10 Things to Include in an Apartment Lease

10 Things to Include in an Apartment Lease

Developing a lease isn’t an easy task. It requires a lot of your time and energy, and even then, it’s possible you’ve forgotten some pivotal information. For that reason, it’s all the more important that you understand what details absolutely need to be outlined in your lease.

When it comes to renters, consider the fact that many are renting for the first time, and every detail truly needs to be spelled out for them. When you look at your lease that way, it’s imperative that you include all vital information. In order to help you get started when it comes to the more important details, here are ten things to include/outline in a lease.

  1. All Relevant Dates

Any time you draft a lease, it’s important to outline the relevant dates, all of them. This includes the move-in date(s), the move-out date(s), the length of time the lease is for and even the dates when you can resign your lease are (as well as the deadline). Also, though this is typically an item due at signing, you should always mention when the security deposit is due as well as how long it takes to process these payments to avoid any late fees etc.

Essentially, any information as far as dates that are pertinent to your renters go, they should be clearly outlined in a lease to avoid any confusion on their end as well as to have written proof that the renters were notified well in advance regarding all dates pertinent to the lease.

If there are any additional dates of note (i.e. dates when first month and last month of rent are due) make sure you clearly indicate those in your lease as well. Basically, if there’s a date they need to know about, those are items that you need to clearly outline in a lease.

  1. Subletting Information

Subletting an apartment is stressful for college students, but oftentimes extremely necessary. Most leases run from fall to fall, but students attend school from fall to summer in most circumstances. For this reason, they are left with the options to pay their lease and stay on campus, to pay their lease while returning home for the summer, or to sublet their apartment while they stay home for the summer.

Again, many students are renting for the first time, so it stands to reason they would also be subletting for the first time. Therefore, something essential to outline in a lease is any subletting information relevant to your renters. This includes, but is not limited to, who is liable for what, how those payments work, whether or not subletting is done through the main office or on their own, and if subletting is even an option available to them. (If your office doesn’t allow subletting, you may also want to include relevant information related to summer rent – i.e. what a student is supposed to do if they are returning home for the summer but still paying rent. Is there any upkeep that needs to be done in the apartment? If so, make sure they are aware of this information well in advance, otherwise, their plans may not work out with how your lease is outlined.)

For some, subletting rules are a deterrent from signing a lease; while you may lose out on the rent from that individual, it’s better than taking advantage of them by leaving out pertinent information that could have been outlined in a lease. So, make sure that all rules related to subletting are clearly stated to avoid any confusion and harm to your renters.

  1. Emergency Details

Nobody likes to think about it, but there are instances of emergencies. This could be, but isn’t limited to, fire, break-in, gas leaks, campus shooters, etc. There are so many variables here, but being prepared for any one of them is a good first step, whether or not an emergency actually presents itself.

If there are any details that a renter would need to know, such as a location to take shelter during a tornado siren or a protocol to follow if there is a break-in, make sure you outline this in your lease. Again, this doesn’t necessarily mean that anything will happen, but, as they say, better safe than sorry when it comes to the safety of you and your renters.

Also important is to include a number to call in case of emergency (i.e. gas leaks) and when it’s important to notify authorities. While it’s always a safe bet to alert the police or fire department, outlining this information can prevent unnecessary calls when there is an easier series of steps for your renters to take. Many renters are unfamiliar with such circumstances so, again, it’s much better to be safe than sorry.

  1. Maintenance Details

It’s very likely your renters will need to reach out to maintenance at least once during their lease. For others, the outreach to maintenance may be more common. When you develop your lease, maintenance schedules and contact information are very important to outline in a lease. Whether you’re simply including the contact information for your maintenance people, the emergency contact information or a basic timeframe of expected response for maintenance requests, this is all relevant information that your renters should be equipped with from the start.

I recommend speaking with the maintenance department, determining the best course of action for working together and outlining those details in the lease. This provides students with a general idea of what to expect when something breaks or goes wrong in an apartment.

As a side note, you should also outline in your lease what move-in day looks like from a maintenance perspective. Typically, they are provided with a checklist and required to document any aspects of the apartment that aren’t working, so let them know what this looks like and what to document to avoid charges later on. It should also be mentioned that maintenance is typically busy this day, so requests are handled on a first come first serve basis (or in another manner if applicable.)

  1. Cleaning Specifications

Typically, before an individual move into their new apartment, there is a certain amount of cleaning that needs to be done. For many landlords, this work is outsourced and charged in the last month’s rent of the previous owners. However, in many cases, there are additional costs that aren’t specified in the lease and come as a surprise when they are deducted from the security deposit. Getting ahead of this confusion and clearly letting your renters know what costs for cleaning entail is in your best interest.

Repeat customers are big for business, so negatively impacting your current renters doesn’t make sense. For this reason, let them know what costs to expect when you outline in a lease what these costs would be.

Let them know the charges for paint, for additional cleaning, for damages etc. You don’t need to provide specifics on every item, but essentially give them an outline of what to expect should there be any damage to the apartment.

  1. Rent Details

Rent details are obviously essential to outline in a lease. This comes down to what your student is going to be paying monthly to live in their apartment. This also includes any additional costs they may not have considered in apartment hunting.

For example, if they plan to pay by credit card, is there an associated fee? Can they pay by check? Do they have to drop the check off at the leasing office every month, or can they mail it in? Can they pay cash? What happens when their rent is late? Is there a late fee? Is there a grace period? Does the fee increase after a certain number of days?

There are countless details to include here, and it’s all information that they will need to know, guaranteed. Think of all the questions you’ve gotten as a landlord and include their answers in your lease, as this is the best way to ensure you’ve included all the information they need.

  1. Additional Rules

Let’s be honest, there are always rules. Some are unspoken, but additional rules are something to definitely outline in a lease.

For instance, do you allow pets? If not, what happens when a family member visits with a pet? Are there any areas students aren’t allowed in an apartment complex? What are the repercussions? Is there a rule for having guests? Is there a length of time before they need to leave?

These are all rules that may not necessarily be understood without being clearly written out, so I recommend clearly defining them in your lease to avoid any questions when it comes time for reprimanding your renters.

  1. Additional Fees

Stating additional fees in your lease is imperative. Is there a charge for owning a pet? Is it a per-pet charge? Is there a laundry charge? What about charges for parking?

Any additional fees are imperative to outline in a lease. Basically, if there is an extra charge for something, you definitely need to state that in your lease. Additional costs should never be hidden – always state everything upfront, very clearly to avoid any problems when it comes to payment later on.

The more upfront you can be with your renters, the more likely they are to return or recommend your complex to another student. So, in other words, it’s in your best interest.

  1. On-Site Resources

Most apartment complexes have a variety of on-site resources that are available to their renters, but many renters aren’t aware of these resources. For this reason, it’s a good idea to mention the available resources to your renters and include them when you outline your lease.

For instance, if you have a fitness or recreation center, that’s something to outline in a lease. You should also include any laundry facilities, parking garages, cafeterias etc. that you have available to your renters.

Many students look for these on-site resources, and they are often large perks to signing a lease, so including these details is a great idea to show all available options to your student so they feel they are getting the most out of their lease.

  1. Office Availability

Last, but definitely not least, it’s important to provide your renters with your office availability. This might not be the first thing that comes to mind when thinking about drafting a lease, but it’s definitely information you should outline in a lease.

Like it or not, there are going to be a large number of times in which your renters need to get a hold of you. Sometimes, it’s related to quick questions that can be answered on the phone, and other times, they need to come into the office to speak with one of your leasing agents about changes to their lease etc. No matter the circumstances, you should always list your office availability in a lease.

This includes your contact number (both the main office and individual contact information), perhaps a link to the website for an FAQ section, your office hours and any other emergency contact information not previously listed in your lease. It’s important that your renters always have someone they can contact, so the more information you provide in your lease to that end, the better off you are and the more comfortable they (and their parents) will feel.

While this is by no means the entirety of the information required in a lease, this is a good starting point as far as items to outline in a lease go.

Again, there will be plenty of information pertinent to your complex alone, and other information that you may need to leave out, but make sure you develop some form of outline to begin with to ensure you’re not missing any relevant information.

When it comes to including information to outline in a lease, more is always better, as you would much rather provide them with too much information than not enough. So, don’t be afraid of being wordy, it’s not going to do you any harm!

Use these items to outline in a lease in order to develop yours and good luck drafting your lease!


Commercial Real Estate Financing Glossary of Terms

Commercial Real Estate Financing Glossary of Terms

1031 Exchange

An exchange of business or investment property for another property of equal or lesser value for which Internal Revenue Service (IRS) Code 1031 allows capital-gains deferral. To satisfy the IRS regulations, a replacement property must be identified within 45 days of the sale of the original property, and closing must occur within 180 days. Third-party 1031-exchange intermediaries are often employed to monitor timing, prepare documentation and hold funds between sale and purchase.

4506, 4506-T or 8821

Consent forms that grant the lender rights to obtain and verify borrowers’ tax-return information from the Internal Revenue Service (IRS). The forms are used for the following purposes:

Form 4506, “Request for Copy of Tax Return,” is used to obtain a complete copy of the tax returns submitted to the IRS.

Form 4506-T, “Request for Transcript,” is used to obtain a line-item summary of the tax returns submitted to the IRS, as well as 1099 and W-2 information.

Form 8821, “Tax Information Authorization,” is used to gain information about previous taxation issues. It is not used to obtain tax returns or transcripts.


A mortgage lender’s right to demand immediate payment from a borrower who defaults on a loan.

Acquisition and development loan

A loan provided for the purpose of developing raw land.

Additional advance

Supplemental loans given to borrowers while they are completing their mortgage transactions. These advances are often paid as a percentage of the mortgage.


A process by which borrowers make monthly principal payments to gradually reduce their mortgage debt.

American Society of Testing Materials (ASTM)

Organization that defines environmental regulations used to set the benchmark for standardized environmental reporting. Commercial real estate developers can satisfy Comprehensive Environmental Response, Compensation and Liability Act requirements using ASTM standards for environmental site assessments.

Annual percentage rate (APR)

The annual cost associated with borrowed funds expressed as a percentage.


A dated, written document in which the property’s value has been determined by a qualified real estate expert. From a lending perspective, the appraised value is considered valid for 120 days.


The increase in value of an asset. Real estate may appreciate due to a number of factors, including inflation-rate increases, limited supply of inventory, highly desired location or the local economy’s growth rate.

Balloon payment

An over sized payment due at the end of a mortgage, commercial loan or other amortized loan. Because the entire loan amount is not amortized over the life of the loan, the remaining balance is due as a final repayment to the lender. Balloon payments are often prepackaged into what are called “two-step mortgages.” In this type of mortgage, the balloon payment is rolled into a new or continuing amortized mortgage at the prevailing market rates. Balloon payments can occur within fixed-rate or adjustable-rate mortgages (ARMs).

Blanket loan

A mortgage loan with multiple properties as collateral.


Long-term debt sold to investors. Mortgage loans are often bundled together and sold as mortgage-backed bonds. Proceeds from the sale of the bonds generate new revenue streams for banks, allowing them to continue issuing new loans.

Bridge loan

A short-term loan given to a borrower until permanent financing becomes available.

Building permit

A government-issued document that gives a builder authority to construct or modify a structure.

Business credit report

A compilation of a commercial entity’s credit history and risk.

Capital gain

The difference between an asset’s appreciation and the price paid when it was acquired.

Capital-gains tax

Tax on profits received from the sale of capital assets.

Cash-out refinance

Refinancing a current mortgage at a higher loan amount and taking the difference in cash.

Certificate of occupancy (C of O)

A key piece of documentation in commercial real estate that is issued when building construction is complete. The C of O indicates that no other work is required and that all inspection requirements have been satisfied. In commercial finance, when the borrower receives the C of O, the lender will close a temporary bridge loan and, once the final project costs are calculated, issue a permanent loan.

