RE/MAX of Boulder Radio here in RE/MAX in Boulder, Colorado with your host, Duane Duggan, 35 years of experience in the industry, co-host George Thomas. Today we’re going to be talking about analyzing real estate investments. We have an expert, Kyle Malnati, from Madison & Company Properties. Kyle is a commercial realtor. Kyle, take it away.
KYLE: Thanks, George. That’s correct. I am a commercial REALTOR that focuses on selling Denver apartment buildings. My specialty is 4-50 unit apartment communities for local real estate investors. We do work with some investors that are out of state, as well. Thanks for having me on the show.
Part of our conversation today, Kyle, get us started if you’re someone investing in real estate for the first time. Question: What type of information do you need to collect to analyze a real estate investment?
The first thing that people typically ask or a reason why people might come to a broker like myself is maybe some frustration with the volatility in the stock market, ups and downs in other investment areas of your life. Real estate, whether it’s a four-unit or a 40-unit. Ups and downs and other investment areas of their life, real estate whether it is a 40 unit or a 4 unit offers a tangible asset where a property owner can actually walk over to the building and understand the dynamics of the rental property and really get your hands dirty for lack of a better term and some things that are important to start source of a down payment, finding out what your comfort level is when it comes to leverage or getting a loan. That will end up enabling you to back into the size of property that you can purchase. Everyone has got different purchase requirements based on their availability of a down payment and that’s usually the first step.
Question: Are sellers willing to freely provide confidential information, like detailed operating expenses, to help a buyer analyze an investment property?
To a qualified buyer I think that when someone walks into my office and/or calls me off of a listing that I have online or if they see a sign in front of the building I always want to make sure that I’m not just handing out information to someone freely without making sure that they’re qualified. What I do whenever I list a property for sale is I get what is called a rent role which is a roster of all the tenants in the building at the property and this rent role shows what the rental amounts are, the lease expiration dates, security deposits, and some other important information. Then I’ll also get the owners either 12 months profit and loss statements or a 12 month trailing income and expense statement or their last tax return statement which shows what their expenses were and from those two pieces of information the income and the expenses we can then derive a financial analysis for the investor.
Question: Do you help the customer with analyzing locations of their investment property?
Yes, absolutely, that is usually when I am working with a buyer the most important thing. Ironically, you would think that return is more important, but for most, it is the location that you feel comfortable being at. Investment properties, especially multi-unit, that are larger than two to three units, when you start to get into a size of building that is anywhere between ten and thirty units, you really start to get into different areas that people are not used to living in. Most of my clients start from the basis, and this would sound natural, of trying to find locations that they would feel comfortable living in, and that’s still a good metric for understanding an investment that you’d like to own, but again by definition, most of the apartment buildings are in areas that are zoned for multifamily, not single family. The most important thing is understanding your location. The location, location, location dynamic of real estate still applies in apartments because you’ll have higher returns in potentially riskier areas, but then you also have the potential for better appreciation in less risky areas. That’s the most important thing, is starting with the location.
DUANE: I know one of the things I get asked a lot in single family houses is what the property history has been, what the property potential is, as far as appreciation and such, so as Realtors we obviously can’t guarantee appreciation.
Question: What kind of things do you talk to people about relative to the property’s history and potential for appreciation?
Sure! Appreciation, in my mind, directly tied to level of risk. Higher quality buildings in better locations are less risky… generally returns are lower in that type of property (and this will be something very obvious and apparent when you go and visit a property). The more established a neighborhood is, the more established the tenant base is at a property, will typically give you a better understanding of how well your investment is going to produce a return or a yield. And, going back to a comment that I made at the beginning of the show, one of the simplest ways of looking at an investment and having a comfort level is if you say: my former self twenty years ago, when I was living in apartments, would I consider living in this apartment building? Do I feel comfortable here? Am I going to be okay if I need to stop by the building after work? Do I feel comfortable enough leading to my tenants? That usually is one of those kind of gut feelings that someone either has or doesn’t, relative to their personal experiences. Those are the ways I look at property history. One thing that we always encourage, is if someone wants to know about things like concerns about, maybe a heavy urban area, you can always contact your local police department just to get a history about that block or that area. We recommend that, we certainly as Realtors can’t furnish that type of information, but it is readily available to you. And then obviously, whether a seller or their Realtors has more or less information about the property, is a pretty big indication of whether there is some good, long term history on the property.