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Evaluating Investments! with The Apartment Consultant!. How To analyze Apartment deals 101 . Our #1 Goal when evaluating is : Does it put $$$ in your pocket?? $$$ = spendable cash. Evaluating Apartment deals . Our #1 Goal when evaluating : How much $$$ in your pocket??

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How to analyze apartment deals 101 l.jpg

Evaluating Investments!

with The Apartment Consultant!

TheApartmentConsultant.com

How To analyze Apartment deals 101


Evaluating apartment deals l.jpg

Our #1 Goal when evaluating is:

Does it put $$$ in your pocket??

$$$ = spendable cash

TheApartmentConsultant.com

Evaluating Apartment deals


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Our #1 Goal when evaluating:

How much $$$ in your pocket??

Note: this is a cash flow business, not a “hope for appreciation” business. Appreciation is a “bonus” for buying smartly and being patient.

TheApartmentConsultant.com

Evaluating apartment deals


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The3Golden Rulesof Evaluating:

Step 1: get the income per year

Step 2: get the expenses per year

Step 3: get the debt service per year

This is all you need to analyze any deal!!

The Apartment Consultant.com

Evaluating apartment deals


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The 3 Guiding Principlesof Evaluating Apartments

#1 Cash flowpositive

#2 Cash-on-cash return10% or higher

#3 Capitalization rate8% or higher

TheApartmentConsultant.com

Evaluating apartment deals


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TheApartmentConsultant.com

Let’s Analyze a 20 unit apartment

Asking price: $700,000


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Key Investment Terms that experts know and use:

 Gross income

 Vacancy rate

 Effective gross income (EGI)

 Operating expenses

 Net operating income (NOI)

 Debt service

TheApartmentConsultant.com

Let’s Analyze a 20 unit apartment


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Key Investment Terms - continued:

 Cash flow*

 Cash-on-cash return*

 Cap rate*

*denotes our Guiding Principles

TheApartmentConsultant.com

Let’s Analyze a 20 unit apartment


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Why do we need Guiding Principles?

 To buy the best performingproperties!

 And to keep out the “money-pit” properties!

 It gives you an investing planto begin with!

 It’ll keep you from wanderingin your search!

TheApartmentConsultant.com

Guiding principles of investment


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What are they again?

 Cash flowpositive

 Cash-on-cash return10% or higher

 Capitalization rate8% or higher

TheApartmentConsultant.com

Guiding principles


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Definition of Cash flow is

Net operating income – debt service = Cash flow

TheApartmentConsultant.com

Guiding principles


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Definition of Cash-on-cash return is your rate of return on investment (roi) or “how fast am I getting my whole investment returned to me?

Cash flow/Downpayment = % Cash-on-cash return

TheApartmentConsultant.com

Guiding principles


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Definition of Cap rate is

Return on investment if you paid all cash (no mortgage)

Net income / Sales price = % Cap rate

TheApartmentConsultant.com

Guiding principles


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Now, let’s put it all together using all of the terms in a simple analysis of the 20 unit apartment building!

TheApartmentConsultant.com

Evaluating apartment deals


Analyzing a 20 unit apartment deal l.jpg

TheApartmentConsultant.com simple analysis of the 20 unit apartment building!

Analyzing a 20 unit apartment deal

Asking price: $700,000


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Address: 6 Joshua Way simple analysis of the 20 unit apartment building!

 Asking price: $700,000

 14 – 2beds/1ba, 6 – 1bed/1ba

 2beds rent for $550/mo 1beds rent for $425/mo

 Tenants pay for elec, gas utilities

 Owner pays for ins, taxes, water, repairs, maint, property mgmt, garbage, gardener, and supplies.

TheApartmentConsultant.com

Analyzing a 20 unit apartment deal


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Recall: simple analysis of the 20 unit apartment building!Golden Rules of Evaluating

Step 1: get the income per year

Step 2: get the expenses per year

Step 3: get the debt service per year

TheApartmentConsultant.com

Analyzing a 20 unit apartment deal


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Step 1: get the simple analysis of the 20 unit apartment building!income per year

2beds: $550 x 14 units = $7700

1beds: $425x 6 units = $2550

$10,250 x 12 months = $123,000 per year of gross income

TheApartmentConsultant.com

Analyzing a 20 unit apartment deal


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Step 1 cont’d: gross income per year is $123,000 simple analysis of the 20 unit apartment building!

The area has a vacancy rate of 7%:

$123,000 x 7% = $8,610 per year of vacancy

$123,000 - $8,610 = $114,390 of effective gross income

TheApartmentConsultant.com

Analyzing a 20 unit apartment deal


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Step 2: get the simple analysis of the 20 unit apartment building!expenses per year

See next page for breakdown of typical categories of operating expenses for apartments.

TheApartmentConsultant.com

Analyzing a 20 unit apartment deal


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TheApartmentConsultant.com simple analysis of the 20 unit apartment building!

Analyzing a 20 unit apartment deal

Ins

Taxes

Elec

Water

Repairs

Maint person

Property mgmt

Garbage

Gardener

Supplies

$4500 Expenses Table

$8610

$1300

$7400

$7900

$6000

$6210

$1150

$1400

$2700 Total: $47,170/yr


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Step 3: simple analysis of the 20 unit apartment building!Get the debt service per year:

Assumptions: 6.50% int. rate, 20% down*

$3539 /mo. x 12 months = $42,468/year

*denotes a conventional commercial loan down payment

TheApartmentConsultant.com

Analyzing a 20 unit apartment deal


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Results: simple analysis of the 20 unit apartment building!

Effective gross income: $114,390/year

Operating expenses: $47,170/year

Net operating income: $67,220

Debt service: $42,468/year

Cash flow = $67,220 – $42,468 = $24,752

TheApartmentConsultant.com

Analyzing a 20 unit apartment deal


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Let’s calculate the other Guiding Principles! simple analysis of the 20 unit apartment building!

Cash-on-cash = cashflow/downpayment

$24,752/$140,000 = 17.7%

Cap rate = net operating income/sales price

$67,220/$700,000 = 9.6%

TheApartmentConsultant.com

Analyzing a 20 unit apartment deal


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In summary, simple analysis of the 20 unit apartment building!Guiding Principles

Cash flow = $24,752/yr positive cash flow √

Cash-on-cash = 17.7%greater than 10% √

Cap rate = 9.6%greater than 8% √

Guiding Principles are met on this deal!

Would you make an offer based upon your number crunching and evaluation??

TheApartmentConsultant.com

Analyzing a 20 unit apartment deal


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#1 simple analysis of the 20 unit apartment building!: The number one mistake new investors make is underestimating expenses. Don’t believe the realtor information! Confirm every detail!

#2: Have your expenses checked by someone who knows – e.g. property manager, coach

#3: Beware of Broker proformas!

#4: Concessions can cause pain…later on!

#5 Know when and how property taxes re-assess.

TheApartmentConsultant.com

5 Deal-saving Tip$ on Income & Expense$


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[email protected] simple analysis of the 20 unit apartment building!

Or go to the website:

www.TheApartmentConsultant.com

Contact Us


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