M A K E M O N E Y with AFFORDABLE APARTMENT BUILDINGS AND COMMERCIAL PROPERTIES SECOND EDITION GARY W. ELDRED, PhD John Wiley & Sons, Inc. JJWWBBKK113322__FFMM..iinndddd iiiiii 33//1155//0088 1100::4411::1199 AAMM JJWWBBKK113322__FFMM..iinndddd iiii 33//1155//0088 1100::4411::1199 AAMM M A K E M O N E Y with AFFORDABLE APARTMENT BUILDINGS AND COMMERCIAL PROPERTIES JJWWBBKK113322__FFMM..iinndddd ii 33//1155//0088 1100::4411::1166 AAMM JJWWBBKK113322__FFMM..iinndddd iiii 33//1155//0088 1100::4411::1199 AAMM M A K E M O N E Y with AFFORDABLE APARTMENT BUILDINGS AND COMMERCIAL PROPERTIES SECOND EDITION GARY W. ELDRED, PhD John Wiley & Sons, Inc. JJWWBBKK113322__FFMM..iinndddd iiiiii 33//1155//0088 1100::4411::1199 AAMM This book is printed on acid-free paper. ∞ Copyright © 2008 by Gary W. Eldred, PhD. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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HD259.E4 2008 332.63'243—dc22 2007045704 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1 JJWWBBKK113322__FFMM..iinndddd iivv 33//1155//0088 1100::4411::2200 AAMM C O N T E N T S Acknowledgments xiii Introduction: How to Start 1 Develop Your Analytical Abilities 1 Develop an Entrepreneurial Spirit 2 Uncommon, Yet Essential 2 Entrepreneurs Create Value for Themselves and Their Customers (a.k.a. Tenants) 3 Market Savvy: Systematic Strategic Thinking 5 1. Profi t with Commercial and Multifamily Properties 7 Advantages of Commercial and Multifamily Properties 7 Cost of Acquisition 8 Cash Flows Relative to Price 9 Search Time 13 Management 14 Trade Up Tax Free 15 Owner Will Carry Financing (OWC) 17 Possibilities to Create Value 18 Summing Up 20 2. Craft Your Market Strategy 22 It All Depends 23 A Strategy of Your Own 23 PVP: The One Constant Rule 23 The DUST Strategic Framework: Questions to Answer 24 Entrepreneur Objectives: Know Thyself 26 Talents, Inclinations, and Resources 26 Assess Your Finances 28 v JJWWBBKK113322__FFMM..iinndddd vv 33//1155//0088 1100::4466::4455 AAMM vi CONTENTS Frame Your Due Diligence 30 Identify and Fully Describe the Physical Property 31 Understand Your Bundle of Rights and Restrictions 36 Where Should You Invest? 48 Time Period 49 3. Where’s the Local Economy Headed? 50 Economic Base Matters Greatly 51 Alamo, California (San Francisco Bay Area) versus Terre Haute, Indiana 52 Authors Neglect Economic Base 52 Benefi t from the Lessons Learned 53 Where to Get Data 55 Will the Population Grow? 55 Enclaves of Existing and Potential Growth 55 Find Out the Actual Numbers 56 Beware of False Negatives 56 Is the Number of Jobs Increasing? 57 What Was the San Diego Connection? 59 Forecasting Recovery 59 Cost of Running a Business 60 Businesses and Employment Migrate to Lower-Cost Cities, States, and Countries 61 Cost of Living for Employees 61 Quality of Life 62 Quality of Life Also Attracts Wealth 63 Community Attitudes and Actions 64 Entrepreneurial Spirit 65 Concluding Remarks 66 4. Outperform the Competition 68 The Competitive Battle 69 Four Good Reasons to Inventory, Inspect, and Critically Review Competitors 69 JJWWBBKK113322__FFMM..iinndddd vvii 33//1155//0088 1100::4466::4455 AAMM Contents vii Where to Invest 69 Market Information Gives You Negotiating Power and Confi dence 71 Searching for a Preferred Value Proposition (PVP) 72 Constructing Your Financial Pro Formas 73 Identify Your Competitors 74 Quickly Adapt to Change 74 When Markets Tighten 75 More Practical Implications 75 What to Look For: The Location 76 Aesthetics 77 School Districts 77 Property Taxes and Services 78 Crime Rates 79 Accessibility 79 Trendiness 79 Public Transportation 80 Who Are the Residents and Recent Homebuyers and Tenants? 80 Site Features 81 The Exterior of the Building 81 Play the Tenant 82 Inspect the Interiors of Competing Units 83 Aesthetics: How Does the Unit Look, Feel, and Sound? 83 Livability: Unit Size, Room Count, and Floor Plan 84 Energy Costs 85 The Rental Process 86 5. Choose the Best Target Market 88 How to Create a PVP 88 Diversity Rules 89 Demographic Differences 90 Psychographic Differences 93 Avoid Standard Labels; Picture Your Actual Renters 98 Hitting the Bull’s Eye 100 Find Unique and Intense Needs 100 Bull’s Eye Lease Assessment 101 Throw Away Standard Operating Procedures 101 JJWWBBKK113322__FFMM..iinndddd vviiii 33//1155//0088 1100::4466::4455 AAMM viii CONTENTS How Do You Identify the Wow (PVP) Features for Your Tenants? 102 Informal Conversations 102 Pay Attention 103 Talk with Insiders and Experts 103 Use Questionnaires 104 Focus Groups 105 Anticipate and Adapt to Change 106 The Age Wave 106 Echo Boomers 107 Local Trends and Changes 108 6. Is the Property a Good Deal? 109 How Much Would It Cost to Construct the Property Today? 110 The Construction Cycle 110 Implications for Investors 111 Local (Regional) Recessions 113 Per Unit Measures 113 Per Apartment Unit 113 Per-Square-Foot Measures 115 Price Per Front Foot 117 Gross Rent Multipliers 117 Capitalized Value 118 Estimate Market Value 122 Anticipate the Future; Pay for the Present 124 Cash-on-Cash Return 125 Growth in Equity 127 Don’t Settle for Low Rates of Appreciation 129 7. Collect More Rents 130 Never Accept Average 131 Stand Out and Stand Above 131 A Strategy of Your Own 132 Verify Current Rent Collections 133 Examine All Leases and Rental Applications 134 Interpreting the Rental Information 134 JJWWBBKK113322__FFMM..iinndddd vviiiiii 33//1155//0088 1100::4466::4466 AAMM