Q: Why are apartments a good investment?
A: Investing in apartment properties has been considered the conservative investors' real estate
haven and inflation hedge for decades. This is greatly due to the demand for housing being more
stable through economic cycles than that of many other property types competing for the same
investment dollars.
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Q: Are apartment investments secure?
A: Since housing is not a discretionary expense that can be eliminated in tough economic times,
apartment properties generally maintain their occupancy better than other property types in times
of economic difficulty. Risk is more broadly spread in apartment properties than in other property
types.
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Q: Can apartment investments yield strong returns?
A: Just as apartment properties minimize downside in weak economic times, housing investments
generally serve as an excellent inflation hedge in strong economies. Apartment investing offers
the benefits of real estate investment while minimizing potential risks. With a limited supply of
existing housing, limited ability to add additional housing and a forecast of almost continual
population growth, apartment investing in California promises to be viable and prudent for decades
to come.
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Q: What are some of the indicators that investors use to judge value?
A: Capitalization Rate (CAP Rate) - The initial measure of return of an investment excluding the
effects of financing.
Gross Rent Multiplier (GRM) - The GRM is the ratio of price to annual
scheduled income, and is calculated by dividing price by annual income.
Intrinsic Value - Intrinsic value refers to the amount of physical building you receive for your
dollar.
Replacement Cost - Replacement cost valuation reflects value by assessing or estimating what
it would cost to reconstruct an identical new building in a comparable location. Investors are
obviously more comfortable when a purchase can be completed below replacement cost.
Comparable Sales - A comparable sale is one that is similar to the subject in location, size,
style, income, units, amenities, etc. By knowing what other comparable buildings in similar
locations are listed at or have sold for, investors can use the CAP rate, GRM, and cost per
foot/unit methods to justify a building's value.
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Q: What are the different ways of viewing income?
A: Scheduled Gross Income (SGI) - Scheduled gross income is the total amount of income an owner
would expect to receive based on the current leases, with 100 percent occupancy.
Vacancy Rate - The estimated percentage of SGI lost due to turnover of units. In addition to
physical vacancy, this category often includes concessions, bad debts, etc.
Gross Operating Income (GOI) - Gross operating income is the total amount of income received less
the amount of vacancy, concessions, bad debts, etc.
Net Operating Income (NOI) - Net operating income is the remainder of SGI after vacancy and expenses
or GOI minus expenses.
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Q: What are the different elements of expenses?
A: Operating Expenses - Varying from building to building and from area to area, operating
expenses generally include taxes, insurance, utilities, maintenance costs, management fees,
and all other operating costs.
Debt Service - Debt service is the cost of all financing against the property including principle
and interest.
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Q: How do I calculate the return on money invested?
A: Cash on Cash Return - Cash on cash return is the return you receive annually on the
actual cash you have invested into the property.
Total Return on Investment - The total return is the cash on cash return plus the annual
equity that has been built during the period.
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Q: What are the different ways to analyze rents?
A: Rent Survey - A rent survey is a survey of current rent of competing and proximate properties
similar to the subject. They determine the market rent for each specific unit type.
Rent Roll - The rent roll shows who occupies what unit in the building and how much rent they pay,
and often show projected rents on vacant units, move-in and move-out dates, security deposit amounts,
and other information.
Current Rent - Current Rent is the amount that each tenant is currently paying for his or her unit.
Current rent of the property is the sum of the individual units current rent plus any additional
income.
Street Rent - Street rent is the current price the landlord is asking for any specific unit type.
Street rent is often the same as market rent, but sometimes street rents are seen at levels above
or below market levels.
Stabilized Rent - Stabilized rent is the total demonstrated or "proven" rent that would be collected
if all units were rented at the current street rents.
Market Rent - Market rent is the maximum amount of rent that could be achieved by a property's
units if they were pushed to the highest levels that the market could support.
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Q: What is a 1031 Exchange, and how can it help me?
A: Section 1031 - Section 1031 of the Internal Revenue Code allows investors to defer the payment
of capital gains taxes on the profit of a sale by exchanging into investment properties of "like kind"
(i.e. properties held for investment purposes in trade or business). If you have taken depreciation on an
investment property or if you have a property that has increased in value, you may face a considerable
capital gains tax.
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Q: What is Leverage?
A: The term leverage relates to an investors use of financing. A building with low leverage
is purchased with a large down payment and a small or no loan. A building with high leverage
is purchased with a small down payment and a large loan.
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