Income Reducers: What are they? The difference between the Gross Potential and the Gross Collective are categories of rental income that we call Income Reducers. Income Reducers bring you from Never Never Land to Reality in terms of understanding how you are managing the property.

There are two types of income. There's what we call rental income and other income. So we look at the rental income separately than all the other income because the rental income is comparable to other properties down the street. 

But the other income is usually unique to that particular property. That is why we break up rental income and the other income. And we have the other income within that category. We have two other categories : good income and bad income. But we're not going to talk about the other income right now. All we're talking about is the rental income. 

When we break down rental income, we start at the very top, which is the Gross Potential. This is never, neverland. This...

This is among the provisions found in a Purchase and Sale Agreement. You need to ask for the gold standard - The ALTA Survey! This is in Article 5 of the Purchase and Sale Contract - this will become important when doing your Title Insurance search.

The ALTA survey is what you find in Article V of the Purchase and Sale Contract. You have to understand how important this survey is. But before we get into the details, let me show you that ALTA means “American Land Title Association”. 

If you go down to Texas, they don't use the ALTA. They use the TLTA or the “Texas Land Title Association”. You need to understand what is the gold standard in different markets predominantly across the country. The gold standard for the serving is the ALTA survey. And, the other thing that you have to understand is that not all surveys are the same. So when you see an ALTA survey, you could see another one called a Boundary Survey. 

A Boundary Survey is inadequate for...

What is a Ratio Utility Billing System?

What is RUBS? It's called the Ratio Utility Billing System. It's not a company. 

There are several companies that have this service or have created their own service but the general generic term is a RUBS system. And so, if you have a property that is an all bills paid property and you want to get away from it, you go online and you find a company that does RUBS and then you give them the information about your property and they'll give you a quote. They'll tell you what they can do for you. 

So, it's a method of allocating utility costs in apartments and other multi-family properties or multi-unit. The actual utility bill for the property is distributed to each resident based on an allocation of their usage, an allocation formula. Factors in the formula combine like the number of occupants. 

You see, this a lot especially with water. Water gets a lot of RUBS type of situations. If it's a one-bedroom, the water is going to be...

This one can be seen in a property package, which says HVAC is ABP. But what does that mean?

Well, HVAC is ABP means Heating, Ventilation, and Air Conditioning is All Bills Paid. This is versus tenant-paid. 

As we all know, we don't like to do all-bills paid. There are things that you need to know what to do when you're looking at the financial statement. 

If you see utility income on that statement or on the income section, that means that the tenants are paying up for a portion of the utility. You need to take your finger right down to the expense line item for what the utility expenses are. If you see the utility income is $60,000 you follow your finger down to the utility expenses. I can almost guarantee you, it's not going to be 60,000 bucks for the expenses. It's probably going to be closer to 100,000. 

In any type of a situation where you're billing back the utilities to the tenants, you’re never going to get a dollar for dollar payoff. Usually about...

Rent Concessions are an example of an "income reducer". Here are examples of Rent Concessions and why they are income reducers!

Rent concessions are what we call an income reducer. Income reducers are those things that bring your report from the gross potential income down to the gross collected rent. Everything in between is what we call an income reducer. Rent concessions are an example of an income reducer. Typically you don't like rent concessions. 

There are properties that offer rent concessions but don't report it. I caught somebody doing this one time when I just did a Google search on the address of the property. A Craigslist listing popped up, showing that they're giving away $200 free rent for the first month. I went to the seller, I said, "Hey, you're giving away 200 bucks." He goes, "Yeah, yeah." I said, "It's not showing up in your books." "Oh, it just started doing that. It hasn't caught on yet." But he never disclosed that they were doing rent...

What's the difference between Net Operating Income and a Net Operating Income?

What's the difference between the net operating income and the net ordinary income? 

Well, technically, nothing, but you have to understand what you're defining here. When you say net operating income, you're talking about a multifamily property - NOI. When you're talking about a net ordinary income, you're talking about every other business. 

So, a net operating income is unique to multifamily. And net ordinary income is not - it talks about every other company. What happens is, when you become experts in multifamily financial statements and when a broker sends you the documentation, you're going to be able to look at it right away and know whether you've got a good report or something that is one step above a cocktail napkin. 

And the easiest way to do it, is to look at the income, the expenses and the line that says net ordinary income. If the financial statement that they're giving you...

This is always the fun one! I spoke to many folks on my Podcast and they talked about Capital Stack. Then, I get so many emails asking "What is a Capital Stack?" 

Capital stack is nothing more than all the money you need to raise in order to buy that property, and it's going to come in a couple of different forms. It's going to come in debt, or your mortgage. 

"Well, I got an 80% loan-to-value." 

Great, 80% of your capital stack has just been taken care of. 

Now we got 20%. Well, where is that going to come from? 

"Well, my pocket, I could put down 5%." 

Okay, fine, now we need 15%. Where is that going to come from? 

"Well, I got investors. "They're going to come up with 10%." 

Good, now we're at 95%. Where's the other 5% going to come from? 

"Well, the seller's going to give me a seller financing." 

Boom, we just got our 100% capital stack. 

That's what a capital stack is. That's all it is. 

It's where all of the money is...

This is what we need to take into consideration when we are doing a value add, kicking people out, cleaning up the units, increasing the rents and putting it back on the market. Find out how to get the absorption rate in that marketplace. You better know what you're talking about especially when you are speaking to your investors!

You need to know, in your calculations for determining the cost of this value add proposition, what is the absorption rate in that particular community. That's the amount of time it takes for a new unit to be absorbed into the market and by a tenant. 

You have to determine how long it takes for a new unit to be leased up by another tenant. If it sits on the market for four months or if it is showing a four month absorption rate, you've got to figure that into your calculation. 

Once the deal is closed and once that unit is put back on the market, you’ve got to hold that unit for four months in order to find the right tenant. And it's not...

There is one thing that sets the multifamily investing business apart from all others. That one thing is 'The Power of the Cap Rate”. Also, check out this fifteen minute presentation from Charles Dobens, The Multifamily Attorney, to find out exactly what he means:  The Power of Cap Rate

We all know what cap rate is.

NOI, cap rate and price - all three variables fit together. 

You need to understand how the cap rate works. A property that has a higher cap rate is less valuable than a property with a lower cap rate! 

Everybody else thinks, "Oh, a 10-cap is better than a four-cap." No! Just do the math. Remember, a one dollar increase on a four-cap is a 25% while a one dollar increase on a 10-cap, I think it's $12.67. Well, $16.67. And on six-cap, it's like 12 bucks. 

That is why we go for the more higher quality properties. That's why the insurance companies, the pension funds, the big investors who build - they go with a Class A property, because of...

I see an interest only period being used far too often by students. I will tell you what the problem is when using an interest only, and the only time it makes sense to use one.

Interest only is typically used only for value-add deals. If it's a performing asset, we don't go to interest only. There's a reason for that. 

At some point, when that interest only period burns off and it becomes what we call an amortizing debt, your mortgage payments are going to go up considerably. If you do not have any corresponding increase in income that you are hoping to do when you do the value-add, then your cash on cash is going to go in the toilet. Your investors are going to say, “hey what the heck did you do?” And the whole thing will look terrible. 

The only time I like to use value-add, interest only is when we're talking about a value add property. You see it on bridge loans and on rehab loans. 

There's an exception to every rule and in this particular case. The...