Commercial Real Estate Investment Newsletter | August 2018

CRAVEY REAL ESTATE SERVICES, INC.

IN THIS ISSUEInvesting In Apartments - Who Is The Tenant? Upgrading Properties And The Benefits Controlling Property With The Least Expense Acquiring Investment Land The Upkeep On Your Rental Property

Investing In Apartments – Who Is The Tenant?The demand for apartment rentals remainsvery strong. Although most people favordetached home ownership, many in thepopulation cannot afford a single-familyhome. A new buyer of apartments must think“management”. Good management hasalways been the most important point inincreasing or maintaining annual operatingprofits. Being a skillful manager requiresintelligent handling of the functions ofbuying and selling properties, rentcollections, maintenance, leasing,controlling expenses, refurbishing,management accounting and more. All ofthis requires long “hands-on” experiencein the field with plenty of assistance fromthe latest in operational and administrativehardware and software. Professionalmanagement companies usually do a muchbetter job than owners and more than earntheir fees. Here are a few tips on types of apartmentsand ways to invest in them. The Market Apartment properties, as always, continueto be the favorite investment property formany investors. Of course, these investorspurchase income producing real estate tomake money. One of the advantages thatapartment property offers investors is thehigher ratio of building to land value whichmeans that more of the capitalinvestment can be depreciated. Also, thedepreciation life of residential incomeproperty is shorter than other investments. It is also possible to reap substantial rentalincome from a relatively small investment,with a large amount of the purchase pricebeing financed by first and second 

mortgages. Looking at an apartment property forinvestment, you must have an idea of whereyour tenants will come from: Downtown High Rise. The advantages ofthe downtown apartment are itsaccessibility (both for work and shopping)to the business heart of the city, and thecultural and entertainment facilitiesavailable. However, because of high rentals,it is not surprising that studies show thatthe luxury-apartment dwellers (1) wereover 35; (2) had relatively high income; (3)either worked downtown or did not work;(4) had no children living with them. Fringe-Area Medium-Rise. Costconsiderations often prevent these in thedowntown area, but they may be feasible infringe areas. They are attractive becausethey have a friendlier atmosphere than thehigh-rise. A typical tenant profile for such aproject showed that most had moved therefrom single family homes, were over 45without young children, and were self-employed or professionals. Garden Apartments. These generally fallinto the middle-income or semi-luxuryclass. In one Southern city, a study showedabout half the tenants in a project weresingle and sharing space, while the otherhalf were married couples with few or nochildren and both working. Average age waslow and most commuted to work withoutfinding the trip burdensome. High-Value Garden Apartments. Theseappeal mostly to older persons who want tolive in the suburbs without having the 

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responsibility of a house. The apartmentstend to be large, both in terms of space andnumber of rooms. Suburban Luxury High-Rise. These areoften popular in high-income suburbs nearfairly large cities. They combine the fullrange of luxury features (swimming pools,organized social activities, etc.) with theadvantages of suburbia (less congestion,adequate parking, modern shoppingfacilities). Usually, these projects arelocated at or near key access routes. Studies have also shown that the reasonmost often given for selecting a particularapartment project is its accessibility to thejob. Most emphasis is on travel time ratherthan distance. Less crowded roads or fastexpressways open up a wider territory forrental projects. After-work accessibility,the feature people want most is convenientshopping, which in the suburbs meansaccess to a shopping center. Thus landadjacent to a center is often highly desirablefor a rental project if it can be acquired atthe right price. Location. If the apartment fits these criteriafor tenants, check the location andsurrounding neighborhood. You don’t knowwhat you’re buying unless you take a hardlook at the neighborhood in which theapartment is located. How does the buildingcompare with other buildings in the area?What are others offering to tenants in thesame neighborhood? How do rentalscompare? What about transportationfacilities?

