Guest Post by Doug Lytle

Are you a small independent landlord trying to rent your properties? Consider renovating them. A recent survey indicates that over half of small, independent landlords are renovating vacant properties in an effort to differentiate themselves from the competition and attract tenants. Renovations don’t just help you attract new tenants; they help you retain current tenants as well.

“With so many homes and apartments sitting empty, landlords want their properties to stand out from the competition,” says Tracey Benson, president of The National Association of Independent Landlords. “Even if landlords have no rent coming in, they need to bite the bullet and make improvements to put their properties on renters’ short lists.”

The Association recently conducted a survey of landlords across the country and found that over half (52%) of smaller, independent landlords who expect the difficult rental market to continue are renovating their vacant properties. Over three-quarters of these landlords (76%) are doing so in an effort to attract tenants, while 42% of respondents said they are renovating to keep current tenants from moving.

But you don’t need to install high-end accoutrements like granite counters, stainless steel appliances or laminate floors to attract or retain tenants. Even low-budget investments like new carpeting or a fresh coat of paint can make a difference.

“Just about any improvement will make a property look better than one that hasn’t received much TLC,” Benson says.

For more information on how to attract or retain tenants in your apartment properties, or to learn about available properties, give our Century 21® office a call today.


Source: Century 21® USA

When calculating return on an investment (ROI) or internal rate of return (IRR) there are a number of expenses to take into account and surprisingly, there are a few that get overlooked entirely. I’ve noticed that, particularly new investors (and often brokers who should really know better!), miss a few essential expenses far more often than I would have expected.

When working on calculating an ROI or IRR, you always need to start with a reconstruction of the net operating income (NOI).

A basic worksheet should look something like this but may be more or less sophisticated based on the asset class:

In researching properties for buyer clients, I always ask for a copy of the income and expenses from the owner or from the broker as reported by the owner if the property is listed. A complete picture of the income and expenses, along with all other pertinent physical, demographic, and economic information about the property and the market, is the only way to properly analyze a property on behalf of my client. Omissions or errors here have a direct impact on the valuation of the property and are therefore essential.

I almost always receive a list of the monthly rents or an annual summary of the gross income – though not everybody seems to grasp the concept of total gross income and often it takes a couple of calls to get all of these figures. I usually get a summary of the expenses as well, though often there are a number of glaring omissions. Either by design, because the numbers are too large and the person providing the information is hesitant to be open with me, or by mistake because they don’t actively track their expenses or have a poor record keeping system, or simple ignorance.

The top 3 most often missed expenses are basic to the operating expenses of any property, but they are sometimes the most difficult to obtain. They are:

1. Property and liability insurance.
2. Repairs and maintenance.
3. Vacancy and credit losses.

Why are these left out so often? As I said, these are real numbers that have a direct impact on value, so if there is a particular expense or expenses that would negatively affect value, some sellers will intentionally make it difficult to discover them. Most often though, they are missed through simple ignorance.

Property and liability insurance.
While not necessarily a large expense in itself, if you are looking at a smaller investment where every penny counts, missing an expense of this nature can have a very serious impact on future profitability – even if such an omission is innocent.

Repairs and maintenance.
Usually this one is omitted intentionally. Why? “Because the roof is only 4 years old, and the paving is only 2 years old…what else do you think needs to be done?!” From the inexperienced buyer’s perspective, it often is left out for the very same reason – there is sometimes a mistaken belief that just because repairs have recently been made that there won’t be any further repairs needed for the foreseeable future. Maintenance items like, snow removal and grass cutting are often ignored by first time investors because they intend to do the work themselves and therefore don’t feel it’s necessary to account for those expenses. But isn’t your time worth anything to you? Even if you plan on doing the work yourself, you should be compensated for your time!

Vacancy and credit losses.
This is the most often missed expense in my experience. If the building is full, why should you account for vacancy? There are a couple of reasons: 1) Your tenants are not invincible – one of your tenants could step in front of a bus tomorrow and you’d be looking for a new tenant. If the property is a small one, and one of your tenants just decides to leave or goes out of business, you could be looking at significant carrying costs while you re-lease the space. 2) In the long term, some credit losses are unavoidable. Even with the best of tenants with the best of intentions, occasionally things don’t work out the way everyone hopes and there’s just too much month left at the end of the money. 3) The last, and maybe the most important, is that when you apply for financing on any investment property, the bank or lender you use WILL include a vacancy allowance to account for lost income that could affect their ability to collect your payments. Go into the financing application process well informed or you could be in for a rude awakening.

So there you have them, my top 3 most missed expenses by new investors. Tell me what you’ve experienced as a buyer or as an advisor; ever run into these or other items that have put the brakes on a deal you were hoping to close?

Guest post by Doug Lytle.

Ever wonder which metric is the best way to analyze a piece of real estate? Me too! There are so many to choose from. Cap rates, ROI, gross rent multipliers, net rent multipliers, leveraged rates of return, yields, etc., etc. ad nauseum. The problem I see with most of these is that they look at a snapshot in time for a given asset and don’t take into account increases or decreases in income over time.

Enter the realm of IRR or ‘internal rate of return’. The internal rate of return shows the rate of return over a period of time and takes into account variables in income over that period. Rather than looking at just one point in time, you get a picture of the return you should expect during your entire anticipated holding period.

Let’s look at a very simple example:

123 Any Street, Peterborough, Ontario is a hypothetical office building of 21,000 square feet with a projected first year net operating income of $105,000. Prevailing market cap rates indicate you should be looking at 8.5% as your ‘going-in’ rate. This puts a hypothetical value of $1,235,000 on the property (give or take a few dollars). Pretty simple, income divided by cap rate equals value.

What if you did some digging into the rent roll and discovered that one of the tenants, who occupies about 4,000 square feet of the building and therefore generates 19% of the net operating income, had a lease that was coming due in two years, and further that you found that they did indeed plan to move out at the expiry of their lease and have purchased land for construction of a new building two blocks away? That’s a significant drop in future income and therefore will have a direct impact on the value of the real estate today. A future event will have direct impact in the present.

As the new owner of the building there would be some period of time when the space might be vacant, and there would be some cost associated with releasing the 4,000 feet including: leasing commissions, build-out for a new tenant, advertising, etc. The series of cash flows over the first five years of ownership (assuming a sale at the end of the fifth year at a similar cap rate) might now look like this:

You can see that there is a substantial difference in the IRR of the two scenarios. This doesn’t mean that the property is a bad purchase, it just gives the investor a better picture of the real performance of the property and provides a more realistic idea of actual return over time. Other factors that would change this picture include things like: the effect of financing, rent escalations, economic factors, changes in future cap rates, and competition in the form of new buildings coming onto the market to name just a few.

If the IRR is within range of your expected rate of return then you can move onto doing more due diligence for the property. If it is well below what you expect, then you need to either negotiate a lower price, or keep looking for another property that does meet your investment criteria.

Have you ever used this method of comparison before? Did you find it useful? Let me know, I’d be interested to hear some real world examples.

Guest post by Doug Lytle