Closing costs

Fees associated with the acquisition of real estate. These include, but are not limited to, lender fees, credit checks, title insurance, and survey and recording fees.

Commercial mortgage-backed securities (CMBS)

A type of mortgage-backed security that is secured by loans on commercial property. A CMBS can provide liquidity to real estate investors and to commercial lenders.


Used to determine the market value of a property, based on comparisons of like-properties sold within a specific geographical area and time period. Also known as comps.

Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) of 1980

A federal law designed to clean up and establish liability for hazardous waste sites, also known as Superfund sites.

Construction completion loan

A loan provided to cover project cost overruns. Typically, a bank will lend a set amount for construction projects, and borrowers are required to pay for or finance any additional costs. If borrowers experience a cash shortfall, construction completion loans cover the difference. Because the borrower is typically in a critical situation, interest rates on these loans are generally higher than for conventional loans.

Construction loan

A loan issued for the construction or major renovation of a property. As work is completed during the various stages of construction, money is paid out to borrowers incrementally in the form of draws.

Construction output price index (COPI)

A measure of the cost of work being executed in a given period. The index was originally designed to measure the inflation-adjusted value of construction output, but is also used in a range of other statutory and contractual applications.

Contingency fund

Money reserved as a buffer to cover cost overruns or unexpected expenses in a project. In loan underwriting, the fund is often tied to and calculated as a percentage of estimated construction costs.

Correspondent lender

A mortgage broker/banker who originates, funds and sells mortgage loans through a relationship with a larger lender, in accord with the larger lender’s underwriting guidelines and program offerings.

Credit report (Personal)

A record of consumers’ credit activities. These activities are tracked by three credit bureaus: Equifax, Experian and TransUnion. According to the Federal Reserve Bank of San Francisco, four main categories are documented in personal credit reports:

Identifying information: Full name, any known aliases, current and previous addresses, Social Security number, year of birth, current and past employers and, if applicable, similar information about spouses.

Credit information: Accounts held with banks, retailers, credit card issuers, utility companies and other lenders. Listed by type of loan, such as mortgage, student loan, revolving credit or installment loan; the date the account was opened; the credit limit or loan amount; any co-signers of the loan; and consumers’ payment pattern over the past two years.

Public-records information: State and county court records on bankruptcy, tax liens or monetary judgments. Some consumer-reporting agencies also list nonmonetary judgments.

Recent inquiries: The names of those who have obtained copies of the consumer’s credit report within the previous two years.

Credit score

A numerical valuation based on personal credit reports that is used to evaluate a borrower’s credit risk. The range on credit scores is 300 to 850. Also referred to as a FICO score.

Debt-service-coverage ratio (DSCR)

A calculation used in commercial real estate underwriting to determine whether income from a property can service the debt associated with the property. To calculate debt service coverage, divide the net operating income by total debt service for the subject property. A DSCR greater than 1 indicates a positive cash flow, and a DSCR less than 1 indicates negative cash flow. Ideally, lenders look for a DSCR of 1.2 or higher.

Debt-to-income ratio (DTI)

A calculation based on total monthly debt payments divided by total monthly income. This is a percentage-based result, and measures the level of lending risk.

Deed of trust

A document created under state law that documents a pledge of real property to secure a loan.  The deed of trust involves the trustor (borrower), the beneficiary (lender) and the trustee.  The trustee is a third party who holds title and is empowered to foreclose on the property should the trustor default.


The failure of a debtor to meet a legal obligation of a loan, i.e. the failure to make a payment, or payments, on a mortgage loan.

Deferred interest

Interest that accrues, but remains unpaid. For instance, on some adjustable-rate mortgages for which borrowers choose a fixed monthly payment, the monthly payment may not satisfy the entire monthly expense as the interest rate changes. The outstanding unpaid interest is added to the loan amount.

Down payment

A borrower’s initial contribution toward a property purchase. To obtain a loan, most lending programs require some form of down payment, based on a percentage of the total purchase price.

Draws on demand

Taking funds from a construction budget to pay suppliers and contractors on demand.

EB-5 Immigrant Investor Program

A program created by federal law, under which immigrants to the U.S. may be granted visas by investing minimum amounts ranging from $500,000 to $1 million in new commercial enterprises. Investments must meet location and job-creation criteria.

Environmental risk

The potential loss of value because of the presence of hazardous materials on a property. Such materials may include asbestos, polychlorinated biphenyls, radon or leaking underground storage tanks.


The difference between a property’s market value and the debt owed on the property. If a borrower owes $700,000 on a loan for a property valued at $1 million, the borrower has $300,000 in equity in the property. Can also be expressed in negative terms.

The value of shares issued in a commercial real estate enterprise, or other company.

Equity line of credit

A credit product in which a property owner borrows against the owner’s equity in a commercial property, as needed. Typically, there is a fixed period of time that a borrower can draw on the loan, after which it is converted to a term loan.

Escrow account

A trust account in which cash or other assets are held to pay expenses pending satisfaction of contractual obligations.

Financial statements

Historical financial reports of assets, liabilities, capital, income and expenses.


Items that are attached to a property. These may include heating and air-conditioning systems, wall-mounted shelves and security systems.

Flagged hotel

A hotel belonging to a nationwide corporation or franchise.

Flood zone

A geographical area designated by the federal government as subject to potential flood damage. Lenders must complete a Federal Emergency Management Agency (FEMA) flood-hazard-determination form prior to funding a property to determine whether a property is localed in a potential flood zone and required to carry flood insurance. The 100-year floodplain — or areas where floods have a 1-percent chance of equaling or exceeding the elevation each year — is the basis for most FEMA determinations.

Floating rate

An interest rate that is allowed to move up and down with the rest of the market or with an index. This contrasts with a fixed interest rate, in which the interest charged on a debt obligation stays constant for the duration of the agreement. A floating interest rate is also referred to as a variable interest rate.

Foreign national

An individual residing in a country, but who has not been granted the legal right to permanent residency.


A business method in which independent owners operate under a right or license agreement to distribute goods or services.

Free and clear

Ownership of an asset without debt obligations.

Garden apartment

In real estate finance, this usually refers to a multifamily development or project in which tenants have access to a shared lawn area.

Good-faith deposit

A monetary deposit made by a purchaser to indicate genuine interest in the purchase of a property.

Graduated-payment mortgage

A loan designed to start with smaller initial payments. Payments then increase at a predetermined rate.

Hard-money loans

A type of financing that typically provides funds for hard-to-fund projects or short-term purposes. Hard-money lenders generally give more consideration to the value of the property, or collateral, than to credit history. Loan-to-value ratios are usually less than 75 percent, and credit scores, if required, can be less than 500. Also referred to as equity lending.

Improved land

A parcel of land that has been developed for use. Improvements may include electrical, water, telephone or sewer lines; grading, landscaping, roads or gutters; and construction of permanent structures.

Individual Taxpayer Identification Number (ITIN)

An alternative to a Social Security number, which is used for federal and state taxation purposes. ITINs are assigned to those who do not qualify for Social Security numbers, such as foreign nationals working in the U.S.

Installment loan

A loan that requires regular, fixed payments over a specific period of time, such as car and student loans.


Assets that lack physical substance, such as goodwill, patents and trademarks.


The price paid for borrowing money, calculated on an annual percentage basis.

Interim financing

A short-term loan issued prior to permanent financing.

Interim statements

Financial statements issued for periods of less than one year.

Investment property

Real estate owned for income or capital appreciation rather than the owner’s personal use.

Joint tenancy

An ownership structure between two or more people. Under joint-tenancy law, if one of the owners dies, the surviving owners are granted the decedent’s interest.

Leasehold improvements

The cost of improvements made on leased property, often paid by the tenant.


A legal claim against an asset for an outstanding debt. If the asset is sold, all liens against the asset must be cleared before a transfer of title can occur.

Loan-to-cost ratio (LTC)

A percentage calculated by dividing the loan balance of a construction project to the cost of building the project.

Loan-to-value ratio (LTV)

A percentage calculated by dividing the loan balance of a property by its market value. The higher the LTV, the greater risk for the lender. Consequently, loans with more than 80-percent LTV have higher interest rates and typically require private mortgage insurance.

Market value

Determined by a property appraisal, an estimate of what a buyer would expect to pay for an asset under current market conditions.


The time at which a loan’s principal balance must be paid.

Mezzanine financing

A loan that comes with a warrant that lets the lender convert to equity-interest in a property if the loan is not repaid in full.

Mini-perm loan

A commercial loan with a balloon payment and a three- to five-year term. Mini-perms are obtained for projects without an established operating history. The loans provide funding while projects are being established, with the assumption that they will be converted into permanent loans once the property is in use.

Mixed-use properties

Properties built and/or zoned for commercial and residential use. They typically feature ground-level commercial space with residential apartments or condominiums above.


A loan that is paid over time and secured by real estate. The lender retains the legal right to acquire and sell the property if there is a breach in the loan contract, such as a failure to pay.

Mortgage broker

An individual who sources mortgage loans and serves as an intermediary between borrowers and lenders. Brokers charge a fee for their services, which is typically based on a percentage of the loan amount.


Properties that are constructed for multiple-family use, such as apartments or duplexes. If the building is sold as a complete unit, condominiums can also be considered multifamily properties. However, condominiums typically are sold as individual units, and not considered multifamily properties.

Net-net lease

A lease in which, in addition to the rent, the tenant pays for property taxes and insurance. Commercial tenants are also might also be required to pay maintenance costs on a property (See Triple-net lease).

Non-owner-occupied property

Income-producing property in which the owner does not live or operate a business. Many lenders consider non-owner-occupied properties to be higher-risk, and as a result, mortgages for these properties may carry a higher interest rate.

Non recourse loan

A loan that is secured by collateral (e.g., a home or building), but for which the borrower is not held personally liable. If the lender seizes the property and the sale does not cover the loan, the borrower is not responsible for the shortfall. Non recourse loans typically have a lower loan to value ratio (80 percent to 90 percent) to increase the lender’s level of protection should the loan go into default.

Nonresident aliens

Immigration status granted to foreign nationals living and working in the United States on non immigrant visas. The most common types of visas are tied to a sponsoring institution or employer (e.g., EB-1, F-1, H-1B, J-1, etc.). For tax purposes, nonresident aliens are taxed on U.S.-based trade, business or employment income.

Office condos

Office units that business owners can buy rather than lease.

On-time completion bonus

A bonus given to a contractor for finishing the construction of a home or commercial project within an allotted time frame.


A property-owner who assumes responsibility for the overall job of building a property, rather than using a general contractor.

Owner-occupied businesses

Businesses that operate out of the building they own.

Par pricing

An interest rate used as the reference point for which a mortgage lender will neither pay a rebate (yield spread premium or negative points) or require discount points for a mortgage.

Passive real estate

Income-producing properties that do not require active involvement in their day-to-day operations, such as storage facilities and car washes.

Permanent resident aliens

Foreigners who have been granted permanent residence in the United States and have been issued a permanent-resident card (aka, green card) but who do not have U.S. citizenship. For tax purposes, permanent residents are taxed on their global income.


Personal Financial Statement

Planned urban development (PUD)

A type of community zoning classification that is planned and developed within a city, municipality and/or state that contains both residential and non-residential buildings (such as shopping centers). Open land, such as for parks, is also often included PUD zones.


Preferred lending partner

Power of attorney

The legal right to make decisions on another’s behalf.


Early repayment of a loan.

Prepayment penalty

A fee charged to borrowers for early repayment of their loan, to compensate the lender for lost interest payments.


The original amount of money borrowed on a loan.