How close to the business area are you?Make a careful study of schools, recreationand shopping facilities, traffic flow, andchurches. An analysis of these factors isessential. Layout. Study the number and layout of theapartments, average rent per room, andprospects for increases. How competitive isthe rental level? Don’t automaticallyassume that the rental level is equal to therental value. Remember that an apartmentrented at a bargain price in a financiallywell-off community has more rental valuethan high-rent premises in a declining area.Also, a low-rent apartment in a fashionableneighborhood will bring more than a muchbetter apartment in a middle-income area. Condition. Before investing, the physicalcondition of the property must be checked.Whether or not the building and thegrounds are in good condition may makethe difference between profit and losses foryou. Look carefully at the age and type ofequipment used. Check for signs of deferredor substandard maintenance. Otherwise,you may find that you will be faced withabnormal costs after you acquire theproperty. If you expect to get the samerentals as other buildings in theneighborhood, the appearance of yourbuildings and grounds should comparefavorably with the others. However, a property that is in poor physicalcondition may be just what you want if youare renovating apartment buildings.

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buildings and start working on them duringslack construction periods. In this way, hekeeps construction crews busy for themaximum amount of time. Cash Flow. A rehabilitated building canbring the investor a steady rental incomeproviding cash flow and profits with taxshelter produced by depreciationdeductions. Quick Action. As the rehabber gainsexperience, a builder can complete work onan older building in less time than it takes toput up a comparable building from scratch.Usually, a rehabilitated building willproduce more rentable space than a similarnew structure because of modern buildingcode requirements. A Rental Portfolio. A portfolio ofrehabilitated houses and apartments shouldproduce a relatively high rate of return withonly a limited risk. As they appreciate invalue, periodic refinancing of the buildingsis possible. In this way, the investor cancash out part of the equity tax-free. Also,refinancing can produce substantial fundsfor new construction and rehabilitationprojects. Later, when the buildings are sold,the gain will be taxed at favorable capitalgains rates.

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Many investors specialize in picking uprun-down properties and renovating themfor sale or lease. Profit can also be made inacquiring properties that offer extra land. Itis sometimes possible to not only get yourmoney back, but also make a profit on thesale of a remodeled house with a reducedamount of land (assuming the local zoningordinances will so allow), while holding theadditional land for long-term appreciationor building another house or smallapartment on it. In addition, many largerhouses that might otherwise be considereduneconomical can be trimmed down toaccommodate a family seeking morespacious quarters. By reducing thestructure’s surplus space, many sprawlinghouses can be made salable. It is alsopossible to buy a large house, remodel it toa duplex or more units (with zoningapproval) and sell it with a good profit. Low Front-Money Requirements. Lessfront money is required for manyrehabilitation jobs than for comparable newconstruction, since the building shell isvaluable and less material is required. Maximum Use Of Work Crews. If theinvestor is a builder, he can buy or option 

Controlling Property With The Least Expense

Upgrading Properties And The Benefits

The Purchase-Option A purchase-option contract lets the buyer-optionee purchase a property at a specificprice within a certain period of time. If theoption is exercised, a closing is held and theproperty is purchased at the pricepreviously agreed upon. There is no legalobligation to buy the property. But, if 

the optionee does not exercise the option,the deposit paid to the seller-optionor isforfeited. The biggest differences between thepurchase-option and direct ownership maybe two advantages from the viewpoint ofthe investor: First, the short term (6 to 24month) purchase option contracts can be anoutstanding way to control property 

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without assuming the responsibilities ofownership. Second, the contract enables theoptionee to receive all of the benefits fromappreciation in market value of theproperty. Basic Responsibilities Eliminated There are five basic responsibilities ofproperty ownership that are eliminated byusing the purchase-option contract: Long-term Commitment. With manyinvestments, there will be no cash profitfrom property ownership until the propertyis sold. With the purchase-option, theresponsibility for a long-term commitmentof ownership is eliminated. The optionee’scommitment is short-term only, with theability to sell the option, buy andimmediately sell the property, or never buythe property. Mortgage Payments. There are no mortgagepayments made by the optionee. He haseliminated the responsibility to “pay for”the property during the period when thepurchase-option is open and unexercised. Property Management. There will be noresponsibility with respect to managing andmaintaining the property unless theoptionee exercises the option and takespossession of the property. In a straightpurchase, the buyer must begin maintainingand managing the property right afterclosing–a time consuming and costlyresponsibility. Cash Payments Required. As we all know,property ownership involves payment in fullor cash down payment (10% to 25% ormore). When the property is controlled withthe purchase-option, the down payment is 

