Important Links for Every Investor! 

Cap Rate info at the bottom of the page!

Take the time and go through these links. By knowing this information it will save you a lot of money!!!

 legal information

Where is the appreciation in Utah

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Vacancy Rate in your investment area!

Map it out

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MLS (property search)

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More information on:

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(If you need a Lease Option Form: click to the bottom of the page)

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Landlord Tips 

(This site has Landlord laws, stores, legal forms, tenant credit check etc.)

A ton of informatin if you are a landlord!

Landlord Legal Aid

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Operating Expenses in Salt Lake

Salt Lake Demographics

Salt Lakes Largest Employers

Multi-unit Sales Summary

Utah Resources! (Economy, Demographs, local government, education....everything!)

Article: Homes Increase in Price

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 2007 Greater Salt Lake Area Multi-Family Operating Expenses
Properties of 50 Units and Larger

Note: Management Fees, while comprising an average of 10% of the operating expenses, represent 4% of a property's annual gross income.

Market Research Summaries
Wasatch Front Apartment Unit Mix by County

Salt Lake Vacancy Rates

Salt Lake Rental Rate Summary

Salt Lake Rental Rates by Class and Age

Salt Lake County Rental History by Unit Type and Class

Detailed Salt Lake Rental Rates and Vacancy by Area

Detailed Multi-family Area Map

Building Permits and Construction Activity by County

Salt Lake Multi-Family Operating Expenses

Wasatch Front Demographic Data

Wasatch Front Largest Employers

INVESTOR INFORMATION

NOI - Net Operating Income - APOD A property's NOI is a necessary part of almost any formula used to determine the value of investment property so it must be as close to a real number as possible. The present value of well maintained income producing real estate is always some multiple of it's Net Operating Income. For example: if the present value of investment capital is 10%, a property with an NOI of $6,820 might be worth about $68,820 to a new investor. NOI is determined by subtracting all operating expenses from gross rents. Professional investors and appraisers usually use an APOD form (Annual Property Operating Data) to determine NOI.  Sellers and their agents, typically arrive at the advertised NOI by using gross scheduled rents and ignoring deductions for such things as uncollected rent, vacancies, redecorating, adjustments for deferred maintenance and management costs. Operating expenses must include almost all of the costs of owning, managing and maintaining a property, except depreciation and debt service (principal and interest payments).        They are generally broken down into the following seven categories: Vacancy and Collection Losses Capital Reserves Property Management Maintenance Utilities Taxes Insurance  Vacancy and Collection Losses: A rental property will not be occupied 100% of the time and landlords do not collect 100% of the money even when it is occupied. Some realistic allowance must be made for these losses. Real estate appraisers will often use a number between 5% and 10% of gross income. Professional investors ask to examine a seller's Schedule E from the previous two or three year's tax returns. If that isn't possible, they may research the market, select competing properties, and try to determine what real vacancy and collection losses are likely to be. Capital Reserves: Reserves for major replacement are often overlooked when calculating an NOI. It is the money that should be set aside each month to cover the cost of replacing such things as roofs, heating and air conditioning, parking lots or structures. A capital reserve account operates similar to the escrow or impound account for property taxes and insurance that is often required by lenders.  The applicable percentage of gross revenue that should be set aside depends primarily on the age and condition of a property. Property Management: Many small property owners do not consider management expense when they value property because they intend to manage it themselves. That concept is not realistic for many reasons, and should never be used to help justify paying too much for an investment property. A buyer should ask themselves if they intend to continue working for free for the next owner, or how they will deal with an injury or illness that forces them to hire a manager. Maintenance: The costs of properly maintaining a property are almost always underestimated by small property owners and novice investors. The owner may do much of the work without charging his time to the property, and a new investor may believe he can do the same thing. You think you can replace a toilet control assembly for less than $10 if you do it yourself, while a licensed plumber would likely charge $75 or more. But, when you consider your time; not just actually doing the work, but the trip to verify the problem, the time picking up the part and driving to and from the job, how much is it really worth? Don't forget the cost of operating and insuring your vehicle or the purchase of tools. When considering the cost of maintenance, you must include the cost paying   yourself, or someone else at market rates, to arrive at a realistic NOI. Note: the APOD form has maintenance and repair broken out in many different categories so that an experienced investor or property manager can easily spot potential deferred maintenance problems and what may be missing or misinformation. Utilities: If any are paid by the owner, they are a deductible operating expense. Taxes: Property taxes are a NOI deduction, income taxes are not. Insurance: Both the normal property insurance premiums and any additional liability umbrellas you may carry are included in operating expenses. The following is a simplified APOD Gross rents     $12,000 Operating Expense Estimated Actual      Vacancy and Collection, 5% 600        Capital Reserves, 3% 360        Management, 5% 600        Maintenance, 7% 840        Taxes 2,400        Insurance 380       Total Operating Expense $5,180                       NOI     $6,820   Property Value:  NOI x 10 = $68,200.00 Tax advantages, leverage and appreciation in value, could raise the actual return on investment to considerably more than 10% and may influence how much a sophisticated investor might be willing to pay for a property. Location, condition and improving or declining market are also factors