Principal reductions with re-amortization

Reducing the loan’s principal balance and applying the existing interest rate to the remaining principal over the life of the original loan term.

Private money

Typically short-term, high-interest-rate loans by private individuals or small companies. Also known as hard money.

Pro forma

Financial adjustments made off the balance sheet, reflecting the impact of recent or anticipated changes.


Financial statements that predict future income, cash flow and balance sheets. They typically span multiple periods of time.

Quit-claim deed

A legal term indicating one party has terminated its interest in the property.

Raw land

Land that remains unused and in its natural state. Raw land is historically free from any improvements such as grading, construction or subdividing.


Process by which a loan is paid off with proceeds received from a new loan. The same property is used as collateral for the new loan. Loans may be refinanced for several reasons, including more favorable terms, change of lenders, access to equity, change of guarantors, etc.

Rent roll

A detailed list of tenants on a property, outlining the square footage and area leased, amount paid in rent, lease terms, etc.

Rent step-up

A rental agreement in which the monthly rent payment increases over a fixed period, or for the life of the lease.

Right of rescission

Borrowers’ ability to back out of a loan, usually established by law as a specific time period.

Small Business Administration (SBA) loans

The federal Small Business Administration guarantees bank loans that are structured to meet SBA requirements. The 7(a) program is the most popular for starting, acquiring and expanding businesses.

The 504 program supports long-term, fixed-rate mortgages for fixed assets – usually buildings, land and machinery. The loans are intended to promote economic growth, and are offered at terms that are often more favorable that conventional bank financing.

Securitized mortgage

The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors. The process can encompass any type of financial asset and promotes liquidity in the marketplace.

Seller carry-back

An agreement in which the seller provides financing for all or part of the purchase price of a property.

Special-use/single-purpose property

An income-producing property designed for a specific purpose. In most cases, a significant expense would be required to convert this type of property to a general-purpose facility. Examples include restaurants, car washes and hotels.

Subdivision construction loans

Loans for the construction of single-family and multifamily subdivisions, typically ranging from two to 30 homes. Financing is provided for all phases, including land acquisition, development and construction.

Subordinate financing

A secondary or “junior” lien on a property. If there is a foreclosure, the primary-lien holder is paid first. For lenders, taking a subordinate position involves more risk, as well as the potential that they won’t get paid in a foreclosure. Consequently, the interest rate is usually higher.

Sweat equity

Providing labor, rather than cash, toward the completion of a project. Often this term applies to a property under construction for which the owners do some of the work. This is a cost-saving technique with a fair market value. Lenders accept sweat equity on a case-by-case basis, which varies by lender.

Tenants in common (TIC)

Two or more individuals holding title on a property.


Evidence of legal ownership. With real estate, it establishes the owner’s right to occupy and eventually sell the property without a third-party interest.

Title insurance

Insurance policy that protects borrowers and lenders against title defects. The fee for this is typically included in real estate closing costs and paid to a title company or attorney who provides due diligence to ensure the property is marketable.

Treasury bill (T-bill)

A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks).T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, they provide a return to the bondholder through appreciation.

Triple-net lease (NNN)

A lease in which, in addition to rent, the tenant is required to pay for property taxes, insurance and maintenance. Commercial leases might also require tax and insurance payments, but not the cost of maintenance (See Net-net lease).


A legal form that a creditor files to give notice that it has an interest in the personal property and/or income related to the collateral backing a commercial mortgage.


Process used by lenders to determine borrower eligibility and ability to repay a loan. A number of factors are evaluated, including personal credit history, financial statements, employment history and salary. In commercial real estate finance, these factors also include business financial records, history and projections.

USDA Business and Industry Loan Program (USDA B&I)

United States Department of Agriculture loan-guarantees made to rural businesses to improve a community’s economic condition.

Warehouse line

A line of credit extended to mortgage bankers to allow them to provide mortgage loans. With the line, they often can make faster lending decisions and fund loans faster than through typical bank approval process.

How to Find Off Market Apartment Buildings

One of the most elusive and desirable real estate opportunities is the off-market property.

Investors and specialty real estate companies covet an apartment building where they are the first to contact the seller.

How can you find off market apartment building for sale?

The following are some of the people that can lead you to find off-market properties:

Estate, Probate and Divorce Attorneys

Relocation Companies

Local Builders

Other Investors

Commercial Brokers

Public Records, for bankruptcies and Sherriff sales.

But why not look for properties that aren’t yet for sale?  This is a great way to bypass the “middle man” and go “direct to seller.”  Here are a few ideas that can help you discover those “hidden gems” – those great off-market apartment deals.

Driving Around

If you live in the same area you want to buy in, you can always start by driving the local neighborhoods.  Find out, if you don’t already know, where the “B” class neighborhoods are with the better schools, in neighborhoods consisting primarily of single-family homes and in close proximity to the better restaurants, shopping facilities and services.

Look for a class “C” looking building in a “B” class neighborhood and you could potentially find a great “value add” opportunity.  When you see those properties, join down the address and look up the properties either online or through the county assessor’s office to get the owner’s name, address and telephone number.  Draft a strong letter or, if possible, call and see if you can find motivated owners.

Google Mapping

If you are an out-of-area or out-of-state investor, you can also cruise neighborhoods, but instead of driving, cruise the neighborhoods online through Google maps.  After doing your research by talking to brokers, agents and others from the area of interest, identify the “B “class neighborhoods, look for apartments that look like “C” class apartments and jot down the address off the building or apartment sign.  And do the same as above.

Placing an Ad

An ad placed on Craigslist or through social media stating what you’re looking for can also attract motivated sellers.

Buying an Apartment Building That’s Not for Sale

Buying apartment buildings that aren’t for sale starts with a three-step search process.  You first decide what you’re looking for and in what market.  Do you want duplexes and four-plexes, or larger apartment buildings?  The second step is to start looking for properties that fit your criteria.  And finally, you contact the owners.

Don’t limit yourself to “fixer-uppers” or other “problem” properties that seem more likely to have owners willing to sell.  Probably, most owners of rental properties have thought of selling at one time or another, so you can start with almost any building.  How can you tell when or why a landlord is ready to call it quits?  By asking.

Of course, tact is necessary.  When you call the owner, tell him you’re an investor, not a broker.  Tell the owner you like what you see, and you can have an offer ready in a week if he the owner is interested.  What if the owner is not interested?  Thank the person politely and hang up, but send your card or a follow-up letter.  Investors often buy from owners that change their minds.

If the owner is interested, explain that you are an investor, so your offer will have to be based on your return-on-investment.  That means you’ll need to see the books, specifically the rent roll (listing the units and what they rent for plus current occupancy), a financial history of his income and expenses for the last 2 or 3 years, and finally, do some research on the neighborhood and greater market.

Have a confidentiality agreement ready before you call, and let the owner know you’ll sign it and deliver it before you see the books.  It’s possible he doesn’t want the tenants to know he’s thinking of selling.  If so, inspecting the units may have to wait until you make an offer.  Just make an acceptable inspection a contingency in the offer.

Why should you buy income properties this way? Because having no competition and no sales commission can mean a much better price.  Instead of waiting for that perfect property to be listed for sale, you just find it now.  Look for it, find it, and make an offer.

IRS Section 179 Explained

IRS Section 179 Explained for 2018 Tax Year

What is Section 179?

Section 179 allows businesses to deduct the full purchase price of qualifying equipment and or software purchased or financed during the tax year. That means if you buy or lease a piece of qualifying equipment, you can deduct the full purchase price from your gross income.

Who Qualifies for Section 179?

All businesses that purchase, finance, and/or lease new or used business equipment during tax year 2018 should qualify for the Section 179 Deduction, assuming they spend less than $3,500,000.

What type of equipment qualifies for the Deduction?

This deduction is good on new and used equipment, as well as off-the-shelf software. To take the deduction for tax year 2018, the equipment must be financed or purchased and put into service between January 1, 2018 and the end of the day on December 31, 2018.


How to Run a Short Term Apartment Rental Business

How to Run a Short Term Apartment Rental Business

If you’re interested in renting short-term apartments, you might be wondering if such a thing is possible in the Airbnb era.

Airbnb is dominating the short-term rental space with its peer-to-peer model. On the other end, the hotel industry remains the “go-to” solution for shorter stays.

The key is finding your way into that cozy niche between Airbnb and the hotel industry, a daunting task for sure. Don’t lose hope; this niche is the perfect place for “apartment hotels” to flourish.

Managed apartment rental companies are seeking to combine the comfort and convenience of an apartment with the service offerings of a hotel in a short-term rental capacity.

Where do you begin if you want to enter this space, and what can you learn from the hotel industry and Airbnb? Let’s take a look.

Airbnb vs Hotels

A quick Google search of “Airbnb vs. hotels” yields more than 7.1 million results featuring pricing and convenience comparisons between the industry’s primary players. Airbnb continues to grow year over year, and shows no signs of slowing down.

It’s here to stay in the travel and accommodation space, and for good reason. Travelers, as it turns out, enjoy staying somewhere that feels homey while granting access to a kitchen, comfortable furniture, and space to spread out.

That’s a win for you, if you’re in the apartment rental business. If you run a hotel, don’t look away. Chances are other hotels in your industry are taking notice of this trend, and adjusting to meet market demands.

Not every hotel manager or business enjoys—or has time for—the back and forth of messaging individual apartment owners, dealing with unique access and instructions for each unit, and limited rental dates.

That’s where apartment hotel companies come in. They’re filling a niche created by traveler demand and business need, and you can learn from what they’re doing to stay competitive.

An Airbnb Listing

Entering the apartment rental business niche

Apartment rental companies seeking to capitalize on the short-term rental demand fill that space between Airbnb and traditional hotels. Sometimes called “managed apartments” or “apartment hotels,” these companies combine the comfort, space, and convenience of having your own apartment with the fully managed services offered by hotels.

These companies allow travelers to book a private apartment in the same way they would book a hotel room.

If you’re looking to rent properties to travelers, consider listing them as “short-term rentals” for anywhere from one week to 30+ days. Focus on marketing to business travelers who have longer stays in your city.

Play up the hotel-esque features you’re offering as an alternative to staying in someone else’s apartment. While the owners of an Airbnb listing aren’t often around, booking their place can still feel as though you’re peering into someone else’s life.

With apartment hotels, travelers can settle in to a well-furnished and serviced space that feels like it was prepared just for them without battling another person’s knick-knacks or personal proclivities.

What does a typical apartment rental look like?

Pending on the company, apartments offered as short-term rentals can range from one to three bedrooms. They are fully furnished, including a kitchen, washer / dryer, and other conveniences of home.

Companies such as UrHIP, Roost, Zoku and AKA are serving customers by providing apartments similar to what you’d find on Airbnb with added hospitality services such as local fitness club access, cleaning services, and grocery delivery.

Certain companies in this space are unique to one city or area and focus on inspiring architectural design, while others have honed in on offering nationwide bookings.

Pitching an Apartment Rental

So, how do you pitch this to business travelers and the companies who employ them?

With your apartment rental, you’re offering an advantage over a hotel by giving them a place that includes more amenities than a standard hotel room and may be less expensive than renting a hotel room for weeks.

You’re offering an advantage over an apartment by not requiring travelers to sign a 12-month lease. And, you’re offering an advantage over Airbnb by offering a space that’s all their own, rather than invading someone else’s home.

This model makes your apartments more attractive to international visitors who often require flexible check-in times and need more services than an individual listing a room on Airbnb can provide.

You won’t be able to compete with the hotel industry in areas like hosting local events and trade shows, but you can compete for event attendees and vendors.

As Airbnb continues to grow and reach independent travelers or families, extended stay apartment companies are uniquely positioned to serve a niche audience of traveler.

