How To Tell A Good Apartment Deal From The Bad
So you are out there, in the mix, you have brokers sending you deals, you have a postcard campaign going, your ad in the classifieds is generating calls coming in, deals are coming across your desk every day. Congratulations!
But how do you determine which deal is worth committing time and resources to, and which is not?
Well, first and foremost, you have to understand how to value an apartment property. Then you can determine which deal represents the greatest opportunity and is worth spending your time on.
The key to apartments as investments is to recognize that at their core, they are cashflow streams, and the property’s value is derived from the amount of income is produces.
Every deal is a different combination of income, expenses, debt service. Some will have high gross rents, low vacancies, low expenses, but high debt service. Others will have lower rents, higher expenses, low debt service.
You are looking for ways to profit so that means you are looking for deals where you can make changes that will increase income and reduce expenses on the property, thereby increasing the value. These are called “value plays”, and in each deal you evaluate you are looking for value plays you can take advantage of.
Does the deal have:
- bad management resulting in high expenses that hog income?
- high vacancies, 20% or more?
- below market rents?
- deferred maintenance limiting the appeal of the units to renters
If yes, you have a property you can make a legitimate case to the seller for negotiating the price down, and then after taking ownership, increase income and reduce expenses by executing the value plays.
The result, increasing the value of the property by 50-100% inside 18 months.
Yes, it is amazing, and is what makes apartments awesome investments. Key point to remember; increasing income through value plays are what make it happen.
Evaluate deals on the potential they offer for value plays and you will become a more savvy investor.