Apartment Wars

I’ve been to battle lately and I’m frustrated as hell.  It seems like every deal I look at is dead before I even get started.  The problem is those darn cap rates!

Newbie agents spew their drivel about how a cap rate of 6% is standard for a C-class apartment building in the Atlanta market.  The stabilized rents will net a ‘nice’ return on the investment is what they try to tell me.

Here’s my problem with that.  First, I don’t know of a single lender in the world that would consider lending on an unstable complex with a ‘C’ rating and 6% cap rate on future rent.  The DSCR (debt service coverage ratio) is barely a break even when you consider current rent!  Give me a break.

When you are out there looking at deals and making offers remember that the profit is made at the purchase not at the sale.  If you buy into this non-sense and buy a property that is being capped at it’s ’stabilized’ rent you will end up on the loosing side of the deal! 

Just say NO!  There is a war going on right now and it’s being fought between those that know-better and those that know-nothing.  Don’t side with the later group, you’ll end up losing your pants!

All my offers are based on a 9-10% cap of the CURRENT rents!  The profit is created when I begin to update the property and raise rents to market levels.  Then maybe I can sell the place in a year or two with market rents as a stabilized property and charge the new buyer an 8% cap.

I lift the property from C to B and the buyer get’s a ‘coupon’ (a clean property that just needs good management and they just collect a check at the end of every month).  In the end I create a buyer for future properties that I purchase, rent up and stabilize. 

That’s how you win the apartment war!  Don’t get caught behind enemy lines by falling for the know-nothing’s propaganda.  If you want to know something about how to win and get financing for your apartment deals, give me a call.

Michael Gross is President of Dividend America Mortgage.  He has been a builder, an appraiser, a Realtor and is an active real estate investor.  He uses all of his knowledge and experience to help real estate investors create successful deals.  For financing questions or negotiation assistance contact him at 770-350-7373 or mgross@dividendamerica.com.