An increasing number of travelers (both business and otherwise) want to eat healthier meals or prefer to cook for themselves due to dietary restrictions or food sensitivity / allergy concerns.

Your apartment hotel makes everything from coffee brewing to having a “home” office space easier.

Key Takeaways

As you explore entering the apartment hotel space, keep these three key takeaways in mind:

There is space for you. If you’re a property manager, pull what you can from Airbnb and hotels as you model your apartment hotel business. Your target market is looking for consistency, hospitality, and comfort.

If you’re an individual short-term apartment renter, use Airbnb to get in front of customers and pitch your unique value proposition. When you craft your apartment listing, focus on young business travelers and offer a significant discount for extended stays of seven days or more.

If you’re in the hotel space, think about how you could adapt this strategy for your hotel. Consider how to create spaces that don’t feel like traditional hotel rooms, which often lack warmth.

While it may not be feasible to create a full apartment space in each room, insert simple comforts such as an in-room coffee corner offering locally roasted coffee or a bookshelf with a few paperback offerings and a Bluetooth speaker for your guest’s smartphone.

How to Calculate Income Approach for a Commercial Property

How to Calculate Income Approach for a Commercial Property

Appraisers use three general approaches to value properties.

The cost approach looks at what it would cost to replace a building while the sales comparable approach looks at what similar properties sell for and adjusting the market data to come up with an accurate value for the property.

The income approach applies a multiplier, called a capitalization rate, to its income. This approach is usually most appropriate for income producing commercial properties.

Calculating the Income

The income approach only works if you have an accurate “net operating income” for the property. To calculate the NOI, start by annualizing the property’s rental income and subtracting a vacancy factor that is appropriate for your market to find the “effective gross income.” For example, if the building is full, you would subtract 5 percent of the rent for vacancy.

Add up all of the property’s annual operating expenses and subtract them from the EGI to find the NOI. Operating expenses include normal recurring expenses that are tied to the building, such as property taxes, utilities, non-capital repairs, and management.

They don’t include capital expenditures, the cost of leasehold improvements or landlord expenses such as mortgage payments.

Conducting Market Research

Before you can find a value based on the NOI that you calculate, you must select a capitalization rate based on market sales comparable.

To find an accurate cap rate, research recent sales of similar properties in the market. For example, if you’re valuing a 50,000 square foot class-B office building in San Rafael, you might want to look at any building between 25,000 and 100,000 square feet that sold anywhere in Marin County.

Third-party data sources such as CoStar or LoopNet can be helpful, and you can also get sales data by calling a county assessor, looking at research reports from local commercial real estate brokers, or working directly with a broker.

Deriving a Cap Rate

Once you have derived a cap rate based on market research, you will need to adjust it slightly for your property. For instance, if your property has higher-quality tenants than other properties that have changed in your market, you might reduce the cap rate slightly.

On the other hand, if your property is less attractive than others that have changed hands, increase the cap rate slightly. Generally, you will want to set a cap rate that is within 50 basis points of the market norm. For example, if the average market cap rate is 7.25 percent, you would probably value your property between a 6.75 and a 7.75 percent cap rate.

Once you have a cap rate, divide the property’s NOI by it. For example, if your property has a $650,000 NOI and you select a 7.25 percent cap rate, it would be worth approximately $8,966,000.

Confirming the Value

As a part of your research, you probably also came across some other valuation metrics, such as a price per unit for a multi-family property or a price per square foot for a leased property such as an office or industrial building or retail center.

If the price per square foot for your building is reasonably close to the market price per square foot, it can serve as a confirmation that your price is reasonably accurate.

Perhaps the best approach to take at this point if you are unsure how to properly assess the value of your property is to hire an appraiser. Appraisers in the San Francisco area can be found relatively easy using a simple web search.

What is a Cap Rate How to Calculate

What is a Cap Rate How to Calculate

What is a cap rate – A cap rate is what investors expect to earn as a percentage of their investment on an annual basis?

Commercial real estate valuation is a very complex business with many variables that affect price.

Over the years investors found that they needed a way to compare property values, essentially price, in a market using a shorthand method, thus capitalization rates or cap rates came into general use. In simple terms, a cap rate is what investors expect to earn as a percentage of their investment on an annual basis.

For example, a property with a cap rate of 10 tells a buyer that he should expect a 10% return on his investment assuming a debt free transaction.

How to calculate a cap rate – Formally, Direct Capitalization (cap rate) is a method used to convert a property’s annual net income (NOI), into an estimate of the property’s value.

Value = Net Operating Income / Capitalization Rate

Cap Rate = Net Operating Income / Value

In general, the lower the cap rate, the higher the property’s value, and the higher the cap rate, the lower the value. In other words, a property with a lower cap rate compared to a property with a higher cap rate will return less income to the investor.

Markets like San Francisco, Manhattan, Seattle and Miami tend to have some of the lowest cap rates in the country. Properties located in secondary and tertiary markets tend to have higher cap rates rewarding the investor for taking additional risk by purchasing in a smaller market.

Annual Property Operating Data [APOD] Real Estate Analysis Explained

Annual Property Operating Data

The APOD is arguably one of the most popular real estate analysis reports investors, agents, brokers, and others engaged in real estate investing use during the investment decision process.

Although the word “APOD” can be misleading, the word itself is really just an acronym for Annual Property Operating Data (i.e., A-P-O-D), and the report concerns the rental property’s annual financial performance for the first year.


Real estate analysts like the APOD primarily because it gives a one-page “snapshot” of the property’s financial performance over the course of the first year. Many, in fact, regard the data as a mini income-and-expense-statement because it includes the projected annual income, operating expenses and cash flow.

Personally, I like the APOD. During my tenure as a realtor, it was the one report presented to real estate investors I was meeting to discuss a property for the first time, and in most cases, it proved to provide enough data for the investor to decide whether or not there was enough profitability to pursue the investment further. So, it “cut to the chase” and saved us both valuable times.


There are four sections of the investment’s annual property operating data that essentially comprise an APOD. Rental income, operating expenses, debt service, and cash flow. It is structured as follows:

Gross Scheduled Income (GSI) – The sum of all annual rents as if the units were 100% occupied. Apply any rent you wish (perhaps a market rent) to units that are vacant. The idea is to show the potential when all units are rented and all rent collected.

Vacancy and Credit Loss – The potential rental income lost do to unoccupied units or nonpayment of rent by the tenants. I recommend nothing less than 5%.

Effective Gross Income (EGI) – This is gross scheduled income reduced by vacancy allowance and represents the amount of rental income you realistically expect the asset to generate.

Other Income – The amount of income (if any) you expect can be collected from other sources such as coin-operated washers and dryers, storage rooms, garages and so on.

Gross Operating Income (GOI) – The actual amount of income available for you to start paying the bills.

Operating Expenses – The expenses required to keep the rental property in service such as property taxes, property insurance, utilities, trash, repairs and maintenance, property management and so on.

Net Operating Income (NOI) – The amount of income remaining to service the debt once all the operating expenses are paid.

Debt Service – The annual sum total of all mortgage payments.

Cash Flow – The cash available after all cash inflows are reduced by all cash outflows. In this case it is cash flow before taxes (CFBT) which means it is money still subject to the owner’s income tax liability.


Gross Scheduled Income

less Vacancy and Credit Loss

equals Effective Gross Income

plus, Other Income

equals Gross Operating Income

less Operating Expenses

equals Net Operating Income

less Debt Service

equals Cash Flow

Rule of Thumb

The APOD is not perfect because it only evaluates the first year of a rental property’s annual property operating data and does not include consideration for tax shelter or time value of money. Nonetheless, when populated with accurate and realistic numbers it will provide real estate investors with a concise and easy-to-read report that will benefit initial real estate investment decisions.

EBIT and EBITDA – Shortcut to Cash Flow

EBIT and EBITDA – Shortcut to Cash Flow

While there are several factors that go into qualifying for a variety of business loans, there is one metric upon which banks heavily rely, but is unfamiliar to most applicants.

It is the Fixed Charge Coverage ratio (slightly modified for pass-through entity accounting), and it measures your projected ability to pay back the loan with interest better than any other calculation or ratio.

EBIT and EBITDA – Shortcut to Cash Flow

The bank wants to know how many times your cash flow can cover your loan payments. The way they determine cash flow is EBIT, or calculating your earnings before interest and taxes.

Your may have heard of EBITDA, which adds Depreciation and Amortization back to EBIT, and I have always contended that this is the lazy man’s formula to derive free cash flow.

The investment and banking community have established this standard.

Pass-Through Entity Hides Cash Flow

But the problem with EBIT, or even EBITDA, is that it leaves out a significant decrease in cash flow inherent to S-corps and most LLCs — owner draws or dividends.

Due to tax and other reasons, owners of and partners in S-corps, and most LLCs, often receive a large portion of their income as draws or distributions, for which EBIT and EBITDA do not account.

A bank, therefore, is possibly seeing a prospective borrower too favorably without accounting for this form of owner compensation.

Modified Fixed Charge Coverage Ratio

Banks have gotten smart. They have taken the Fixed Charge Coverage ratio, which was derived to more accurately determine a company’s wherewithal to make its loan payments than the Interest Coverage ratio, and added the owner draws/distributions to the formula.

It is focused on assessing all of the company’s fixed financing commitment, in which fixed distributions to owners should be included. Here is how it works:

[EBIT + Lease Expense + Owner Draws]

[Interest Expense + Lease Expense + Owner draws]

Don’t feel overwhelmed by all of the inputs into the formula; it’s not that hard to pull together.

What’s good?

A ratio of exactly one means the business is running on tight cash flow but it will be able to make all of its obligations.

A ratio greater than 1.2 is a comfortable place for a bank to lend, and a ratio over 3 means the company may not be using leverage to its maximum potential.

Here’s an example:

Saul’s Deli generates EBIT of $80,000 annually. Saul has fixed leases in place of $20,000 and takes another $60,000 out of his company every year as a dividend (he is an S-corp). He pays $15,000 per year in interest. Here is his Fixed Charge Coverage ratio:

[80,000 + 20,000 + 60,000]

[15,000 + 20,000 + 60,000]



Fixed Charge Coverage ratio = 1.68

This means that Saul’s Deli can cover his existing debt and obligations by 1.68 times.

A bank would likely feel comfortable with this ratio if he meets the other loan underwriting criteria and the new loan does not decrease this ratio too much. Interestingly, the interest coverage ratio would have come back over 5, not nearly as realistic as the fixed charge coverage ratio in determining Saul’s ability to service his existing and potential new debt.


Applying for a loan can be intimidating. You should know your ratios, including your fixed charge coverage ratio, before you even start the application.

Not only will the EBIT and EBITDA coverage ratio, along with the modified fixed charge coverage ratio help you think like a banker, but it will also help you determine if asking for a loan will help or hurt your business.

What Landlords Need To Know About Selling A Tenant Occupied-Property

No Upfront Fee Commercial Real Estate Loans

The time has come to sell your tenant-occupied property. As a landlord, you care about your tenants and want to show them respect. Although the house they are living in is yours to sell, you always want to keep their best interest in mind throughout the sales process, as an angry tenant could slow down the selling process significantly.

It is also important that you abide by the terms of the lease and do not violate any tenant agreements you have made.

The Month-To-Month Tenant

Let’s start with a best-case scenario: the month-to-month lease. Depending on the city and state you live in, this is typically the most flexible rental situation because the renter only needs about 30 to 60 days’ notice before they need to move out.

It is important that you provide adequate notice to your tenant and abide by the terms of the rental agreement detailing the day their lease will end.

Although you as the landlord do have the ability to end a month-to-month lease without explanation and are not required to tell your tenant that your home is on the market, I strongly advise keeping them in the loop on your plans to sell.

