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Financial Management

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  1. Financial Management

  2. Introductions • Your name • Where you work • Your job responsibilities • How long you have been in the industry • What you hope to get from this class Course 8: Financial Mgmt

  3. Agenda • Investments • Adding Value to the Investment • Economic Analysis of a Property • Budgets • Property Valuation Course 8: Financial Mgmt

  4. Chapter 1: Investments We will discuss: • What are investments and whether to make them • Advantages and disadvantages of investing in multifamily housing • Different types of ownership and methods of financing Course 8: Financial Management

  5. Definition: Investment • An investment is the use of funds to earn a profit. Course 8: Financial Mgmt Chapter 1

  6. Four (4) Factors in Investment • Risk – low risk = low return high risk = high return • Income – may depend on risk involved • Growth – means a potential to increase in value >NOI = greater value • Liquidity - ability to convert to cash Module 8: Financial Mgmt Chapter 1

  7. Owner’s Objectives Why is it important to know the owner’s investment objectives for the property you manage?

  8. Performance Measures • Rate of return on investment (ROI) • Cash-on-cash return • Capitalization rate • Internal rate of return (IRR) Course 8: Financial Mgmt Chapter 1

  9. ROI • Rate of return on investment = percentage of return on each dollar invested Cash flow/Investment = ROI Module 8: Financial Management

  10. Capitalization Rate • NOI/Purchase Price = Cap Rate • NOI/Cap Rate = Value Course 8: Financial Management

  11. Exercise • We paid $7,000,000 for a property and the NOI is $500,000. What is the cap rate? • Divide NOI by 6% Course 8: Financial Management

  12. Remember • Lower cap rate = higher value • Higher cap rate = lower value

  13. Advantages of Investments • Advantages include: • Periodic cash payments • Potential for increase in value • Reduction in income taxes due to depreciation • Ability to invest using borrowed funds Course 8: Financial Mgmt Chapter 1

  14. Disadvantages of Investments • Disadvantages include: • Real estate is not a liquid asset • Active participation is often required • Potential for risk (natural disasters, changes in market conditions) Course 8: Financial Mgmt Chapter 1

  15. Forms of ownership • Direct ownership • Partnership • Limited liability partnership • Limited liability corporation • S corporation • Joint venture • Real Estate Investment Trusts (REITs) • Tenants in Common (TICs) Course 8: Financial Mgmt Chapter 1

  16. Types of mortgages • Fixed rate • Variable rate • Balloon • Bullet loan Course 8: Financial Mgmt Chapter 1

  17. Where to obtain a mortgage • Commercial banks • Finance companies • Savings and loan institutions • Insurance companies • Pension funds • Mutual funds • Federal government (Freddie Mac, Fannie Mae) Course 8: Financial Mgmt Chapter 1

  18. Skill Check #1 Chapter 1- Investments Course 8: Financial Mgmt Chapter 1

  19. Chapter 2 Adding Value to the Investment Course 8:Financial Management

  20. Adding Value: CAM Responsibilities • Generating and collecting as much income as possible • Controlling expenses • Meeting the financial goals of the investment Course 8: Financial Mgmt Chapter 2

  21. Additional ways to add value: • Reduced staff turnover and lower personnel costs • Reduced resident turnover with better customer service • Aggressive rental rates set by unit type • New income sources through resident services • Better collection of resident charges Course 8: Financial Mgmt Chapter 2

  22. Rent Administrative Fees Parking/Garage fees Pet fees Laundry room/Vending Late fees/collection fees Clubhouse rental/video rental Car wash Cable/Internet/ Phone Sources of Income Course 8: Financial Mgmt Chapter 2

  23. Maintenance Administrative Salaries/Personnel Taxes Insurance Utilities Contract services Advertising and Marketing Types of Expenses Course 8: Financial Mgmt Chapter 2

  24. 3 Factors That Affect Rental Income • Competitive rental rents • Physical occupancy • Collection percent or economic occupancy Course 8: Financial Mgmt Chapter 2

  25. Concession Impact Market rent = $700 Concession = one month rent What is the Effective Rent? Course 8: Financial Management

  26. Law of Supply and Demand • If the demand is high and the supply is low, higher prices can be obtained. • If demand is low and the supply is high, rents must be made competitive to attract residents. Course 8: Financial Mgmt Chapter 2

