Understanding Multifamily Lingo : "Absorption Rate"

blog Apr 03, 2020
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...

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Understanding Multifamily Lingo : “Cap Rate”

blog Mar 20, 2020
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...

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Understanding Multifamily Lingo: “Interest Only Period”

blog Mar 13, 2020
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...

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Understanding Multifamily Lingo : “Debt Coverage Ratio”

blog Mar 06, 2020
This is the first financial measurement that I look at when doing a cash flow analysis. By understanding the Debt Coverage Ratio, I know whether I did the analysis correctly or not. That's why I call this number my "Sleep Number"

Now, I'm going to tell you how I teach Debt Coverage Ratio when I'm in the class. It's expressed as a ratio between the net operating income and the mortgage payment. 

When I put the numbers into the cash flow analyzer and I've got it all in there correctly, I go to the cash flow analysis tab, and scroll right down to the DCR. That's the first financial measurement that I even look at because that tells me whether I can make this a deal or not. It tells me whether the price of the property that the broker told you was way out of whack. It tells me whether my offer price is way out of whack. 

Just by understanding the debt coverage ratio, I know whether I did the analysis correctly or not. And that's why I love the DCR. 

This is how I teach...

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Is It a Bad Time to Invest in Real Estate?

blog Jan 27, 2020
Talk of a recession is growing. Successful investors know how to recognize opportunities that may present themselves during a recession. Charles Dobens discusses how you need a solid business foundation to withstand these market downturns.

So recession talk is growing. This is the other article that I have in the in the Slack room: recession talk is growing. Is it a bad time to invest in real estate? All right, let's talk about this for a second. You know recession is always coming at some point. The recession is going to hit a recession is going to hit at some point. Who knows if it’s going to be a big one or a little one. I know they were saying that we are already in one already during the Trump administration - that we are already in a recession. I don't think so. You know maybe a recession of 20 years ago is not the recession of today.

There are opportunities and deals to be had in every market. Remember, more millionaires were made during the depression than any other...

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Power of the Cap Rate in Multifamily

blog Nov 15, 2019
There is one thing that sets the multifamily investing business apart from all others. That one thing is 'The Power of the Cap Rate'. 

The way I teach multifamily is different than everything else, everyone else. Because what I say is, multifamily is not real estate. It is not real estate. Let me put it to you this way. 

Let's say Dave owns a 100 apartment complex built in 1986. It has 60 one-bedrooms, 40 two-bedrooms, it has pitched roofs, separate entrances, individually metered. Great property. And Link owns an identical property across the street. Absolutely identical, built by the same builder. The fact that they're across the street has absolutely no meaning whatsoever on the difference in any value, okay? Location is the same. Whose property is more valuable? Link's, or Dave's? 

So we're talking about real estate here guys. So, they're right across the street from each other, which one's more valuable?

Well, it depends upon the NOI with the cash, the...

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Know the Trends in Your Market

blog Oct 04, 2019
You need to gather all the data for your market and submarkets so that you can present this information to your investors. You’ve got to put together your offering memorandum and you need all the information in reports on trends in your marketplace.

As a multifamily investor in your marketplace you need to know all of the trends of your market - from vacancy, expenses and rent. Let me give you an example of what I'm talking about. Where is the best place to find average vacancy in your market and submarket along with absorption rate? Okay listen, there are many different places in different markets who'll have different sources. If you are among those who have not looked at this yet, or if you're looking in to some particular markets and you haven't even gone to this most basic site, then shame on you. I'm going to show you what you need to be doing for this type of data and start keeping track of trends on an Excel spreadsheet. 

Build out the most beautiful model so...

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Know the Average Vacancy for Your Market

blog Oct 04, 2019
Every sub-market is unique. It is your responsibility to understand what the metrics are even within your sub-market. Vacancy, average rents, absorption rates, building permits, etc.

Let's take a look at mistake number four. You've got to know the average vacancy for your market. All right, this sounds simple but let me explain to you where this goes wrong. And I'm going to show you exactly what I'm talking about. When I talk about the market, the average vacancy, I'm not just talking about the market. I'm also talking about the sub market within your area. 

You can't just say, "Oh that's all 10%." You've got to know exactly what it is within your sub-market. And there are different places that you can find that. And here's why this has become such a crucial problem for new investors. 

When you're building the model in your CFA and the cash flow analysis, does it model what the market is doing? In other words, if you put in there the standard or you think that you're...

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Know What The Average Expenses Are In Your Market

blog Sep 26, 2019
Expenses are usually per year, per unit number. If you can decrease your expenses you can make so much more money because of the power of the cap rate. If you can break it down on a per item basis you can see where you can save.

Mistake number three : Know what the average expenses are in your market. Now, what you'll see some brokers doing is expressing the expenses as a per unit per year number. I see that quite a bit good, alright? That's fine. Let's capture that information. So when we capture that information from them and we also capture on our own, we then have perfect information or more precise information as to what is going on in that market as far as the expense numbers go. 

And this gets to a value play. But what do you do on the expense side? How many times have you looked at the expense side and really broken it down to know that, if you can just adjust this one particular category of expenses, it's going to save you a lot of money. You've got to look at all...

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Know What The Average Rents Are In Your Market

blog Sep 19, 2019
If you don't start collecting information, you will have to go on what the broker tells you! You have got to understand the numbers!

One of the mistakes that I see people making is knowing what the average rents are in your market. Some of you may be thinking to yourself, "Charlie, that's ridiculous, of course." Listen, I'm telling you right now. I'm blown away by the fact that investors , new investors will take the offering memorandum and just take the broker’s word as to what the market is for the rents in the area. Let's just think about this for two reasons why you need to know what the average rents are going to be. 

The first reason is when you receive the offer memorandum, you will know right away if the rents are in line with the market. In other words, what they're saying and when they’re showing you the rent roll, you're going to know. And that’s because you know the market.

You can say, “hey, these guys are way low, or these numbers don't...

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