Keeping the tenant informed will most likely make them more inclined to assist you in the selling process and will be far easier on them than being forced out of their living space with little or no notice at the last minute.

Here is how I recommend proceeding:

  1. First, send a letter to your tenant advising them on the exact date their lease will end.
  2. Inform the tenant that they must be completely moved out and return the keys on or before the date specified in the letter.
  3. Make the tenant aware that if they do not move out, the eviction process will, unfortunately, be the next step.

The Fixed-Term Lease

A fixed-term lease can make the selling process a little bit lengthier than you might like. Assuming your tenant pays rent on time and doesn’t violate any terms of the lease agreement, he or she has the right to live on the property until the lease expires — unless there is an early termination clause. Unless you are in extenuating circumstances, I advise waiting until your tenant’s lease has expired before selling your property.

The Difficult Tenant

If you find yourself in the unfortunate situation of having a challenging tenant, I recommend waiting until the lease has ended to put your home on the market, as he or she could make the sales process very difficult.

An uncooperative tenant might leave the home messy when prospective buyers come by to see it, or they might refuse to leave the home during open houses, making the situation uncomfortable for everyone involved. However, if they go beyond merely being difficult and go as far as violating any lease terms, you may have the ability to terminate the lease before it ends.

The lease can be terminated if your tenant commits any of the following:

Fails to pay rent altogether (or continuously pays rent significantly late).

Engages in illegal activities on your property.

Causes major damage to your property.

Includes false information on their application.

Becomes a nuisance to neighbors.

Violates a non-pet clause, if applicable.

Rent Concession

Whether you have an easy-going or challenging tenant, I advise offering a discount on rent (such as offering a full or half month free). In return, work out a deal with the tenant so that they agree to keep the house clean for open houses, take any pets out of the house when prospective buyers visit and accommodate last-minute showing requests (within reason).

What if my tenant doesn’t want to leave?

There are a few options available to you and your tenant if they feel attached to the property:

Sell your home to your tenant: Your tenant could turn out to be the ideal buyer. They know the home well and are already completely moved in.

If your tenant is unable to obtain a mortgage, seller financing could be a feasible option. If you decide to go that route, you would act as both the seller and the lender, thereby letting your tenant make payments to you.

Although this might not be the most ideal situation, it will spare you from having to go through the lengthy process of finding a buyer and waiting for your tenant’s lease to end.

Pay your tenant to leave: If you are under a time constraint and need to sell your property as quickly as possible, it might be necessary to pay your tenant to vacate.

This can include paying for the cost of movers, paying their security deposit for their new apartment or paying for a month’s rent in their new space.

Sell to an investor: Finding an investor can be challenging, but if you do find someone who is willing to purchase the property while your tenant’s lease is still active, the investor must allow the tenant to remain in the home until their lease expires.

In nearly every state, the security deposit and fixed-term lease are transferred with the property when it is sold, making the investor the new landlord.

If you’re selling a tenant-occupied property, you’ll want to be sure you take everything into consideration as your tenants can make selling either super easy or a nightmare for you. Sometimes offering perks — whether it’s financial concessions or even baked goods — can go a long way in them working to help you get your home sold.

When Should You Hire A Property Manager For Your Rental Properties

When Should You Hire A Property Manager

Keeping on top of rental maintenance is vitally important for any landlord. But for most, it’s not exactly something they enjoy. After all, being on call 24/7 for any repairs and maintenance issues that arise can get tiring after a while, even for the most resilient landlord.

Then there’s the issue of time. While in the beginning, doing cleaning, painting and small plumbing jobs might be fine, once you’ve got a few rentals under your belt you’ll quickly find that management can escalate into a full-time job.

If you’re on the fence, here are a few questions that can help you determine whether a property manager is the best option for you.

Do I have time to manage my property?

If you’ve reached a stage where you dread answering the phone because you don’t want to deal with yet another tenant maintenance request, it may be time to outsource.

It happens all the time: landlords running themselves ragged, trying to do it all. They have a few properties, but instead of creating passive income streams for themselves, they’ve simply acquired another job — a full-time one at that.

Don’t let your dream of owning rental properties become stifled because you can’t afford to put any more hours in at your properties. Instead, consider outsourcing to a reputable rental management professional who will be able to oversee the properties in your stead.

Do I want to expand my rental property portfolio?

If your goal is to own five, 10 or more rental properties, outsourcing is the fastest way to get there. This is especially true if you’re finding that maintenance and repairs are starting to keep you from high-level tasks like finding and assessing new investment opportunities and properly overseeing your property portfolio.

Will I invest in markets outside of my local area?

While many landlords start out with properties in their own hometown, if you’d like to grow your portfolio, you may wish to take advantage of up-and-coming markets or opportunities that are better than what’s available in your own backyard. However, being a long-distance landlord can bring its own set of unique challenges, even for experienced landlords.

If you’re thinking of investing in an out-of-town property, hiring a professional property manager who will be your eyes and ears on the ground can free you up from the stress that’s often associated with long-distance landlording.

Will a property manager help me be more profitable?

Finally, is hiring a property manager a financially smart decision? If you have one or two local properties, it might make more sense to oversee them yourself. But often, professional landlords find that hiring a property manager to oversee their rentals enables them to invest in more properties than they’d be able to otherwise, helping to maximize returns.

Finding A Reputable Property Manager

Much of your rental property’s success is contingent on how well it’s managed. For landlords who are thinking of outsourcing management or maintenance, finding a reputable and qualified professional is crucial.

Be sure to do your research upfront. Read online reviews. Ask for referrals. And, much like conducting an interview, ask your prospective property managers qualifying questions to ensure you end up with a great match. Here are a few questions you should ask:

1. How much experience do you have?

First, you’ll want to ensure that you find a professional who’s experienced and knowledgeable — one with a proven track record of success. Consider asking how many rental units they are currently responsible for. A low number could indicate that they’re new to the game, or perhaps struggling.

2. How do you structure your fees?

Concerns about cost is one of the main factors that keeps people from outsourcing. And naturally, this should be one of the first questions that you ask.

Generally, monthly fees are either fixed or a percentage of the rental yield, often 8-12% of the monthly revenue. Optional packages and additional services could impact the cost, though, so make sure you’re aware of their fees before you commit.

3. Are there any fees when the property is vacant?

If you find a company that charges you while the property sits vacant, be careful. Property managers should have an incentive to keep your rental occupied, and if they’re being paid regardless, then that incentive goes away.

4. How do you screen tenants?

Any property manager worth their salt will not only screen tenants thoroughly, but also have airtight policies and procedures in place to ensure that they do so in a way that’s in compliance with the Fair Housing Act.

5. What’s your average vacancy rate?

Reducing vacancy times is key to maximizing your returns. A reputable property manager should know their average vacancy rates, and will be more than happy to inform you of them. Anything within the two- to three-week window is outstanding.

At the end of the day, the decision to outsource comes down to your personal preferences and investment goals.

Many landlords find that it’s a pivotal turning point in their investment career — the decision that’s responsible for allowing them to reclaim their time and focus on growing their investments.

Commercial Loan Interest Rates for Dummies

Commercial Loan Interest Rates for Dummies

We spend a lot of time talking about interest rates because they affect so much of our lives.  On a personal level, they govern the cost of our mortgage, our credit card bill and our car payment.  In business, they affect our ability to grow and expand, to invest in new equipment, and to purchase commercial real estate.

But how well do we really understand interest rates?  Where do they come from?  What do they mean, and how can we make smart financial decisions based on our expectations for future interest rates?

Those are questions we’d absolutely love to answer.

Rates From “the Fed”

An awful lot of talk around interest rates centers on “the Fed.” The Federal Reserve is the United States’ central banking system.  Broadly, its job is to make sure that our economy is healthy and as predictable as possible.

When it comes to interest rates, the federal funds rate is the granddaddy of them all.  Every other meaningful interest rate in this country, from your credit card APR to mortgages to SBA 504 loan rates, is either directly or indirectly linked back to the federal funds rate.

The fed funds rate is set, or more accurately targeted, by the Federal Open Market Committee.  They meet about every six weeks and release a target interest rate, often alongside their expected plans for future interest rate changes.

At its core, the fed funds rate is the percentage rate which big banks will lend money overnight to other big banks. To make their target rate a reality, they use a couple of mechanisms: buying and selling government securities (something that happens all the time), as well as changing the amount of money banks are required to hold in reserve (something that happens much less frequently).

For all intents and purposes, the target federal funds rate is the actual federal funds rate.

What’s a “normal” federal funds rate?  That depends.   In a healthy economy, it’s typically going to be between 2% and 5%. Currently, it’s just above 2%.  Its high mark was 20% in January of 1981.  Its low point was in December of 2008, when it hit 0.25%.

Prime Rate – The Basis for Variable-Rate Loans

The prime rate is, at its simplest, the interest rate that banks will give their very best corporate customers.  Each bank technically has its own prime rate, but when people talk about the prime rate, they’re most often referring to the WSJ prime rate.

This rate comes from The Wall Street Journal sending a survey to the 10 largest banks in the U.S., and asking them what rate they’d lend money to their most qualified corporate customers.

Now, while the prime rate is not linked in any official capacity to the fed rate, it’s almost always about 3% higher than the fed funds rate.

The prime rate is a very popular tool in managing variable-interest-rate loans.  Credit card debt is typically set at Prime + a fixed percentage.  For example, in November of 2018, the average credit card APR was 17.14%, while the WSJ prime rate was 5.25%, making the average credit card rate about Prime + 12%.

But it’s not just credit card rates that come from Prime. Many other variable-interest-rate products are set at Prime +, including SBA 7(a) loans.

What About LIBOR?

LIBOR is basically the international version of the federal funds rate.  It’s based on eurodollars, traded between banks on the London interbank market.

Just like prime rates, while there’s no official link between it and the federal funds rate, they tend to track each other very closely, with the exception of times when the Fed is taking exceptional actions, e.g., a financial crisis in the U.S. market.

Here’s a chart showing Prime, LIBOR and the fed funds rate from 1985 until 2018.  As you can see, with the exception of the financial crisis of 2008, they stayed essentially in sync.

LIBOR is used very similarly to prime rates, in that many variable-rate loan products are pegged at LIBOR + a specific number of percentage points.

SBA Peg and Max 504 Third-Party Interest Rates

Before we drill down into exactly how SBA interest rates are set, there are two more rates to be aware of.  Both of these are set directly by the Small Business Administration, on a quarterly basis.

The first is an SBA peg rate.  SBA 7(a) lenders have the options of tying the loans they issue to either Prime, LIBOR or the SBA peg rate, which also closely follows these indexes.

The Max 504 third-party rate is the maximum interest rate a SBA 504 private lender is allowed to charge for their portion of an SBA 504 loan.  This is typically set as a Prime+ rate, and as of September 2018, was set at Prime + 4%.

Every quarter, the SBA releases these numbers in a press release, and they’re either directly (in the case of the Max 504 rate) or indirectly (in the case of the peg rate) tied to other key rates like the Prime, Fed and LIBOR rates.

Swap Rates & Treasury Yields

We promise these are the last two rates we’ll discuss, but discuss them we must because they’re important for fixed-interest-rate commercial loans, like SBA 504 loans.

These rates are Treasury yields and swap rates. Functionally, they represent the same thing: rates at which large institutions are willing to lend money for a fixed time period, at a fixed interest rate.

Treasury yields are based on the amount the government pays to borrow money for a specific amount of time, say 5, 10, 20 or 30 years.

Swap rates are the rates at which institutional lenders are willing to exchange a variable interest rate for a fixed rate over a specific period.  Again, like Treasury yields, in intervals of 5, 10, 20 or 30 years.

Swap rates and Treasury yields tend to be closely linked to each other, and to the other key rates we’ve been discussing, as illustrated in this chart of five-year swap rates,

Treasury yields and the federal funds rate.