What does it mean? IRR (Internal Rate of Return)?

Internal Rate of Return Calculator

The internal rate of return (IRR) method of analyzing a major purchase or project allows you to consider the time value of money. Essentially, it allows you to find the interest rate that is equivalent to the dollar returns you expect from your project. Once you know the rate, you can compare it to the rates you could earn by investing your money in other projects or investments, and determine the best value for your money. For the calculator, enter the initial cost of the project in initial investment block as a negative value, and then enter the estimated yearly cost to operate and maintain, and replace the project equipment in each year block for the new expected life cycle of the equipment. Remember to enter payments at the time when the payments are made. Click on the Calculate IRR button to get your project's IRR, and clear if you want to calculate a new IRR..

LEASE OPTIONS

What is a Lease Option?  

A "lease option" is really two separate but related agreements: a "lease agreement" and an "option agreement".
 

A LEASE AGREEMENT is just a standard agreement to rent a home. In general, a lease agreement gives you the right to live in a home in exchange for payment of rent. Typically, move-in charges to rent a home might look like this:
 

Security Deposit	$1,000	(Refundable)
One Month’s Rent	$1,050	(Non-Refundable)
Cleaning Fee	$   250	(Non-Refundable)
TOTAL MOVE-IN	$2,300

An OPTION AGREEMENT is the right to purchase the home within a specified period of time for a fixed purchase price . For example, the option agreement could state that you had the right to purchase the home at any time before March 1, 2004 for a purchase price of $150,000. There would be an initial option payment of $2,000 and, in addition to your rent every month, there would be Additional Option Consideration of $250 per month. Therefore, the total monthly payment might be, for example, $1,050 rent + $250 additional option consideration for a total of $1,300 per month.

 
Although all the option money paid is non-refundable, as long as you arranged for financing with a bank and the home is purchased by the agreed date, all the option money paid applies to the purchase price. The advantage of this option program is that it gives you time (up to 30 month terms available) to save up for the down payment (and time to improve your credit, if needed). In the meantime, your purchase price stays fixed. For example, a 30 month option on a home with a $150,000 purchase price might look like this:
 

Option Consideration	$2,000	(Non-Refundable)
Additional Option Consideration:              30 Months @ $250=	$7,500	(Non-Refundable)
TOTAL PAID	$9,500	(Non-Refundable)

This $9,500 is available to be applied to your purchase of the home and represents more than 6 percent of the example purchase price of $150,000. Depending on your credit and other factors which a lender may consider, this amount of cash is generally enough to close on the purchase of the home. (Many lenders have 3% and/or 5% down programs).