replaced by an option deposit (theconsideration in the contract), that can be in a much smaller amount, perhaps in the1% to 5% range. Financial Liability. Optionees have nofinancial risk in the property other than theamount paid in the option contract. Theproperty owner must pay the propertytaxes, mortgage payments, insurancepayments, maintenance and repairs and anyother obligations of ownership. The optionee has the specified period oftime that is in the term of the option inwhich to buy the property or decide to pass.During the time, the optionee can evaluatethe potential and make those decisions. It iscertainly the best way to hold a property foran increase in value over a very short term. Control Of Property Most real estate investors have traditionallybeen attracted to commercial real estateopportunities. Typically these investorshave been well rewarded for theirinvestment. Properties that are designed for“doing business” proliferate and succeed asbusinesses grow and diversify and becomemore and more profitable. For investors tobe successful it is normally important tounderstand the operation of the particularcommercial enterprise involved in the realestate investment. However, some investors look for the short-term investment with less of an emphasison “doing business” and more pre-investment research on controllingproperty for the maximum gain in the shortterm. These investors often use the optionor purchase-option.

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Land is always at the top of investments byreal estate professionals. Before anybuilding project can be planned, the landmust be available. At all times, real estateassemblers are looking at and acquiringunder-utilized sites within cities or insuburbs. Here are some ideas on how thoseprofessionals do it. • A thorough knowledge. Only purchase oroption property in well-known localities toreduce the risk of unexpected surprises. Ifthe locality is not familiar, seek out localprofessionals for their opinions. • Be a follower. Being the first to buyincreases the risk of being wrong and maymean an unexpectedly long wait until valuesrise. It is often better to go in after valueshave begun to increase or after somedevelopment has started. • Government maps. Local governments 

Keeping your property in top condition isnot difficult if it is a continuing effort. Therewill be a plan in place for making ongoingimprovements by investing a portion ofeach year’s income.  Many investment properties suffer fromimproper care and neglect. Getting startedon the program of enhancing the valueshould focus first on three these three areasto immediately make an office or apartmentbuilding begin to stand out: 1. The lobby and interiors of the buildingmust be perceived by tenants and visitors assomething unique. 2. The outside appearance from the streetmust give a favorable impression topassers-by, both pedestrians and those invehicles.

often have maps and plans for projectedroads and highways. These can point theway to desirable acquisitions.• Prepare anacreage map. The map should show theownership of all tracts in the locality and (ifknown) the asking price of each. This stepmarks the prime difference between theprofessional and the non-professional landacquirer. • Seek out builders. Try to find a builderwilling to let you act as an intermediary inacquiring land. Note: An investor or investment groupretained by a builder to find land isobligated to give the builder the firstopportunity to buy in all cases. However,any land the builder does not want may be agood investment for the assembler since itsvalue is likely to increase as newconstruction occurs.

3. The building must stand out from itssurroundings when seen from a distance. Here are a couple improvements thatusually will change the appearance of anoffice or apartment building quickly: • A new lighting system will enhance thenighttime visibility and take advantage ofany nighttime traffic. The building will bemore visible from a distance. • Replace the wall coverings on each of thefloors to produce a lighter, cleaner image. It is seldom necessary to “do” an entirebuilding all at one time, disrupting tenantsand running up big costs. Try animprovement on one floor to see how itworks ant effective it is. If it makes sense,phase in the improvement over a period ofmonths or years.

The Upkeep On Your Rental Property

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Acquiring Investment Land

“This publication is designed to provide accurate and authoritative information in regard to the subject covered. It is distributed withthe understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice isrequired, the services of a competent professional person should be sought.” - From a Declaration of Principles jointly adopted by aCommittee of the American Bar Association and a Committee of Publishers and Associations. © 2018 All Rights Reserved

Cravey Real Estate Services, Inc. 5541 Bear Lane, Suite 240 Corpus Christi, TX 78405 361-289-5168 Office 361-289-5442 Fax cravey@craveyrealestate.com www.craveyrealestate.com

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