How Individual Loans Are Priced

The pricing of nearly all loans follows a pretty simple formula:

(Base Interest Rate) + (Interest Rate Spread) = Loan Interest Rate

The interest rate spread attempts to take into account how risky the loan is, along with other market forces like competition and the necessary profit margin for the lending institution to issue the loan.

SBA loans tend to have an advantage here.  The protections offered by the Small Business Administration to lenders lower the overall risk they take on. As a result, they tend to be at a lower rate than other types of loans that small businesses have access to.

What Makes Interest Rates Rise and Fall?

That’s a very big, complex question that economists could probably argue over for an eternity.  But let’s look at it through the simplified lens of monetary policy at the Federal Reserve. If you think of our economy as a car, the Federal Reserve tries to use interest rates as either a gas pedal or brake to keep us going close to the speed limit.

If the economy is going to slowly, like it was after the crash of 2008, the Fed might hit the gas pedal by lowering interest rates.  This makes it cheaper for businesses to borrow money, and encourages economic activity and investment.

If the economy is going too quickly, and headed toward a possible crash, the Fed might hit the brake pedal by raising interest rates.  As it gets more expensive for businesses to borrow money, things might slow down a bit to a more sustainable level.

The Advantages of Fixed-Interest-Rate Loans in a Rising-Rate Environment

We recognize we’re a bit biased here, but let us make the case for a fixed-interest-rate loan like the SBA 504.

Right now, our economy is doing well, and the Fed has indicated repeatedly that they’re in the process of raising rates.  Barring an economic event that’s unforeseen by Wall Street or the Fed, interest rates are going to be headed up from here.

That means that the sooner you get into a fixed-interest-rate loan product, the bigger your likely savings are to be.

If you get into an SBA 504 loan today, your interest rate is going to be fixed for at least the next five years, as, in all likelihood, rates rise.  With a variable-rate SBA 7(a) loan, as interest rates rise, so will your monthly payments.

The truth is, if you’re eligible for an SBA 504 loan, it’s often the better of the two.  SBA 504 loans are nearly always available at lower interest rates, and have longer-term fixed rates.

Here’s a table that compares average interest rates of SBA 7(a) loans of at least $1M, and a term of 20+ years, with average interest rates for the CDC portion of SBA 504 loans during the same time period.

Now, if you got an SBA 7(a) loan in 2016 at 5.25%, it would be likely resetting at 6.3% this year.  If you got an SBA 504 loan at 4.3% in the same year, that CDC portion of the loan would be fixed for the 20-year life of your loan.

Let’s look at it another way.  If you borrowed $1 million today, going with an SBA 504 loan instead of a 7(a) would save you about $937 per month in interest, or $11,244 per year.  If rates continue to rise as most people expect them to, that difference would only get more significant over time.

Loan Amount      Rate       Monthly Interest + Fees Annual Interest + Fees

SBA 7(a)               $1M       7.25%    $7,228   $86,737

SBA 504               $1M       5.75%    $6,291   $75,493

Savings:               $937      $11,244

Putting It to Use

Now that you understand the basics of interest rates and loan pricing, you can put that knowledge to use for your customers or your business.

If you’re a broker or business owner, and you agree with the Federal Reserve and Wall Street that interest rates are going up for the foreseeable future, protect your clients or yourself with a fixed-interest SBA 504 loan.

Commercial Property Purchase Check List

Commercial Property Purchase Check List

Many new commercial property investors lack a fundamental understanding of the complexities of the business and property due diligence and time frames involved.

When considering the purchase of commercial real estate consider the following check list. Do this prior to any purchase offer or setting an arbitrary closing date.

Without the necessary property and business due diligence. It’s unlikely that a financing proposal will have a successful outcome. Or worse you’ll purchase a property that quickly will become a money pit.

Acquisition Actions / Documents

Signed Letter of Intent

Investment Committee Presentation and Approval

Request/obtain Due Diligence Materials

Select Legal Counsel

Select UBIT/ERISA Counsel

Obtain/review 1st draft of Purchase Contract

Obtain/review 2nd draft of Purchase Contract

Obtain/review 3rd draft of Purchase Contract

Obtain/review 4th draft of Purchase Contract

Obtain/review 5th draft of Purchase Contract

Obtain Access Agreement

Client Authorization Letter

Portfolio Manager Authorization Letter

Obtain/review fully executed purchase contract

Deliver copy of fully executed Contract into escrow

Arrange for Buyer’s initial LC or cash deposit with Escrow Holder

Arrange for investment of Buyer’s initial cash deposit

Independent Contract Consideration to Seller

Prepare funding schedule and forward to portfolio manager/client

Obtain name of acquiring (title holding) entity

Arrange for required bank accounts to be set up

Obtain fully executed 1st Amendment to Purchase Contract

Obtain fully executed 2nd Amendment to Purchase Contract

Title/Survey/Zoning Matters

Select Title Company

Receive/review Sellers title commitment and underlying documents; forward to Title Company

Order current title commitment and underlying documents

UCC and judgment lien searches

Receive and review existing survey

Order new ALTA survey (or update)

Subdivision and parcel maps

Restrictive covenants, easements, and agreements

Local improvement district information

Verify Leases, Entitlements, and other assets are in Seller’s name or that appropriate Assignment documents exist

Confirm releases available from current lienholders (if applicable)

Deliver Title and Survey Objection Letter to Seller (if applicable)

Tenant/Lease Matters

Obtain current Certified Rent Roll

Receive/review Leases, Amendments and all related documents; prepare Lease Summaries

Engage Legal Counsel to review Leases and prepare Lease Summaries

Compare Internal Lease Summaries to Legal Counsels Lease Summaries

Compare Lease Summaries with Rent Roll and Pro Forma

Review Tenant Lease Files

Resolve issues regarding Leases

Review Tenant Correspondence Files

Compare expense pass-throughs/CAM charges to Operating Statements

Review cost pools for overcharges to tenants

Receive/review tenant sales reports

Receive/review list of security deposits

Receive/review aged receivables report

Review tenant credit information, payment history

Review Leases for any contractual Landlord obligations (i.e. construction, payments to tenant)

Compare square footage between Leases and Rent Roll

Prepare Tenant Estoppel Certificates

Review signed Tenant Estoppel Certificates

Cross‑check signed estoppels against the rent/deposit schedule

Financial Matters

Receive and review copies of historical and proforma financial information

Receive and review utility bills (electric, water, gas)

Receive and review most recent tax statements and related information

Verify all expenses of operating the property have been reflected in the financial information provided by the Seller

Compare expenses to comparable building data

Receive/review past and budgeted capital improvements

Service Contracts

Receive and review service contracts

Verify all service contracts terminable without penalty

Confirm assignability of service contracts

Approve contracts to be transferred & notify Seller


Review litigation list (if applicable)

Determine existence of contingent liabilities or open claims against the property


Obtain insurance quote from Risk Management

Review third party Property Management Agreement for adequacy of insurance coverage

Provide information to Risk Management for final Certificate of Insurance

Physical Property Inspection and Review

Receive/review as-built plans/specs (electrical, mechanical, structural)

Receive/review existing inspection reports (roofing, HVAC, seismic, soils)

Order current engineering report (Property Condition Assessment), to include structural, mechanical, code compliance and ADA compliance.

Receive/review existing environmental reports and studies

Order current Phase I Environmental Site Assessment

Order current Additional Site Investigation (Phase II)

Receive/review building permits, licenses, certificates of occupancy

Verify parking is adequate (i.e. governmental regulations, practical requirements, lease requirements)

Verify approximate sf of improvements

Review utility site plan, verify adequate utility hook-ups, verify all utility hook-up fees paid, identify requirements for utility deposits

Review energy usage reports; compare usage to expenses

Verify amount of available wattage past and compare to market

Receive & review construction contracts/subcontracts

Receive & review building warranties/guarantees

List of personal property and trade/service names

Copies of liability, casualty and other insurance

Site plans, leasing brochures, maps and photographs

Personal Property Inventory

Receive and review list of personal property

Verify no material personal property omitted from personal property list

Verify personal property in good operating condition

Governmental Review

Review licenses and permits; verify no breach of licenses and permits, that all conditions are satisfied, that licenses and permits are in current Owners name and whether transfer is required, and that there are pending applications for licenses and permits

Verify certificates of occupancy for property and tenant spaces on file

Verify proper zoning; obtain zoning letter

Verify improvements comply with governmental regulations

Verify no development rights transferred

Verify no existing contemplated assessments

Verify no pending rezoning

Verify no pending administrative proceedings or governmental plans or studies

Verify no utility moratorium

Closing and Miscellaneous Actions

Notify Seller of any breach or misrepresentation discovered during due diligence review

Aggregate cost of correcting any problems discovered through due diligence

Initiate any necessary changes to forms of Closing Documents

Prepare and approve authority documents

Request current financial information from Seller for prorations

Confirm prorations for taxes and assessments

Confirm prorations for utilities

Confirm prorations for rents

Confirm prorations for permit and license fees

Confirm prorations for utility deposits

Confirm prorations for operating accounts

Confirm prorations for obligations under contracts

Confirm prorations for security deposits

Confirm prorations for closing costs

Confirm prorations for any commissions, tenant improvements, or other leasing expenses

Confirm prorations for any other apportionments

Request schedule of Buyer’s title related costs from title company

Prepare schedule of estimated closing costs

Prepare & distribute form of Tenant Notice

Prepare the assignment of Purchase Contract

Arrange for Buyer’s replacement/additional cash deposit

Arrange for investment of Buyer’s replacement/additional cash deposit

Confirm return receipt of initial LC and return it to bank; or

Confirm return receipt of initial/additional cash deposit; or

Instruct bank to transfer returned cash deposit to line of credit Prepare schedule of Buyer’s funding into escrow

Arrange for Buyer’s purchase proceeds to be funded into escrow

Arrange for Buyer’s purchase proceeds to be invested overnight

Review escrow instructions and exhibits to closing documents

Coordinate delivery of original documents to property manager

Obtain/review the closing statement

Confirm recording/disbursement of funds

Confirm property/liability insurance in place

Send letter to client confirming closing (with closing statement/funding schedules)

Instruct counsel to distribute the closing binders

Property Operations and Management

Select Property Management company

Finalize Property Management Agreement

Verify financial terms of Property Management Agreement are reflected in proforma

Select leasing company

Verify Service Contracts are at market

Verify no disputes with brokers, suppliers or employees

Verify no existing or contemplated labor strikes

Verify all obligations and trade creditors being paid in normal course

Review Property management files

Review list of warranties and expiration dates

Review maintenance schedules for equipment, and repairs and maintenance expenses

Financing Matters (If applicable)

Contact Mortgage Consultant

Provide Property information to Mortgage Consultant

Receive/review Loan Quotes

Select Lender

Signed Loan Commitment

Arrange Payment of Loan Commitment Fees

Receive/review/negotiate Loan Application

Signed Loan Application

Provide Mortgage Consultant/Lender with requested documents

Finalize Loan Documents

Signed Loan Documents

Arrange for funding of Financing Proceeds

Internal Procedures and Reporting

Confirm property visit by Asset Management and Management Committee member

Confirm that all client specific acquisition requirements are met

Issue transition memo to Asset Management, Property Management and Accounting (if applicable)


How To Apply for a Commercial Mortgage

How To Apply for a Commercial Mortgage

If you have never borrowed money for your business before, you may be in for a surprise. Whether you want to borrow working capital to expand your business or leverage equity in a commercial real estate venture, you will soon find out the commercial loan process is very different from the more common home mortgage process.

Commercial loans, unlike the vast majority of residential mortgages, are not ultimately backed by a governmental entity such as Fannie Mae.