With a "lease option" agreement, your move-in charges might look like:

Option Consideration	$2,000	(Non-Refundable)
Security Deposit	$      0
One Month's Rent	$1,050	(Non-Refundable)
Cleaning Fee	$        0
TOTAL MOVE IN	$3,050

So, in this example, your total move-in would only be $750 more with a lease option than with a standard lease agreement. The additional option consideration of $250 per month would then start the first month after your move-in.

 
Another advantage of the lease option program is that the home price is fixed from the start. This means that if market inflation causes the home price to increase higher than the set price, the bank could consider extra value as your equity towards your purchase of the home. For example, if the purchase price for the option is set at $150,000 (as in the example above) and the home increases in value within the 30 month option term to $154,000, you would be able to buy a $155,000 house and pay only $150,000 for it.

NOTE: Lease option agreements are a great way for your to save your way into home ownership, but these agreements are not for everyone. If you move out of the home during the option period for any reason or if your option payments are late, your right to purchase the home terminates. Be certain that you fully understand the terms of the lease option agreement before signing such an agreement. It is important to understand your own commitment and determination to see the option to completion before you begin. However, if you know what you want and are willing to work for it, this is a great way to afford a new home in a short period of time - and to live in there in the meantime

Click here for a free lease option agreement.

Cap Rate Follies

Avoid These Pitfalls When Calculating Commercial Property Values.

By John Simpson, CCIM, MAI, and Eileen Simpson

Capitalization rates are often controversial and misunderstood variables in commercial real estate valuation equations. To value properties, most buyers and sellers prefer an income approach, which analyzes cash flows to determine debt service and investor return — typically the internal rate of return — so it's easy to see why cap rates are scrutinized.

In fact, no other valuation aspect is debated as heavily as cap rates because unsupported data often lead to inaccurate commercial property valuations. By understanding the fallacies that exist, real estate professionals can perform more thorough financial analyses for their clients.

Valuation PrimerEssentially, a cap rate converts income into value: A property's net operating income is divided by the cap rate, and the resulting figure reflects a return on and of capital. The income approach begins by estimating property income and subtracting a vacancy/collection loss allowance and expenses to achieve the NOI. Then the NOI is divided by the cap rate to obtain the property's value.

Commercial real estate owners, lenders, analysts, appraisers, and assessors typically obtain similar projections for a property's income, vacancy/collection loss, and expenses. Minor variances in these figures have little effect on a property's value, especially when compared to historical projections on a stabilized income stream. However, value opinions usually differ in the cap rate selection.

The importance of the cap rate to a property's value conclusion using the income approach is significant. In Table 1, the value conclusion ranges from $3.6 million to $5.3 million — 44 percent — depending on the cap rate. Even a 1 percent or 0.5 percent difference in the cap rate can affect a transaction's outcome.

Cap Rate FallaciesSince cap rates strongly affect properties' values, commercial real estate professionals should avoid the following fallacies that can blunt their projections' accuracy.

The Cap Rate Is Always 10 Percent. Many in the industry consider a 10 percent cap rate as a good rule of thumb for a quick estimate of a property's performance. Although this shortcut may be helpful at times, even a small variance is critical to the actual value. Set cap rates should not be relied upon as a firm industry benchmark.

Data Services Are Accurate. A decade ago, obtaining sales transaction data from a national or local service was almost impossible, but today several companies gather and sell comparable sales data. Though services may claim to provide verified data, commercial real estate professionals should conduct their own due diligence by carefully reviewing financial details, such as income, vacancy rates, expenses, NOI, and cap rates, in data service reports. Beware round numbers: If the income is a round $200,000, vacancy an even 5 percent, and the expense-to-income ratio a flat 50 percent, the data cannot be trusted.

Data services' use of unique terms also points to inconsistencies. For instance, data probably are unreliable if the service provides potential gross income when the property owner only reported effective gross income. Potential gross income typically indicates the service has used rounded figures in the cap rate calculation, which likely results in inaccurate data.

