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- Jul 24, 2007
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We will start with income related to an improving market.
I have talked before about the merits of finding the right location. Apartments are valued primarily on income. Improving that income while managing your expenses is the key to wealth building in this business. Read Vollucci's book on "How to Buy and Sell Apartment Buildings" for more details on this process.
If your homework on an improving market paid off, the rental income should be on an upward pattern. Cap Rates should be in an improving pattern as the area creates more attention. For the sake of our examples, we will hold cap rates steady.
Income improvements come in a few different forms. The primary increase that is usually talked about is rent increase. What we care about is the rent increase for the area.
Rent loss is not talked about as frequently and is usually tossed around as vacancy. There is more to the rent loss though. Delinquency and move-in concessions need to be looked at as well. All of these line items typically reduce in an improving rental market. They are also a target that should be focused on.
Taking a look at what those increases mean to us. The attached file is a simplified analysis of the calculations used to determine returns on an investment. The rent increase, rent loss decrease, and corresponding return are labeled in red. It includes income from cashflow, value increase and depreciation tax savings. They are all totaled and displayed at the bottom of each section. The cap rate used for the calculation is at 7%. For simplicity, the debt service was calculated as interest only. The expenses were increased at 3%/year.
As you can see, the returns look pretty good. Four percent rent increases are not easy to get. This is why it is valuable to be able to move to markets where the increases are targeted to occur.
I have talked before about the merits of finding the right location. Apartments are valued primarily on income. Improving that income while managing your expenses is the key to wealth building in this business. Read Vollucci's book on "How to Buy and Sell Apartment Buildings" for more details on this process.
If your homework on an improving market paid off, the rental income should be on an upward pattern. Cap Rates should be in an improving pattern as the area creates more attention. For the sake of our examples, we will hold cap rates steady.
Income improvements come in a few different forms. The primary increase that is usually talked about is rent increase. What we care about is the rent increase for the area.
Rent loss is not talked about as frequently and is usually tossed around as vacancy. There is more to the rent loss though. Delinquency and move-in concessions need to be looked at as well. All of these line items typically reduce in an improving rental market. They are also a target that should be focused on.
Taking a look at what those increases mean to us. The attached file is a simplified analysis of the calculations used to determine returns on an investment. The rent increase, rent loss decrease, and corresponding return are labeled in red. It includes income from cashflow, value increase and depreciation tax savings. They are all totaled and displayed at the bottom of each section. The cap rate used for the calculation is at 7%. For simplicity, the debt service was calculated as interest only. The expenses were increased at 3%/year.
As you can see, the returns look pretty good. Four percent rent increases are not easy to get. This is why it is valuable to be able to move to markets where the increases are targeted to occur.
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