Consequently, most commercial lenders are risk-averse; they charge higher interests’ rate than on a comparable home loan. Some lenders go a step further, scrutinizing the borrower’s business as well as the commercial property that will serve as collateral for the loan.

This means that the business borrower should have different expectations when applying for a loan against his commercial property than he would have for a loan secured by his or her primary residence.

Following is a list of questions the borrower should ask himself and the lender before applying for a commercial loan.

  1. How am I going to meet the loan repayment terms?

Typically, bank loans require the borrower to repay his or her entire business loan much earlier than its stated due date.

Banks do this by requiring most of their loans to include a balloon repayment. This means the borrower will pay interest and principal on his 30-year mortgage at the stated interest rate for the first few years (generally 3, 5 or 10 years) and then repay the entire balance in one balloon payment.

Many borrowers do not save enough in such a short time frame, so they must either re-qualify for their loan or refinance the loan at the end of the balloon term.

If the business happens to have any cash-flow problems in the years immediately preceding the balloon term, the lender may require a higher interest rate, or the borrower may not qualify for a loan at all.

If this happens, the borrower runs the risk of being turned down for financing altogether and the property may be in jeopardy of foreclosure.

A balloon loan has other risks as well. If the borrower’s business is in a “risky” industry at the time the balloon is due (think of the oil and gas bust in the 1980s or the telecom implosion of the 2000s), the lender may back out of all refinancing for the enterprise.

Alternatively, a lender simply may decide its loan portfolio has too many loans in a given industry, so he will deny future refinancing within that trade.

Non-bank lenders generally offer less stringent credit requirements for commercial loans. Some non-bank lenders will make long-term commercial loans without requiring the early balloon repayment. These loans, which may carry a slightly higher interest rate, work like a typical home loan.

They allow a steady repayment over twenty or thirty years. It is often worth paying a one- or two-point higher interest rate for a fixed-term loan in order to ensure the security of a long-term loan commitment.

  1. How much can or should I borrow?

Most bank loans prohibit second mortgages, so the borrower should go into the loan process intending to borrow enough to meet current business needs, or enough to sufficiently leverage real estate investments.

For a traditional acquisition loan in which the borrower is buying a new property, banks usually require a down payment of 20-25%. So, for a $600,000 acquisition, the borrower will need to come up with $120,000-$150,000 for the down payment.

Some non-traditional loans will allow the borrower to make a smaller down payment, maximizing the loan-to-value (LTV) at 85-90%. Such loans are generally not bank loans, but are offered by direct commercial lenders or pools of commercial investors.

If the customer wants to borrow the maximum amount possible, the interest rate on such loans may be a point or two higher than typical bank loans. Before deciding how much to borrow, potential borrowers should:

Evaluate how much cash they are likely to need

Analyze their ability to repay the loan as it is structured

Research has consistently shown that the number one reason behind the failures of most small businesses is the lack of adequate capital to meet cash-flow needs. Because of this it may actually be safer for a small business to leave a larger cushion against unforeseen events by borrowing more money at the slightly higher rate.

The amount of the loan requested has an effect on which commercial lenders will fund the loan. Small businesses borrowing less than $2,000,000 will visit a different pool of potential lenders than those seeking loans of over $5 million.

Small business loans are generally made by direct commercial lenders (easily located by internet searches) or by small local banks. Larger loans are generally made by regional banks, and very large loans are made by mega-banks or Wall Street lenders.

  1. How long will it take to get a commercial loan?

Borrowers generally start the loan process by contacting their bank. Unfortunately, it is difficult to secure business loans from most banks. Besides, bank loans:

Contain the most stringent requirements

Impose the most loan covenants

Take the longest time to secure the loan.

Bank loans go through several phases of review. First, they will look at your historical income statements, balance sheets and statements of cash flow. Then they will review 5 years of tax returns on the borrower and all owners who will guarantee the loan.

Generally, it takes several weeks before the borrower can get a verbal or written commitment letter from a bank. Even after the loan commitment, the bank’s credit committee may veto the loan. The business will then have to start the process over with a new lender.

If a firm has very good credit rating, a good relationship with its bank, a solid and confirmable history of earnings and profits, and is not in a hurry, a local bank will probably give them the lowest stated interest rate on the loan.

If you need to be pre-qualified quickly, you should shop for credit over the Internet or look at non-bank sources of funds first. Once you secure a commitment from a direct lender, then you may start a parallel process with your bank.

Some direct non-bank lenders can give you a verbal commitment in a few days, but keep in mind that you are only searching for “commercial” loans-offers from Internet companies may often be for residential property, so you will need to screen your searches.

Keep in mind the parameters of the terms you will accept: Will you take a balloon loan? What about a covenant or condition on the loan?

If you know that your profit and loss statements are not provable and solid, or you do not have a high credit score, applying at banks is generally a waste of time. Instead, go directly to non-bank commercial lenders.

  1. What kind of covenants and conditions are required?

Many borrowers are not aware that much more may be required than simply making regular monthly payments on time.

Many loans ask you to provide quarterly or annual income statements, balance sheets and tax returns. Some loans will require covenants-promises that your business will meet certain tests in the future.

They may require a certain positive cash flow, or a certain debt-to-cash-flow ratio, or other financial criteria. During a downturn in your industry or the economy, your business may face temporary cash flow or profit shortages.

If your business falls short of the terms and conditions contained in the loan covenants, your bank may deem that your loan has entered into default.

Default triggers numerous penalties. It may require that you pay back the loan immediately. This can cause you to have to find another lender very quickly, or face foreclosure on the property.

Different lenders require different conditions, so ask the lender up front what conditions or covenants apply. Some non-bank loans charge a slightly higher interest rate but will waive all covenants and conditions except for timely repayment of the loan.

If you feel that your business cash flow is uncertain, you might want to consider these non-bank loans first.

If your business does not have its financial statements certified regularly by one of the larger CPA firms, you may opt for a slightly higher interest rate loan. This may relax the reporting process or not require future covenants.

Likewise, if losing your business or property to the bank is likely because of the financial test requirements, then find another lender.

Ask any real estate developer who has managed to stay in the business for 20-30 years about the risks inherent with traditional bank commercial property loans; he will name many other developers who lost all their assets during lean times in the industry.

  1. What kind of documentation will be required?

Traditional lenders require 3-5 years of financial statements, income tax returns, and other documentation. This may include:


Asset statements

Original corporate documents

Personal financial records of the business owners

Keep in mind that many small businesses do not have the level of income documentation some lenders require. If you ask ahead of time, it will save you numerous headaches from delays or rejected loan applications.

The documentation required and the timelines for approval are related-the more information required, the slower the loan approval and funding process.

  1. What if I want to sell the property?

If your business booms, you may want to repay the loan early or sell the property and move to a larger space. Commercial mortgages, unlike residential loans, usually have pre-payment penalties.

However, some lenders will allow the purchaser of the property to assume the mortgage by taking over the seller’s payments. An assumable loan is an excellent selling point, because it provides built-in financing for the buyer.

  1. What are the “hidden” or total costs of the loan?

The stated interest rate is often artificially low when one considers all the costs of a loan. Points, for example, are direct percentages of the loan that the lender deducts from your loan. If your interest rate is 9% with two points that means your real cost of the loan is 11%. The extra 2% comes right off the top into the lender’s pockets. Other costs may include:

Legal fees, Survey charges, Loan Application Fees, Appraisal charges

Every item that will be charged against your loan or that must be pre-paid.

For some loans, these charges can be tens of thousands of dollars. They often must be pre-paid before the loan will be approved or rejected. You will need to know whether you are likely to be approved before spending money just to qualify for a commercial loan.

Other questions to ask

Will my interest rate go up if U.S. interest rates go up in general?

Is a fixed-rate alternative available?

Can I get a discount for paying your mortgage faithfully and consistently over a period of time?

Some lenders allow for decreases in the interest rates over time if you pay the mortgage on time. But if you want to refinance and repay your mortgage early, the lender may penalize you and charge extra interest.

All of these details are important, and they can seem overwhelming.

Keep in mind how you expect your business to perform in the future and how you plan to repay the loan. Do not ignore worst-case scenarios.

You do not want to be so optimistic about the possibilities that you lose sight of the fact that the lender may take away your business or livelihood if you do not meet all the terms. Sometimes the lowest interest rates represent the riskiest loans.

The Best Lender

When considering a commercial mortgage, borrowers should seek out lenders who are willing to fund the loan under acceptable time constraints, keeping in mind their general creditworthiness. Borrowers should look at both bank and non-bank funding in order to get their needs met in a timely manner.

Asking questions and obtaining unbiased evaluations will reduce delay and frustration. Fortunately, new lenders have emerged to challenge banks on their traditional terms, so borrowers have more leverage now than ever before when seeking commercial loans.

5 Types of REITs and How to Invest in Them

5 Types of REITs and How to Invest in Them

Real estate investment trusts (REITs) are a key consideration when constructing any equity or fixed-income portfolio.

They provide greater diversification, potentially higher total returns and/or lower overall risk. In short, their ability to generate dividend income along with capital appreciation makes them an excellent counterbalance to stocks, bonds, and cash.

REITs generally own and/or manage income-producing commercial real estate, whether it’s the properties themselves or the mortgages on those properties.

You can invest in the companies individually or through an exchange-traded fund or mutual fund. There are many types of REITs available. Here we look at a few of the main ones and their historical returns.

Historical Returns of REITs

Real estate investment trusts are historically one of the best-performing asset classes available.

The FTSE NAREIT Equity REIT Index is what most investors use to gauge the performance of the U.S. real estate market.

Between 1990 and 2010, the index’s average annual return was 9.9%, second only to mid-cap stocks, which averaged 10.3% per year over the same period. In comparison, fixed income assets managed 7% annual returns and commodities just 4.5% a year.

Real estate was the worst performer of eight asset classes in just two years out of 20. Fixed income, on the other hand, was the worst performer six times in the same 20-year period.

More recently, the three-year average for REITs between March 2013 and March 2016 was in line with the averages in the 20 year period, clocking in at 10.76% over that time.

Historically, investors looking for yield have done better investing in real estate than fixed income, the traditional asset class for this purpose. A carefully constructed portfolio should consider both.

6 Accounting Formulas Every Business Should Know

6 Accounting Formulas Every Business Should Know

Managing your business’ finances and revenues can be a full-time job, and you might even have a full-time accountant on staff to handle the books. Many small business owners, however, prefer to handle this aspect of their businesses themselves, foregoing an accountant in order to maintain control over their own books.

If you fall into the latter category, here are some standard accounting formulas you should know. These formulas are generally regarded as universal to any business and will provide you with the figures you need to understand the viability and health of your business.

  1. The Accounting Equation

Equation: (Assets = Liability + Owner’s Equity)

What It Means:

Assets are all of the things your company owns, including property, cash, inventory and equipment that will provide you with a future benefit.

Liabilities are obligations that you must pay, including things like lease payments, merchant account fees and debt service.

Owner’s Equity is the portion of the company that actually belongs to the owner.

  1. Net Income

Equation: (Revenues – Expenses = Net Income)

What It Means:

Revenues are the sales or other positive cash inflow that comes into your company.

Expenses are the costs that are associated with making sales.

By subtracting your revenue from your expenses, you can calculate your net income. This is the money that you have earned at the end of the day. It’s possible that this number will be negative when your business is in its nascent stage, so the goal is for your business’ net income to become positive, meaning your business is profitable.

  1. Break-Even Point

Equation: (Break-Even Volume = Fixed Costs / Sales Price – Variable Cost Per Unit)

What It Means:

Fixed Costs are recurring, predictable costs that you must pay in order to conduct business. These costs include insurance premiums, rent, employee salaries, etc.

Sales Price is the retail price you sell your products or services for.