Sale Disclosures Are Valid. About a dozen non-disclosure states do not require sellers and buyers to document sales prices. Unless a state requires a separate disclosure instrument for determining the sales price, actual sales prices must be verified.

A problem in many non-disclosure states is inconsistent sales data. The buyer, seller, or another party involved in the transaction should be a reliable source for verification. At least two different sources should confirm the sales price.

All Cap Rate Components Are Included. Data services usually only report sales above a certain dollar amount — generally $500,000 to $1 million minimum. These sales frequently include business elements that are not denoted in the sales price. For example, car dealerships often include a business value component as part of the price, but this is rarely separate from the real property value. Comparing sales prices that mix real estate and business values to real-estate-only situations produces skewed results.

Historical Projections Are Reliable. Real estate professionals frequently overlook this fallacy, but differences become magnified when using older data. Cap rates usually are calculated based on the prior year's income and expenses. Although the income projection is for the next 12 months, the cap rate is based on the prior 12 months. This discrepancy can produce inaccurate results when the economy or the local real estate market is changing.

Buyer Expectations Are Clear. A common explanation for low cap rates is unclear buyer expectations. Did the buyer expect to expand a business or renovate the building? Was the purchase price heavily based on upside potential? Was there a particular reason why the buyer needed this property, such as its unique location? Buyer compulsions might result in higher selling prices and lower cap rates. Therefore, if a market shows a wide range of cap rates, rely on the median rate for the most accurate assessment.

Cap Rates Reflect Total Value. Some types of real estate, such as hospitality properties and marinas, allow owners to pocket cash that does not appear on financial statements. Such properties' listing prices may reflect value that is both on and off the books. When data services use financial information that reflects only value on the books, the resulting cap rate may be skewed significantly lower.

The Math Is Correct. Investors often want to know an appropriate cap rate for a particular property type or market. However, real estate professionals' cap rate conceptions can result in market values that do not provide buyers with sufficient return on investment.

For instance, consider the investor's requirements in Table 2. The property has a 70 percent loan-to-value ratio, an 8.5 percent interest rate, monthly mortgage payments, and a 25-year amortization rate.

The investor's equity return ranges from 7.45 percent to 20.79 percent depending upon the cap rate. The equity return then must be compared to more-liquid, safer investments to determine if capital would be attracted to this investment. If the first-year equity return is not sufficient for investors to compare it with other investment vehicles, the only way to generate that return is to bank on appreciation, which no longer is considered a good investment strategy.

When real estate is listed at prices resulting in poor equity returns, financially savvy owners and investors may make significantly below-market offers. These low-ball offers reflect the purchaser's return on investment requirements without considering appreciation factors. Many potential buyers refuse to make an offer on properties in these situations because the spread for negotiation is too great.

Frequently when a property's projected equity return is very low or negative, the cap rate also is too low to attract capital to the project.

Cap Rates Always Should Be Developed From Sales. Several techniques other than sales prices, such as the band of investment technique, mortgage equity technique, and hybrids of these two approaches, can be used to derive cap rates.

Like sales-based calculations, these techniques build cap rates from the components necessary to create a deal. Each attempts to model investor and lender requirements by weighting the cap rate for each deal participant. For example, using the loan terms in Tables 1 and 2 and a 15 percent return for the purchaser, a built-up cap rate would be calculated as shown in Table 3.

Mortgage equity and other techniques use the general calculations shown in Table 3 with modifications for variables such as equity increases for paid-down loans and property value appreciation if applicable.

In today's low interest rate environment, it is critical to note that the calculations in Table 3 imply cap rates are heavily dependent upon the current mortgage interest rate. Although this is accurate to some degree, risk parameters are difficult to gauge. For instance, examining the cap rates reported in the Korpacz Investment Survey during the past five years shows relatively little variation, yet during this time a recession began and several other factors affected many commercial real estate markets' performances. Therefore, when relying on these cap rate calculation techniques, fully consider the risks inherent in the equity rate portion of these equations.