An apartment community with an effective gross income of $2,123,235, total operating expense of $1,166,489, and annual debt service of $731,724 in a 5.5% cap rate market has a value of $___________ based on the income approach.
- For this apartment community, the market cap rate is 5.5% and the net operating income is $956,746 (effective gross income - total operating expense). Debt service is used in the cash flow calculation, not the net operating income calculation, so it is not used in the income approach
- The value is $956,746/5.5%, or $17,395,381.80
True or false – In apartment syndications, limited partners have control over the business plan
Examples of factors that are considered operating expenses are:
The three main ongoing expense categories for apartment communities are revenue losses, operating expenses, and non-operating expenses.
- Payroll, insurance, maintenance and repairs, advertising, contract services, utilities, and taxes are considered operating expenses
- Debt service is considered a non-operating expense
- Loss-to-lease, bad debt, and vacancy loss are considered revenue losses, which are used to calculate the effective gross income
- Click here for a list of the most common operating expenses for apartment communities
True of false – The loan guarantor of a recourse loan in default is not personally liable unless certain carveouts are triggered
The two main types of loans a recourse and nonrecourse.
- The loan guarantor of a recourse loan is personally liable in the event of a default
- The loan guarantor of a nonrecourse loan is only personally liable if the reason for the default is fraud or gross negligence
- Generally, the loan guarantor of a recourse loan receives a higher compensation due to the increased level of risk
- Click here to learn more about the differences between recourse and nonrecourse debt and the overall process for how an apartment syndicator secures financing for deals
An apartment community with an effective gross income of $2,123,235, total operating expense of $1,166,489, and monthly debt service of $60,977 has a debt service coverage ratio of ___________.
The debt service coverage ratio (DSCR) is a factor used by banks to qualify an apartment for a loan.
True or false – I should start the money-raising process before I find a deal
You need to know how much money you are capable of raising prior to looking for deal.
- The amount of money you can raise is used to set a 12-month financial goal and your investment criteria (i.e., number of units, purchase price, etc.)
- Click here for over 20 blog posts on how to raise money for apartment deals
How do you create alignment of interest with passive investors as an apartment syndicator?
All three are ways for the general partners to have alignment of interest with passive investors.
- Alignment of interest is one of the four factors a passive investor will use to qualify a general partner before investing.
- Click here to learn more about how to create alignment of interest with passive investors, as well as the other three factors
What are the Three Immutable Laws of Real Estate Investing?
Follow my Three Immutable Laws of Real Estate Investing and your business will thrive in any market conditions:
- NEVER buy for appreciation
- ALWAYS secure financing that is longer in term than the expected hold period
- ALWAYS have upfront and ongoing cash reserves.
True or false – You should never invest in a flood zone
What are the main documents needed to underwrite an on-market apartment deal?
On-market deals are listed for sale by commercial real estate brokers.
- To underwrite on-market deals, you need access to the apartment's historical performance (i.e., T-12), current tenant information (i.e., rent roll), and the broker's marketing package (i.e., offering memorandum)
- For off-market deals, you only need the T-12 and rent roll, because since it is not listed for sale by a commercial real estate broker, an offering memorandum isn't available
True or false – loan-to-value is based on the appraised value of the apartment community and loan-to-cost is based on the appraised valued of the apartment community and the capital expenditures budget?
Loan-to-value and loan-to-costs are factors used by banks to determine how much money to lend on a property.
- If it is a loan-to-value loan, the bank will lend up to a certain percentage of the apartment's value (70% to 80% is standard)
- If it is a loan-to-cost loan, the bank will lend up to a certain percentage of the total project costs (70% to 85% is standard)
- They have the option between an 80% LTV loan and a 75% LTC loan
- LTV: The lender will lend up to $8,000,000 for the LTV loan (80% of the $10,000,000 purchase price) and the general partner will need to raise the remaining $4,000,000 ($2,000,000 for the loan down payment and $2,000,000 for renovations)
- LTC: The lender will lend up to $9,000,000 for the LTC loan (75% of the $12,000,000 project costs) and the general partner will need to raise the remaining $3,000,000
What is the formula to calculate loss-to-lease?