Variable Cost Per Unit is the amount it costs you to make your product.

If you divide your fixed costs by the sale price of your product, minus the amount it costs to make your product, you’ll have a break-even point, which tells you how much you need to sell in order to cover all of your costs.

  1. Cash Ratio

Equation: (Cash Ratio = Cash / Current Liabilities)

What It Means:

This gives you an idea of how much cash you currently have on hand.

Cash is simply the amount of cash you have at your disposal. This can include actual cash and cash equivalents (i.e. highly liquid investment securities).

Current Liabilities are the current debts the business has incurred.

This ratio demonstrates how well your business can pay off its current liabilities. In this case, the higher the number, the healthier your company.

  1. Profit Margin

Equation: (Profit Margin = Net Income / Sales)

What It Means:

Net Income is the total amount of money your business has made after expenses have been removed.

Sales are the total amount of sales you’ve generated.

When you divide your net income by your sales, you’ll get your organization’s profit margin. A high profit margin indicates a very healthy company. A low profit margin can reveal how unsuccessful a company might be, but it can also mean that your organization doesn’t handle its expenses well. Remember that your net income is made up of your total revenue minus your expenses. If you have high sales revenue, but still have a low profit margin, it might be time to take a look at the figures making up your net income.

  1. Debt-to-Equity Ratio

Equation: (Debt-to-Equity Ratio = Total Liabilities / Total Equity)

What It Means:

Total Liabilities include all of the costs you must pay to outside parties, such as loan or interest payments.

Total Equity is how much of the company actually belongs to the owner or other employees. In other words, it’s the amount of money the owner has invested in his or her own company.

How to Set Rent Specials

Apartment Building Investing

When times get rough at a property, the savvy property manager fixes the problem with… a rent special.

Or, at least, that’s how it often works out in our industry, isn’t it?

But this solution isn’t altogether satisfying.

It takes money out of your community, makes you look desperate, and, worst of all, may not even produce the effect you’re looking for.

In this post we want to first share a framework for thinking about revenue and rental rates. Then we want to talk about how to set effective rent specials that do what you need them to do. Finally, we will talk about when you can safely end a rent special.

How should you think about rent specials?

The multifamily industry frequently runs in a compartmentalized, siloed style that leads to revenue management questions being isolated from marketing and leasing.

As a result, when occupancy dips to a certain point, communities often find themselves looking to pull a single lever to fix the problem when really, they should be reevaluating their entire system of managing the property. More often, however, communities simply try to pull a marketing lever (more money to the ILS’s!) or a leasing lever (hire more leasing agents!) or a revenue lever (offer rent specials!) in hopes that doing so will fix the problem.

In the short run, of course, you might fix the problem with this sort of reactive move. But at best you’re simply going to be solving it for a short window of time, only to have the issue recur in the not-that-distant future.

There is a better way of managing this.

The alternative begins with recognizing that marketing, leasing, and revenue should all be working together rather than separately. With that baseline idea, we can begin to imagine a different model that will quite often free you from the need to use rent specials at all.

Briefly, the system works by recognizing the relationship between your rental rates (revenue management), your supply of apartments, and the demand for your units (marketing). You can anticipate supply by simply tracking units on notice as part of your vacancy rate. When you see your vacancy rate trending in a troubling direction—meaning you expect your supply to exceed demand by enough that you’ll need to do something drastic to make up for the difference—you begin making decisive adjustments to head off trouble before it begins.

This means doing two things:

First, you need to begin advertising heavily on Google, Facebook, or both. This will only cost you hundreds per month in most cases and if you only need to run the campaigns for a few weeks even less than that.

Second, you may consider some more pronounced reductions in rent on a select number of units in order to incentivize prospects to sign a lease more quickly.

Using these two tactics will cost you some money, of course. But typically, the advertising spend will not be that significant, especially when compared to the cost of having units sitting vacant. And even if you radically slashed rent by 8 or 10% on certain floorplans in order to turn them quickly, you probably will only rent a small number of units at the discounted rate, perhaps even just three or four depending on the size of community and size of the problem.

Meanwhile, by making these decisive steps you will have addressed your vacancy problem before it really gets out of hand. That puts you in a stronger position going forward to demand higher rent from new residents and to raise rents across the board on a year-over-year basis.

Generally speaking, if you manage occupancy well by monitoring units on notice and making decisive steps with advertising to manufacture demand as required, we have found that rent specials may not even be necessary.

If I do need to use rent specials, how should I do that? What makes a good rent special?

A good rent special is going to do two things:

It will offer the prospect something valuable enough to motivate them to rent.

It will minimize the damage done to your bottom line both by long-term vacancy and by the special itself.

Because of the different needs of different properties, it is hard to be more specific than that in terms of defining a good rent special. However, there are three questions we generally recommend client communities ask themselves when they are trying to move from a general idea of a good rent special to a specific special, they wish to offer.

What are you offering as incentive?

You can dangle any number of different carrots as rent specials in order to attract prospects. What specific thing does your community have to offer?

There are many possible answers to this question:

Temporary rent reduction

Waived deposit

Waived application fee

Waived pet deposit

Free month of rent

Free offers:




Special offer:

Gift card to area business

Discounted membership at a local gym

These are just some ideas as to what you could offer. But it is good to identify all the options and then work backwards by asking yourself what is the easiest for your community to offer and what would be most valued by your residents. When you identify the offer that checks both of those boxes, you probably have identified the benefit you should offer as part of the special.

Does this incentive apply to specific floor plans or units?

Rent specials can become very expensive if you offer them on all vacant units in your community. On the other hand, they can become very complex and lose their appeal if you offer them more narrowly. So, figuring out what units to offer the special on is an important question for every community to figure out.

Again, in an ideal scenario you may not even need to ask this question. If you are using online advertising effectively, your vacancy should never get so high that you need to offer community-wide specials. Also, if your advertising is being used well you can use that to drive traffic to problem floorplans instead of relying on floorplan-specific rent specials.

That being said, if you are at a point where you need a rent special, you will need to decide how to answer this question: Does the special apply for all new residents or only for new residents who lease specific units?

When does the rent special end?

This question often ends up being more complex than it needs to be. In a community with clearly defined revenue and occupancy targets, the question answers itself: Once we hit our goal for the special, the special ends. But if you are not clear on your goals or, worse still, on why you are experiencing vacancy problems, then the question becomes much harder.

You might think of a rent special as being something like a personal savings account you have as part of your personal financial life. If you are having to dip into the savings account every month to make ends meet, that tells you something needs to change in your monthly budget. Likewise, if you are having to regularly use rent specials or run rent specials for long periods of time, then you have larger problems at your property that you need to diagnose.

That being said, if you have a system for tracking occupancy that accounts for both currently occupied units on notice and vacant units that are leased but not yet occupied, then you will have an accurate picture of your occupancy situation at the community. With that information in hand, you can make informed, sound decisions about when you need a rent special and when you do not, which also means you will know when you can stop using a given rent special.


Rent specials can be a powerful tool to help make fast changes at a struggling property. But it’s an emergency option rather than something you should be leaning on regularly. So, make sure you are doing the work to manage occupancy, to set reasonable rent rates, and to serve your residents well. If you are doing these things, then hopefully you will not need to use rent specials because you will never find yourself in a position where they will appear necessary.

That being said, things happen. Perhaps you’ve gone through some unexpected transition at the property or you are taking over a property that was badly managed by the former owner. Whatever the case may be, it is likely that you will at some point find yourself needing a quick fix of the sort that a good rent special can offer. When that time comes, you’ll want to make sure you’re setting the right specials in the right way. If you are following the tips in this post, they should set you on the right path both toward fixing your short-term problem and toward getting your community on firmer footing long term.

Property Management 101 The One Thing All Landlords Should Do

Management of Apartment Building Investments

Property managers and landlords often go above and beyond, taking care of tenants when unforeseen circumstances occur or needs must be met despite short timelines or budgets. Still, it is important for property managers to take in new ideas within their industry — including the increasing influence of social media and online review sites — as well as continuing the meet the everyday wants and needs of their tenants.

Maintaining and managing properties is often a challenging role. Landlords or managers may sometimes overlook a good practice, or plan to circle back to it later on, but never do so.

Make Regular Checks on Your Rentals

One of the biggest mistakes I see with rentals is not checking on them. We do quarterly checks on the properties. At the same time, we are doing the check, we change furnace filters, check batteries in the smoke detectors and CO alarms, and make sure there are no issues with plumbing leaks.

Screen Your Tenants Carefully

Landlords will spend thousands to repaint, recarpet and remodel — but sometimes they will not take the time to realize who they are renting to. Don’t skip the basics when evaluating a renter: rental application, past references and income/ability to pay, as well as credit and criminal backgrounds checks. Taking the time to screen renters will prove to be the best ROI in real estate investing.

Establish Open and Honest Communication

Property managers must communicate with their tenants to ensure a sense of community, maintain proper operations and keep tenants informed. Also, the building owner deserves to know the good, the bad and the ugly on a real-time basis in order to make business decisions. By expressing candor and providing honest feedback, property managers can ensure that all lines of communication are open

Ask Current Tenants for Referrals

Ask current tenants to help you find new tenants. Current tenants are likely to know potential new tenants. Tenants are likely to only recommend other people they’d like to be neighbors with, and you can build goodwill by offering tenants a referral credit for bringing in a new tenant

Keep Up with Maintenance, Including Cosmetic

Do preventative maintenance. The more a property is allowed to deteriorate, and the longer problems go unaddressed, the more it will cost in the long run to fix. If items are cosmetic and impact first impressions, not correcting can also increase vacancy cost and lower the rent you can get for the property.

Collect Demographic Data

If landlords and managers are not creating tenant profiles, they should be. Being able to tailor your operations and buildings to specific demographics will help with retention and new leases.

Keep in Touch with Your Tenants

Everyone wants attention, and that especially includes your tenants. You need to check in with them to see how everything is going and get any input on the property. Knowing that you care about them will have a huge impact. Surprise them with a lunch event or invite them to a fun event you are hosting (like a sporting event, concert or a few hours at a movie with their family).

Establish Benchmarks

Property owners should identify the true competitive set of their building and benchmark their operations to this set. Data is the key, and revenue and expenses must both be tracked. In this way owners can frame the operational performance of their properties as market conditions change and make decisions with hiring, firing or repositioning management teams.

Offer Reliable Service Across Properties

Based on my experience, the landlords that are most successful are the ones that operate the same way across each of their assets, therefore creating little confusion and expeditious service. The buildings are regularly maintained and cleaned, giving their tenants few reasons to have any concerns about where they house their business.

Treat Tenants with Respect

Landlords should always treat their tenants with respect, honesty and integrity. A bit of kindness goes a long way. When a tenant can feel that respect, our experience has been they treat the property with a higher level of ownership, taking better care of it and consistently paying rent on time.

Attract Renters with Quality Photographs

Landlords and property managers need to amp up their marketing efforts by using professional photography, which is more important than ever in the Instagram age, where people quickly judge listings on a purely visual basis. Great quality photographs are more likely to build renter interest quickly than using dark, unattractive and/or outdated photographs.

Solicit Positive Online Reviews

The biggest differentiator in success today is increasingly becoming online reviews. It is vital that everyone, from prospective tenant applicants to exiting renters, receive amazing service. Say what you do, and do what you say. Look for ways to go above and beyond those expectations. Then be extremely proactive about soliciting positive online reviews from every contact.

Stay on Top of Your Online Presence

Our most successful landlords and property managers stay on top of their online presence to manage their vacancy rate to below 1%. They make sure availability and pricing is up to date on their website and on the platforms, they syndicate to, while keeping track of and adjusting to changing rental trends and utilizing social media platforms to deliver their marketing to their target audience.