Property Factors to Consider - Apartment Blocks - Private Rental Sector ...

22/05/2020 11:52 By Team GIC

Unfortunately, like with any new venture, its not uncommon to see new and sometimes "seasoned" investors getting hung up on the wrong aspects or less viability-breaking elements of an investment property. This is one of the main reasons why lenders funding real estate or property investments emphasize on the mandatory requirement experience in the majority of cases, especially for larger transactions. 

So, what should a potential investor be focusing on? Below are some of the main factors to consider when analysing a property for investment: 

  • Net Operating Income (NOI) 
  • Taxes & Entity Structure (Current and Future) 
  • Physical Condition 
  • Location including 

    • Crime 
    • Employment 
    • Amenities 
    • Transport Links 
    • Future developments and growth trends

We aim to deliver much needed capital for SME’s and Property Developers.

These are just some of the factors to determine whether or not the apartment block investment works not only for you but ultimately makes sound financial sense and you able to get funding and maybe even Joint Venture investors.  

1. Net Operating Income (NOI) Analysis 

Any property investment (apartment building) or business is a good or bad investment based on how much money it makes versus how much you paid, including the cash you used as well as on-going operating costs. 
Since no two owners’ NOIs will ever completely match due to circumstances surrounding tax, funding terms, entity structure, management and management costs etc, you must always look at all the revenue and expenses for the way you plan to run the building to arrive at your own NOI moving forward.
Looking at existing operating expenses and revenue is a good starting point to help you justify for offering price, but not necessarily going to be your financial position ongoing, and one would hope that you would be able to improve/ enhance your NOI through value-add to make this an even more worthwhile investment. 

Examples of value add changes 
  • Setting rents and or review to not only maintain your occupancy threshold but perhaps improve? 
    • 100% occupancy may come at the expense of forfeiting some rent, while 
    • Lower occupancy, say 90%, would maximize rent revenue. 

The perfect scenario being 100% occupancy and maximum if not premium rents 

  • Any planned property improvements to the building should increase tenant appeal and improve asking rents compared to market. 
  • Offering anything from pet rent to move-in fees and paid parking allocation could improve your revenues therefore NOI. 
  • Property management? Will you manage the building yourself or hire professional third-party management company? 
  • Property Maintenance? Will you do minor repairs inhouse or via professional maintenance contractor to fix things? 
All these items affect either the revenue or expense, meaning the NOI. Only after determining the NOI based on how you will run the building can you evaluate that number as a return on your investment (otherwise known as a cap rate) to determine what you should pay for the building.  
Potential Gross Income (PGI) aka Gross Scheduled Income (GSI) 

This is about how much anticipated income your property will generate if all units within it are rented and if there are no rent defaults. This can be a very useful measure to compare against your actual income. 

Potential Gross Income = Rental Income + Lost Rental Income from Vacant Units
Gross Operating Income aka Income from Operations 

This figure reflects the gross operating income in addition to all other sources of income from your rental property. This can include revenue from parking spaces, public vending machines, pet rent etc. 

Gross Operating Income = (PGI – Lost Rental Income from Vacant Units) + Other Income 
Net Operating Income 

You first need to figure out your gross operating income. Once you have that figure, you subtract your operating expenses (insurance and maintenance costs etc). You should note, however, that things like investment property depreciation and interest payments do not factor into operating costs.  

Net Operating Income = Gross Operating Income – Total Operating Expenses
Capitalization Rate 

Also known as Cap Rate, is one of the most important real estate formulas. The cap rate formula compares an investment property’s net operating income with its market value, allowing investors to quickly compare properties to see which one is most worth it. 

Cap Rate = Net Operating Income / Market Value of Property 

2. Taxes as well as entity structure, current and future 

Whether you are a new or seasoned investor, always consult with a property tax professional, usually a qualified and chartered accountant. This is no time for DIY, money saving tactics because a significant movement in property taxes can quickly erode all the upside forecast for your investment and make it not only none profitable and maybe even loss making. 
Factors such as the right purchasing entity structure as well as any joint venture agreements etc are all matters for professional qualified guidance and not your mate down the pub. 

3. Physical Building / Property Condition 

Focus here should be at examining the major fixtures and fittings of the building such as  Roof, Heating and Cooling systems, Electrical and plumbing, Windows, Exterior, etc. 
A thorough examination by local contractors who specialize in each building aspect to look at and give you their professional opinions on current state, maintenance repairs required and or replacements, will help you determine if a system is sufficient or needs short- or long-term attention as well as likely costs and timing. 
Awareness of current state of the building and future possible repairs both major and minor will enable adequate expenses provision in your maintenance and repairs budgeting. 
  • For short-term needs (meaning anything within five years), you will need to budget for them as one-time expenses, as well as for other major items you cannot anticipate. These are capital costs, not operating costs, so the full amount should not be included as an annually occurring expense in the NOI. 
  • Instead, a line item in operating expenses should be reserves, which is an estimate of all the major short-term needs of the building spread over time and budgeted on an annual basis. The easily anticipated costs are system replacements — boiler, roof, windows, electrical, plumbing, etc. You should estimate when you think systems will need to be replaced and their cost, and analyse their lifespan once installed. You can then estimate how much money you need to set aside for these items. 
  • Harder-to-anticipate issues are when a tenant wrecks the apartment and moves out in the middle of the night with all the appliances, and you have to renovate and replace everything. 

4. Location, Amenities, Transport Links, Trends 

One of the primary drivers of value in any real estate is its Location & Convenience , Transport Links, Amenities, Employment, Education, Etc. 
It can also be just a matter of supply and demand. Limited supply and high demand coupled with local authority building restrictions or availability of building space are a sure positive factor for a location, the all the other above points also being positive. 
All factors you should consider as to why market rents are as they are and why anyone would be willing to pay anticipated rent for the location. If you cannot come up with three compelling reasons putting yourself in potential renters shoes, you should probably pass on the location. 

In conclusion, do your homework and seek professional guidance and look at market data sources for factual information and to make a well informed investment decision. For your commercial or investment property finance the team at GIC Capital are available to give you professional guidance with any and all your funding requirements. 

By CEO, GIC Capital 
Ready to Refinance your Commercial Mortgage?