- An apartment with a loss-to-lease greater than 3% is a value-add opportunity, because you can increase the revenue by demanding market rental rates without the need for renovations
What are the asset management responsibilities of the general partnership in apartment syndications?
As an asset manager, your primary responsibility is to implement to business plan.
- Other responsibilities include updating your passive investors on the deal, analyzing the market and competitors, maintaining occupancy, determining when the sell, and much more
- Click here for a comprehensive guide on all of the duties and responsibilities of the asset manager of an apartment community
What resource/s do you need to determine the rental premiums after purchasing an apartment community?
Rental premiums are the increase in rent after performing renovations to the interior and exterior of an apartment community.
- The rental premiums are an assumption set by the general partner during the underwriting phase based on the rental rates of similar units in the area or previously renovated units at the subject property
- The listing broker's pro forma should NEVER be trusted at face value (click here to learn why). You can use the listing broker's rental comps as a guide, but never trust their data. Always perform your own rental comp analysis using apartment communities that you chose
- Click here to learn the 6-step process to performing your own rental comparison analysis on an apartment community
What is/are the method/s a certified appraiser use/s to determine the apartment’s value?
The income approach is a good short-hand way to determine the apartment's value. However, once a deal is under contract, an appraiser will determine the apartment's value using all three valuation approaches.
- Cost approach: A method of calculating a property’s value based on the cost to replace (or rebuild) the property from scratch. Also referred to as the replacement approach
- Income approach: A method of calculating an apartment’s value based on the capitalization rate and the net operating income (value = net operating income / capitalization rate)
- Sales comparison approach: A method of calculating an apartment’s value based on similar apartments recently sold
What is the difference between physical and economic occupancy?
If all units are occupied by tenants at market rates who pay their rent and other fees in full and on-time, the two occupancies are equal.
- However, if renters are behind on rent, move out without paying their balance owed, rents are below market rates, etc., then economic occupancy is less than physical occupancy
- Here are the formal definitions of economic occupancy and physical occupancy
- As apartment syndicators, economic occupancy takes priority over physical occupancy because we care more about the rate of paying tenants more than the rate of occupied units
What are the two most important return factors in apartment syndications?
All of the factors listed are important, but the two most important factors are cash-on-cash (CoC) return and internal rate of return (IRR).
- Since we are raising money from passive investors to fund our deals, the CoC and IRR to the limited partners take priority to the overall CoC and IRR for the project.
- Click here to learn more about the CoC return and IRR
True or false – I should allow anyone to passively invest in my apartment deals?
Click here for all of the situations where you SHOULDN'T work with a particular passive investor.
True or false – For a 506(b) offering, I am not allowed to raise capital from sophisticated investors?
The two most common syndication offerings are 506(b) and 506(c).
- For 506(b) offerings, general partners are allowed to raise capital from up to 35 sophisticated investors
- For 506(c), general partners are only allowed to raise capital from accredited investors
- Click here to learn more about the differences between the two most popular syndication offering types, 506(b) and 506(c)
True or false – The preferred return is a threshold return that limited partners are guaranteed to counterbalance the risk associated with investing their capital into the deal
The preferred return is NOT a guaranteed return.
- The preferred return is offered to passive investors and is the first distribution that comes out of the cash flow
- If the cash flow cannot support the preferred return, an amount less than the preferred return will be distributed
- Depending on the PPM, the preferred return may or may not accrue and be paid out at sale
- If you scored between 0 to 10, you need to work on your education before becoming an apartment syndicator. A good first step would be to purchase the Best Ever Apartment Syndication Book on Amazon, which is a comprehensive guide for completing your first apartment syndication.
- If you scored between 11 and 16, you know enough to get started but have a few blind spots. A good first step is identify the answers you got incorrect and click the links provided for those questions, as well as search the Apartment Syndication category on the Best Ever Blog for articles about that specific topic.
- If you scored above 16, congratulation! You are ready to start your journey as an apartment syndicator. A good first step would be to apply for a planning session with me at BestEverAptProgram.com to see if you qualify for my consulting program.
Share your Results :
Please share this quiz to view your results .