All Forum Posts by: Julie Nealey

Hello Everyone!

So I'm reading through the ABCs of Real Eastate and am in chapter seven "Is It Really a Diamond?".  I wanted to ask a question on the numbers people use when evaluating vacancy to get projected income on an apartment.  Projected income is based on the actual rent being generated, rather than the advertised rent per unit (my take away is this is because rents change over time and current tenants may be grandfathered in at an old rate).  I see that Ken McElroy first calculated the projected income based on the historical rents, then uses this number and the excepted vacancy percentage to calculate the expected income lost to vacancy.  For reference, this is in the "income" chart on page 90

My question is, doesn't it make more sense to calculate vacancy off of the maximum potential income (assuming all units are rented at the current market rate) rather than the actual potential income?  Any vacant unit has the potential to be rented for the current market rate, not the average rate that the current tenants pay.  Aren't you actually missing out on that current market rate with vacancy?

To put some numbers on it, if 10 units have a current market rent for $500/month each, but the 10 units are rented at an average of $450/month right now, the way he calculates vacancy uses the $450 number.  With 10% vacancy (90% occupied), this means a total potential income of $4,050/month ($450*10*90%).  Calculating it the way I'm describing above would use the $500 number, giving a vacancy of $4,500 ($500*10*90%).  This gives a more conservative number, which is good I would think.  

So to sum up, why not use the actual generated rent for the gross potential income ($4500/month), but the market rate for vacancy ($500 at 10% vacancy) for a total of $4,000 in potential income?

Thank you for the help!  This is the first I'm learning about apartment investing rather than single family homes and it's quite different.

Hello John, 

What is your background and area you are looking to build? Do you already own the land?

I am actually selling a mixed use property that I have completed a lot of the due diligence for as I held entitlements for an owner occupied development prior to covid(I even partially cleared and graded the 2.68acres right before Covid). After covid, cost over doubled to develop and I could not expect my clients to absorb that cost. I decided to pivot and max out the site. I paid to have my architect draw up basic plans and my civil engineer do a preliminary stormwater drainage plan for the new site plan and got bids for the commercial and townhomes. I did all that thinking I could develop it myself since I had already gone through the process for my previous permits. I met with the city and got pre-app approval for the new plans under a change order.I got numerous bids and chose a developer/GC. 

Lenders loved the plan, but wanted me to have more experience in development in projects of this size, which I completely understand. I couldn't secure the 18million loan unless I brought in an investor. I found one, however they wanted an 80/20 equity split. To me, the stress and timeframe to completion had to be considered.

I had to sit down and really pencil everything out with the pros and cons and hard numbers, long and short term. In about 5 years it would have great returns, but I had to be realistic to my life situation, my lack of experience and decided it would probably be better off to sell the property altogether even though I have paid so much in due diligence already. I have included all the due diligence to be attached to the property. 

There are so many reasons that plans change and not all are nefarious. You just have to be discerning on what projects you are looking to do. I know what I don't know, and decided that this would be better off left to someone with more knowledge than I have at this time. Realistically, I need to work up to a project this size.

Having said that, it's primarily all the due diligence that holds value in my situation, as a developer will more than likely do their own plan. 

Hi Lucio, as for new builds... I had a couple of lots and went through the process of vetting builders, what I learned was to ask for solid estimates and line items right out of the gate, and make sure that they are accurate, do your homework and don't just take their word for it, they should be able to guarantee you pricing within about 10% of estimate..I believe, that risk should fall on them, not you. Moreover, make sure they actually have contractors /workers ready when they call, many of these builders have trouble finding workers and have a poor system in place which can cost you time and money. I was a bit "green"when I did this, I really could have used a mentor or somebody's guidance, best of luck