Enjoy this day with your family and friends. Be grateful for your blessings – not just this day but everyday.
Merry Christmas and Happy Holidays,
Lance
Welcome back. This is the continuation of my earlier post, “Everything Happens for A Reason: 2008 Prepared Us for 2009″.
I concluded that post about the 2-fold opportunity for us as apartment entrepreneurs, thankfully recognized due to my core belief that “Everything happens for a reason and it serves me.”
Before I explain the opportunities, I feel obligated to share some additional mindset points that hopefully will serve you as they have me – in life and with apartments. When the 2008 financial crisis hit, I challenged my Apprentices with this…
I told them to remember that the language we use and the questions we ask ourselves are critical.
I reminded them as I remind you: DO NOT ask yourself the question, “What is going to happen to me.”
That is a disempowering question. It is the question of the victim. And that question repeated and supported in your subconscious will illicit the actions of a victim and you will attract things in your life consistent with playing the victim (unconsciously).
Instead, ask yourself an empowering question, “What am I going to make happen?”
That is a question of power and control. That is the question of the entrepreneur. And that question repeated and supported will illicit actions and observations that will serve you in a time of unprecedented change and opportunity.
The other question I challenged the Apprentices to ask themselves was, “How will I benefit from this crisis?” Keep asking that and your mind will seek it out (if you are following your other daily mindset routine - for assistance, see the resource box to the right.)
When I asked myself that question, I arrived at the following answer:
The financial crisis of 2008 is a time of unprecedented opportunity for the apartment entrepreneur. Here’s why:
1) Increased Demand for Rental Housing: With less people qualified to own homes and more people losing their homes, that is increasing the demand for rental housing.
And in cost-conscious times, people downsize their housing accommodations which creates progressively increasing demand for apartments.
Just 2 weeks ago, my local TV station reported that apartment occupancies are up and apartment rents are up! Apartments may be one of the few businesses where demand is increasing. It’s logical.
2) Increased Supply of Private Money: Do you think there is more money entering or leaving the stock market? That’s right. Leaving – seeking a safe haven; like income producing commercial real estate.
People have seen their 401-K plans diminish by 40%. They need fundamental conservative investments like good, old-fashioned apartments where the value is based on the fundamental income – not the neighborhood appreciation brought about by free home loans.
As the apartment entrepreneur, it is our job to be matchmaker; to match deals with dollars and profit from our value-add, which is huge. Private investors are shell-shocked right now and they are desperate for a return to feelings of control and security. And our apartment deals can provide that.
I had a couple approach me recently at a local real estate club. They had lost $300,000 in their 401-K in a matter of weeks. Unsolicited, they told me their story and asked “Can we invest with you?“
That’s a microcosm of the opportunity for high integrity, trained entrepreneurs like you. And especially for those who have the mindset to see the opportunities and stand strong.
I’m challenging you to stand strong – for yourself, for your family, your your private investors. The world needs entrepreneurs right now.
Lance
There is a misconception out there that evaluating real estate deals is a time-consuming and arduous task. Nothing could be further from the truth! Analyzing apartment deals and making money on apartments is all about the numbers. More specifically, it’s all about the revenue and expense numbers. With that in mind, you can easily assess a deal in 10 minutes.
Apartment values are based on the numbers and the Net Operating Income (NOI). The more net operating income you can generate, the more money you will have to put in your pocket every month and again when you refinance or cash them out. However, you have a large degree of control over the revenue and the expenses of an apartment. You have the ability to estimate the value up front but you can also predict the value of your property even if you desire to make changes.
There are three simple questions to ask when evaluating a deal:
- What is the Cap Rate?
- What is the price per door?
- What is the unit mix?
Once you have the answers to those three questions, you will know whether you should move forward with the deal. Let’s examine each of those questions more closely.
What is the Cap Rate?
This is an abbreviation for the capitalization rate. This is the return on investment on a percentage basis if you paid all cash. The formula for CapRate is your NOI divided by the purchase price. For example, if you have a property that has a NOI of $100,000 per year and you paid $1,000,000 cash for the property, your Cap Rate is 10% because you are getting 10% return on your $1,000,000. The golden rule in evaluating deals is to look for properties that have a 10% or higher Cap Rate.
What is the price per door?
Price per door equals the price divided by the number of doors (or apartments). As a general rule, if it is less that $25,000 per door, then it is a candidate because it will most likely have a good Cap Rate and it will most likely have cash flow. Your general rule of thumb is that you go with less than $25,000 per door for an apartment building. This figure does not include any rehabilitation costs.
What is the unit mix?
The unit mix is the percentage of units that are one bedroom, two bedroom, and three bedrooms. A property that has more two bedrooms than one bedrooms will have higher rent or higher revenue per door. It is better to have a property with more two and three bedrooms than one-bedroom units because the rent per apartment will be higher on average. Generally speaking, two bedrooms are easier to rent.
The answers to these three questions reveal a lot of things. The Cap Rate tells you about the cash flow of a property. The price per door will tell you the class of property you are dealing with and the unit mix will tell you about marketability and revenue stream. These answers allow you to assess within 10 minutes whether a property is worth pursuing.
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