  27. Economic conditions • Population growth • Household formation • Job creation Course 8: Financial Mgmt Chapter 2

  28. Balancing rental rates and vacancies • The goal is to maximize income not occupancy • Pricing too high may cause longer vacancy • Pricing too low means you are losing money while the unit is occupied Course 8: Financial Mgmt Chapter 2

  29. Increasing rental rate Market value = $800 Raise rent 10% = $880 Vacancy = 15 days What is the cost of the vacancy? At the new rate, how long before you recover the vacancy loss? Course 8: Financial Management

  30. Lowering rental rate • Market value = $800 • Lower rent 10% = $720 • Loss per month = $80 • Loss per year = $960 What would you lose if you did not lower the price and the apartment sat vacant for a month? Course 8: Financial Management

  31. Before adjusting rent, analyze the 4 P’s: • People • Product • Promotion • Price Course 8: Financial Management

  32. Determining pricing • Conduct a market analysis • Use an automated revenue management system Course 8: Financial Mgmt Chapter 2

  33. When to consider a rent increase • When any floor plan remains 95% or more occupied or that remains full even when the community turnover ratio averages below 55% • When rents fall below levels indicated by a comparative rent analysis • Anytime a community is full • Upon owner request Course 8: Financial Mgmt Chapter 2

  34. Rental increases: Current residents • Increase rent as leases expire, OR • Increase rent selectively on expired leases using a quantifiable, non-discriminatory standard (years of residence or number of previous renewals) • Consider a renewal rate that is slightly lower than the new market rate as an incentive to stay • Provide 60 days notice prior to the effective date of the increase Course 8: Financial Mgmt Chapter 2

  35. Managing Occupancy: Reports • Occupancy reports • Rent roll • Delinquency report • Deposit/Income reports • Concession report • Demographics report Course 8: Financial Mgmt Chapter 2

  36. Managing Occupancy: Methods • Calculate occupancy trend • Manage lease expirations • Calculate turnover ratio Course 8: Financial Mgmt Chapter 2

  37. Expenses • Fixed – property taxes, insurance • Variable –utilities, turnover costs, etc. • Capital- appliances, HVAC, etc. • Replacement Reserve Account • Debt service Course 8: Financial Mgmt Chapter 2

  38. Cost Benefit Analysis • Potential Expense • Dollars • Time • Image • Potential Benefit • Income • Time • Employee satisfaction • Market position Course 8: Financial Mgmt Chapter 2

  39. Accounting Practices • Budget control log • Invoices • Purchase discounts • Check request or payment vouchers • Petty cash • Resident records • Resident security deposit • Collection of former resident accounts Course 8: Financial Mgmt Chapter 2

  40. Skill Check #2 Chapter 2: Adding Value to the Investment Course 8 Financial Mgmt Chapter 2

  41. Chapter 3 Economic Analysis of a Property Course 8: Financial Management

  42. Economic Analysis When analyzing a property, ask • How well has a property performed over a specific time period? • Where does a property stand at a given date in time? Course 8: Financial Management

  43. Course 8: Financial Mgmt Chapter 2

  44. Course 4: Fair Housing

  45. Accounting methods • Accrual- records all income and expenses in period they were earned or incurred, regardless of when received or paid • Cash- records all income and expenses when they are actually received or paid Course 8: Financial Mgmt Chapter 3

  46. Cash Flow • The amount of money left after all sources of income are collected and operating expenses, capital expenses and debt service have been paid • Often referred to as the operating statement Course 8: Financial Mgmt Chapter 3

  47. Gross Potential Rent (GPR) • Current rent charged at 100% occupancy- combines the sum of occupied units at current lease rents plus vacant units at market rents • 100% of possible income • All other income and expenses measured and evaluated as % of GPR

  48. Market Rent • Total annual income received if 100% of all units were occupied and paying market rents

  49. Loss to Lease • Variance between market rent and lease rent • Market rent that is “lost” due to lease rents at rates lower than the market rate • For many companies it is a separate line item on the operating statement

  50. Loss to Lease Example • Annual market rent of $1,375,025 with a loss to lease of $125,700 has a loss to lease of 9.1% • 125,700/ 1,375,025= .0914 or 9.1% • GPR of $1,249,325; market rent of $1,375,025 less “loss of $125,700