Make Money with Affordable Apartment Buildings and Commercial Properties

GARY W. ELDRED, PHD, has invested successfully in real estate for more than twenty-five years and has served on the graduate business school faculty at Stanford University and the University of Virginia. One of America's top-selling real estate authors, Eldred's other books include Investing in Real Estate, Fifth Edition, Trump University Real Estate 101, and Make Money with Flippers, Fixers, and Renovations, Second Edition, all from Wiley.

Acknowledgments xiii

Introduction: How to Start 1

Develop Your Analytical Abilities 1

Develop an Entrepreneurial Spirit 2

Uncommon, Yet Essential 2

Entrepreneurs Create Value for Themselves and Their Customers (a.k.a. Tenants) 3

Market Savvy: Systematic Strategic Thinking 5

1. Profit with Commercial and Multifamily Properties 7

Advantages of Commercial and Multifamily Properties 7

Cost of Acquisition 8

Cash Flows Relative to Price 9

Search Time 13

Management 14

Trade Up Tax Free 15

Owner Will Carry Financing (OWC) 17

Possibilities to Create Value 18

Summing Up 20

2. Craft Your Market Strategy 22

It All Depends 23

A Strategy of Your Own 23

PVP: The One Constant Rule 23

The DUST Strategic Framework: Questions to Answer 24

Entrepreneur Objectives: Know Thyself 26

Talents, Inclinations, and Resources 26

Assess Your Finances 28

Frame Your Due Diligence 30

Identify and Fully Describe the Physical Property 31

Understand Your Bundle of Rights and Restrictions 36

Where Should You Invest? 48

Time Period 49

3. Where’s the Local Economy Headed? 50

Economic Base Matters Greatly 51

Alamo, California (San Francisco Bay Area) versus Terre Haute, Indiana 52

Authors Neglect Economic Base 52

Benefit from the Lessons Learned 53

Where to Get Data 55

Will the Population Grow? 55

Enclaves of Existing and Potential Growth 55

Find Out the Actual Numbers 56

Beware of False Negatives 56

Is the Number of Jobs Increasing? 57

What Was the San Diego Connection? 59

Forecasting Recovery 59

Cost of Running a Business 60

Businesses and Employment Migrate to Lower-Cost Cities, States, and Countries 61

Cost of Living for Employees 61

Quality of Life 62

Quality of Life Also Attracts Wealth 63

Community Attitudes and Actions 64

Entrepreneurial Spirit 65

Concluding Remarks 66

4. Outperform the Competition 68

The Competitive Battle 69

Four Good Reasons to Inventory, Inspect, and Critically Review Competitors 69

Where to Invest 69

Market Information Gives You Negotiating Power and Confidence 71

Searching for a Preferred Value Proposition (PVP) 72

Constructing Your Financial Pro Formas 73

Identify Your Competitors 74

Quickly Adapt to Change 74

When Markets Tighten 75

More Practical Implications 75

What to Look For: The Location 76

Aesthetics 77

School Districts 77

Property Taxes and Services 78

Crime Rates 79

Accessibility 79

Trendiness 79

Public Transportation 80

Who Are the Residents and Recent Homebuyers and Tenants? 80

Site Features 81

The Exterior of the Building 81

Play the Tenant 82

Inspect the Interiors of Competing Units 83

Aesthetics: How Does the Unit Look, Feel, and Sound? 83

Livability: Unit Size, Room Count, and Floor Plan 84

Energy Costs 85

The Rental Process 86

5. Choose the Best Target Market 88

How to Create a PVP 88

Diversity Rules 89

Demographic Differences 90

Psychographic Differences 93

Avoid Standard Labels; Picture Your Actual Renters 98

Hitting the Bull’s Eye 100

Find Unique and Intense Needs 100

Bull’s Eye Lease Assessment 101

Throw Away Standard Operating Procedures 101

How Do You Identify the Wow (PVP)

Features for Your Tenants? 102

Informal Conversations 102

Pay Attention 103

Talk with Insiders and Experts 103

Use Questionnaires 104

Focus Groups 105

Anticipate and Adapt to Change 106

The Age Wave 106

Echo Boomers 107

Local Trends and Changes 108

6. Is the Property a Good Deal? 109

How Much Would It Cost to Construct the Property Today? 110

The Construction Cycle 110

Implications for Investors 111

Local (Regional) Recessions 113

Per Unit Measures 113

Per Apartment Unit 113

Per-Square-Foot Measures 115

Price Per Front Foot 117

Gross Rent Multipliers 117

Capitalized Value 118

Estimate Market Value 122

Anticipate the Future; Pay for the Present 124

Cash-on-Cash Return 125

Growth in Equity 127

Don’t Settle for Low Rates of Appreciation 129

7. Collect More Rents 130

Never Accept Average 131

Stand Out and Stand Above 131

A Strategy of Your Own 132

Verify Current Rent Collections 133

Examine All Leases and Rental Applications 134

Interpreting the Rental Information 134

Rent Collections, Not Rental Rates 135

Talk with Tenants 135

Your Competitive Market Analysis 137

Set Your Rents with Market Savvy 138

The Myth of Market Rent Levels 139

Rent Levels and Vacancy Rates 140

The Myth of the Market Vacancy Rate 141

Think Rent Range, Not Rent Rate 142

Raise Rents without Substantially Improving the Building 142

Confirm Your Suspicions 142

Why Owners Underprice Their Units 143

Investor Opportunities with Stage-of-Life Sellers 144

How High Can You Go? 146

Selective Increases 148

Dealing with Current Tenants 149

Can You Boost Your Rent Collections by Lowering Rents? 150

An Extreme Example of Overpricing and Market Ignorance (or Fanciful Dreaming) 150

A Purchase Opportunity 151

Time-Sensitive Rental Markets 152

8. Build Equity Fast with Sharp Interiors 153

The Entrepreneurial Imperative 153

Too Many Investors 153

Too Few Sellers 154

Not Words of Discouragement 155

Your Target Market 155

Visualize Your Tenants 156

Your Suggestion Box 157

Figuring Payback 157

Fast Buck versus the Last Buck 158

Set Your Budget for Improvements 158

The Sum Effect 160

The Interior of the Units 160

Sharpen the Aesthetics 161

Special Touches 163

Safety, Security, and Functionality 163

Rightsizing Room Count/Room Size 165

Create More Storage 167

Check Noise Levels 169

Overall Livability of the Unit 170

9. Generate More Income 171

Your Building Sends an Advertising Message 171

Clean Up the Grounds 172

Yard Care and Landscaping 172

Sidewalks, Walkways, and Parking Areas 173

Fences, Lampposts, and Mailboxes 173

The Exterior of the Building 174

Name Your Building 179

Signage 182

Curb Appeal: Summing Up 182

Collect More than Rent 183

Laundry 184

Parking 184

Build Storage Lockers 185

Cable/Satellite 185

Add Other Amenities or Services 186

10. More Creative Ways to Make Money 187

Tailor Your Lease Agreements 187

Competitive Advantage 188

What Terms Might You Negotiate? 191

Should You Furnish Your Apartments? 198

All Price Levels 199

High Payback 199

Warning: Don’t Pay a Premium Price for Furnished Apartment Buildings 201

Improve the Neighborhood 202

Become a Neighborhood Entrepreneur 203

The Huge Payback 204

Conclusion: Investing in Action: The Bayside Apartments 206

Entrepreneurial Strategy 212

Real Estate Entrepreneurs Outperform All Other Investors 213

Only Investors Perform 214

Entrepreneurial Real Estate Investors Perform Best of All 214

Index 217