poor choices which lead to poor results. And failure is the inevitable outcome.

Mistake#2: Lack of market knowledge. Not knowing levels of rents for the area and vacancy rates will guarantee subpar results for your apartment investment. Not having an aggressive marketing plan or not targeting your ideal tenant profile is a very common mistake. You can’t just hang a sign outside and expect to have your 50-unit apartment building at 100% occupancy with a waiting list – it’s not going to happen. Know your market and its demographics like the back of your hand.

Mistake #3: Not watching the flow of money like a hawk. Human nature says to the property manager, “money is available and I can surely spend it, so I will”. Poor cash control is a property killer. It’s like giving your ten year-old his college education savings in advance and asking him to make sure he takes care of it. Human nature will take over and he will look for opportunities to spend it unwisely and/or foolishly. Know the cash position of the property on at least a weekly basis. Make an effort to understand monthly financial reports of the property. How can you make sound business decisions concerning the direction of the property if you don’t know how much money is in the bank or is due to come in?

Mistake #4: Now knowing the ins and outs of the property, literally. If you don’t know the strengths and weaknesses of your property, how do you then go against your competition? You should easily know the rents and square footages of your one and two bedrooms, what makes them appealing, what amenities (pools, laundry, club house, internet, etc.) are on the premises, highlights of the surrounding area, and so on. You should also have a grasp of the property’s incoming rent amounts on a monthly basis and a deeper grasp of its operating expenses. The more you know, the better the decisions that can be made.

Last week, I went over Key #3, so this week let’s learn Key #4 and #5 shall we? Although there are many moving parts to apartment rehabbing, I have found through the years, common things that lead to great success. I follow these and implement them wherever I go. Here they are. Five keys to successful apartment property rehabbing:
Key #1: Make physical and cosmetic improvements to the property
Key #2: You are in the construction business, so be good at it
Key #3: Be in a strong location and know your market very, very well
Key #4: Focus on the net operating income and know your cash position at all times
Key #5: Have more than one razor-sharp exit strategy and be flexible to market changes
These 5 keys are simple to understand yet are very expansive in content. Read on.
Key #4: Focus on the net operating income (noi) and know your cash position at all times
Remember that income-producing real estate is valued more on its income production than anything else. The more income you generate, the more it is worth. It’s that simple. Here’s a quick analysis:
Apartment building A: NOI generates 75,000 per year. At an 8% cap, it is worth $937,500
Apartment building B: NOI generates $100,000 per year. At an 8% cap, it is worth $1,250,000
Assuming that the properties are comparable, that’s a $312,500 or 25% difference in value just because of the higher NOI.
The net operating income (NOI):
• In a nutshell, you can increase your NOI by either increasing your gross income collections or by reducing operating expenses, or by both.
• The easiest way to increase the NOI is to increase the rent or lease rates when the leases expire. Stay on top of the market and increase the rent whenever you can. If your occupancy is constantly at 100%, it means that your rents are too low.
• After a rehab, you should expect to increase the rents, even on the long-term loyal tenants. They will expect it too. Expect a few tenants to move out as this gives you the opportunity to replace them with higher-quality, higher-paying tenants.
• Another way to increase NOI is by reducing operating expenses by bidding out insurance, keeping closer tabs on repairs and maintenance, and passing on utilities to the tenants. Convert owner-paid heat and electric to tenant-paid utilities.

Cash positioning and rehab budgeting
Knowing your cash position every step of the way is a crucial part of every successful rehabber’s way of life.
Establish both a rehab budget and property operating budget. Due to the distressed nature of the property and its lack of historical financial data, your budgets will be not as accurate as if you were purchasing a stabilized property.
• Anticipate and budget the income to drop initially as tenants will either move out from all the ruckus around the property or will have to displaced during the rehab.
• The rehab budget will come from the bids you receive from contractors.
• Have a “contingency fund” in your rehab budget because there will be cost-overruns and things you missed that need to be done. I tack on an additional 15% to the budget for this.
• Most rehabs operate under a drop dead deadline, meaning that at a certain point, loan payments or investor payments will have to be made. Design your rehab budget realistically with plenty of room for delays. Delays will occur. As a rule of thumb, I add a 25% cushion of additional time to meet such deadlines.
Key #5: Have more than one razor-sharp exit strategy and be flexible to market changes
It’s important to have an exit strategy thought of before you make an offer on the rehab project, during your ownership, and after you sell.
Reasons before: it’s smart to have an exit strategy before you purchase your rehab because you need to prove to yourself that how you plan taking your profits is realistic.
Reasons during: life happens – the market could change, the economy could change, or your personal situation could change. Being flexible with your exit strategies will give you peace of mind during one of these instances.
Reasons after: this is probably the most important exit strategy. If and when you sell your completed rehab, it is possible that Uncle Sam profits more than you do. Plan smartly with a good tax strategy for when the sale takes place. Consider doing a 1031-exchange.
4 typical exit strategies:

#1: After rehab: hold onto the property for cash flow and equity build up.

#2: After rehab: position the property to sell for huge profit

#3: After rehab: refinance, pull cash out and hold

#4: After rehab: sell property and 1031-exchange into a larger property

Peter Harris, The Apartment Consultant