Apartment Building Sales By Long Term Owners

Looking Closely For The Hidden Value

Apartment building sales by owners that have held and managed the property for many years can potentially offer up some hidden value, so pay close attention to these deals. I know this from first hand knowledge.

Why does the length of ownership matter when it comes to apartment building sales?

1. Time can bread complacency. Over time many owners become less aggressive about their management techniques. They choose to take the easy route of keeping their rents low, occupancy high and tenant turnover low. They're not interested in getting every last dollar out of the building. Instead they opt for fewer headaches.

2. Often times the mortgage balances on these apt. buildings are small, and so are the mortgage payments. Translation? Less pressure to maximize the revenues and NOI (net operating income)

3. The buildings are many times "dated". The owners haven't upgraded the suites and common areas in many, many years. New tenants won't pay market rent for dated buildings and suites.

What all these things lead to is below market rents. When you can find apartment properties with below market rents you can buy them at below market values. Remember, for every dollar that you can increase the rents per month (without increasing expenses) you add $120 to the value of the rental property, assuming a 10% capitalization rate.

Apartment Building Sales By Long Term Owners

A real life example...

A few years back I purchased an apt. building from a group of owners who had actually constructed the building about 15 years previous. They had then held on to the apartment complex and managed it over those 15 years. When the property was presented to me for sale by a commercial realtor, the first thing I did was look at the numbers. In fact, that is always the first thing I do when I begin to analyze a commercial property. If the math doesn't work, I don't care about anything else. I suggest you take the same approach.

At the time I owned other commercial property in a nearby city. (Actually the property was owned through a limited partnership I had put together). So I knew the area, and liked the potential of that area. The building was in fairly good shape, which for me is usually not a good thing. I typically like to take over properties that need a fair amount of rehab in order to add value to the rental property. But after some market research, I quickly realized that the rents were below market.

I can't comment on exactly why this was the case, but my guess at the time was that the owners, after 15 years of management, were in autopilot mode. They kept the rents low, and hence tenant turnover and vacancies low as well. The "no headaches" approach. What it presented me was an opportunity to come in and aggressively raise the value of the property. In fact, within 6 months of taking over I had the building appraised at $225,000 more than I paid for it. And a large part of that jump in value was due to the rent increases.

I then put new financing on the property and pulled out all of my investment capital, which enabled me to move on to another commercial property deal. So remember, the amount of time the current owner has held the investment property can be an indication of a potentially good deal when it comes to apartment building sales.

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