06
Jul
13

great article by Andy of the Real Estate Rangers……

Dear Co-investors,

We at Real Estate Rangers Inc. have often been asked how we select our investment properties and why is it that we favour multi-family buildings. For this article, we are going to include some key reasons as to why, and a glimpse of Real Estate metrics for your knowledge.

The Real Estate market is divided into several categories which include: Commercial properties, Residential properties, and so on. The Residential market is our key area of focus, which is divided into owner and tenant occupied.

As we delve into Real Estate for the purpose of investing, we are focused on tenant occupied properties, rather than owner occupied ones, as we firmly believe that it has the basis for greater returns. Although an owner occupied property can appreciate, it is affected significantly more by supply, demand, interest rates, political and economic climates, as compared to a tenant occupied property.

Simply stated, the value of a tenant occupied property has a direct correlation between the income it creates and the value of the asset itself-above and beyond the value of the building and land itself.

Every tenant occupied property that we invest in is treated strictly as a business, as we rely on the fundamentals of analysis and due diligence in our governance, rather than subjective emotions. One of the key metrics we look at is the Net Operating Income (now referred to as NOI) and Cap Rate (based on the area) for a large part of our criteria. By looking at these as key elements, we can invoke our NOI Acceleration strategies, producing returns for our investors in the “business property.”

Let us define NOI and Cap Rate for you, as a way to understand why we look to invoke our NOI acceleration strategies:

NOI is the income produced by the property after all expenses are removed; before the mortgage payment. The NOI is directly correlated to the Cap Rate, as Cap Rate is defined as the percentage return of an all cash purchase on the property. There are other fundamentals involved in a Cap rate such as sales in the immediate area, condition of the property, and other macro and micro economics; so it is very important to be in tune with the Cap Rate in the submarket where you decide to buy. We like to invest in upcoming areas that show solid and sustainable GDP growth, job growth and population growth.

To better define the function of the Cap Rate: Let’s consider an scenario in which we purchase an investment property that generates an annual NOI of $10,000 and the purchase price for this property was $100,000 (assumed all cash). Therefore, based on this purchase price, you are receiving 10% return or, in other words, the CAP rate for this purchase is 10% (Purchase price or Value of property = NOI/Cap Rate). Here is where NOI acceleration strategies play a huge part.

Please keep in mind that increasing NOI (either by increasing revenue or decreasing expenses, otherwise recognised as repositioning the asset) will directly increase the value of the investment.

At Real Estate Rangers, our goal is to maximize on the NOI acceleration strategies and here are some notables:

1. Buy the property right: For every $1,000 understated on Seller NOI, an overpayment of $10,000 will occur for the property (Value = NOI/Cap Rate). Cap Rate assumed is 10% to stay in line with the example in this article. We do see many cases where a seller will avoid adding expenses such as water heater rentals, snow/landscaping and laundry lease.

2. Invoke strategies to increase rents, while keeping vacancy low: Efficient renovations, property facelifts and amenities for tenants can play a huge role in raising the tenant profile, thus increasing rents.

3. Reduce expenses, while still managing the quality of the property: Sub-metering for hydro and water, along with utilizing energy efficiency strategies are some of the best ways that we utilize for reducing expenses and increasing NOI. Also, looking for opportunities to save on items like Realty taxes, by asking for a re-assessment can prove profitable.
Let’s look at an example for an acquisition we undertook in Barrie. We bought an underperforming/mismanaged 4–plex, in which the hydro costs were paid for by the landlord. We invested $5,000 to sub-meter the property and upon tenants turnover (attrition) we charged base rent plus hydro. The previous hydro expense paid by the seller was over $3,700/Year. Once new tenants are in, our NOI will increase by approx $3,000 net, which in turn will increase the value of the asset by a whopping $40,000!! The Cap Rate in Barrie is hovering around 7.5% i.e ($3,000/7.5%). Now combine this tactic with a few others suggested here during the hold period and you can see how you can drive the value of the asset upwards!

4. Fixing expenses: If you can fix an expense at the property level, it allows you not only to know what to expect, but also to ensure that you are paying fairly in the market for services and products. Having fixed contracts with Property Management, snow removal, landscaping and even utilities can prevent from anomalies in charges and ensure a constant NOI.

Our goal is to hold our properties for longer periods of time, normalizing, creating efficiencies and increasing the NOI. This results in wealth creation as a result of increases in equity and increased cash flow.

This is a very high level glimpse of what we do internally at The Real Estate Rangers to protect and also to create value for our co-investors. Hopefully it will have helped to better understand the high-level process that goes behind selecting and operating investments in the multi-family space.

Andy Pospiech

SVP, Business Development
Real Estate Rangers & Taft Forward Management Joint Venture

250 Davisville Ave, Toronto, ON, M4S 1H2
E-mail: andyp@realestaterangers.ca
Cell: 613-266-4446 Fax: 416-482-8010

Over 1400 Apartments under management and growing.

Fully Structured & Managed Real Estate Investments; Canada/USA

www.realestaterangers.ca
www.taft-forward.com

 


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