1. Financial Management

2. Course 8: Financial Mgmt
Introductions
Your name
Where you work
Your job responsibilities
How long you have been in the industry
What you hope to get from this class
Course 8: Financial Mgmt

3. Course 8: Financial Mgmt
Agenda
Investments
Adding Value to the Investment
Economic Analysis of a Property
Budgets
Property Valuation
Course 8: Financial Mgmt

4. Course 8: Financial Management
Chapter 1: Investments
We will discuss:
What are investments and whether to make them
Advantages and disadvantages of investing in multifamily housing
Different types of ownership and methods of financing
Course 8: Financial Management

5. Definition: Investment
An investment is the use of funds to earn a profit.
Course 8: Financial Mgmt Chapter 1

6. Four (4) Factors in Investment
Risk – low risk = low return
high risk = high return
Income – may depend on risk involved
Growth – means a potential to increase in value >NOI = greater value
Liquidity - ability to convert to cash
Module 8: Financial Mgmt Chapter 1

7. Owner’s Objectives
Why is it important to know the owner’s investment objectives for the property you manage?

8. Course 8: Financial Mgmt Chapter 1
Performance Measures
Rate of return on investment (ROI)
Cash-on-cash return
Capitalization rate
Internal rate of return (IRR)
Course 8: Financial Mgmt Chapter 1

9. Module 8: Financial Management
ROI
Rate of return on investment = percentage of return on each dollar invested
Cash flow/Investment = ROI
Module 8: Financial Management

10. Course 8: Financial Management
Capitalization Rate
NOI/Purchase Price = Cap Rate
NOI/Cap Rate = Value
Course 8: Financial Management

11. Course 8: Financial Management
Exercise
We paid $7,000,000 for a property and the NOI is $500,000. What is the cap rate?
Divide NOI by 6%
Course 8: Financial Management

12. Remember
Lower cap rate = higher value
Higher cap rate = lower value

13. Advantages of Investments
Advantages include:
Periodic cash payments
Potential for increase in value
Reduction in income taxes due to depreciation
Ability to invest using borrowed funds
Course 8: Financial Mgmt Chapter 1

14. Disadvantages of Investments
Disadvantages include:
Real estate is not a liquid asset
Active participation is often required
Potential for risk (natural disasters, changes in market conditions)
Course 8: Financial Mgmt Chapter 1

15. Course 8: Financial Mgmt Chapter 1
Forms of ownership
Direct ownership
Partnership
Limited liability partnership
Limited liability corporation
S corporation
Joint venture
Real Estate Investment Trusts (REITs)
Tenants in Common (TICs)
Course 8: Financial Mgmt Chapter 1

16. Course 8: Financial Mgmt Chapter 1
Types of mortgages
Fixed rate
Variable rate
Balloon
Bullet loan
Course 8: Financial Mgmt Chapter 1

17. Where to obtain a mortgage
Commercial banks
Finance companies
Savings and loan institutions
Insurance companies
Pension funds
Mutual funds
Federal government (Freddie Mac, Fannie Mae)
Course 8: Financial Mgmt Chapter 1

18. Course 8: Financial Mgmt Chapter 1
Skill Check #1
Chapter 1- Investments
Course 8: Financial Mgmt Chapter 1

19. Course 8:Financial Management
Chapter 2
Adding Value to the Investment
Course 8:Financial Management

20. Adding Value: CAM Responsibilities
Generating and collecting as much income as possible
Controlling expenses
Meeting the financial goals of the investment
Course 8: Financial Mgmt Chapter 2

21. Additional ways to add value:
Reduced staff turnover and lower personnel costs
Reduced resident turnover with better customer service
Aggressive rental rates set by unit type
New income sources through resident services
Better collection of resident charges
Course 8: Financial Mgmt Chapter 2

22. Course 8: Financial Mgmt Chapter 2
Sources of Income
Rent
Administrative Fees
Parking/Garage fees
Pet fees
Laundry room/Vending
Late fees/collection fees
Clubhouse rental/video rental
Car wash
Cable/Internet/ Phone
Course 8: Financial Mgmt Chapter 2

23. Course 8: Financial Mgmt Chapter 2
Types of Expenses
Maintenance
Administrative
Salaries/Personnel
Taxes
Insurance
Utilities
Contract services
Advertising and Marketing
Course 8: Financial Mgmt Chapter 2

24. 3 Factors That Affect Rental Income
Competitive rental rents
Physical occupancy
Collection percent or economic occupancy
Course 8: Financial Mgmt Chapter 2

25. Course 8: Financial Management
Concession Impact
Market rent = $700 Concession = one month rent What is the Effective Rent?
Course 8: Financial Management

26. Law of Supply and Demand
If the demand is high and the supply is low, higher prices can be obtained.
If demand is low and the supply is high, rents must be made competitive to attract residents.
Course 8: Financial Mgmt Chapter 2

27. Course 8: Financial Mgmt Chapter 2
Economic conditions
Population growth
Household formation
Job creation
Course 8: Financial Mgmt Chapter 2

28. Balancing rental rates and vacancies
The goal is to maximize income not occupancy
Pricing too high may cause longer vacancy
Pricing too low means you are losing money while the unit is occupied
Course 8: Financial Mgmt Chapter 2

29. Increasing rental rate
Market value = $800 Raise rent 10% = $880 Vacancy = 15 days What is the cost of the vacancy? At the new rate, how long before you recover the vacancy loss?
Course 8: Financial Management

30. Course 8: Financial Management
Lowering rental rate
Market value = $800
Lower rent 10% = $720
Loss per month = $80
Loss per year = $960
What would you lose if you did not
lower the price and the apartment sat
vacant for a month?
Course 8: Financial Management

31. Before adjusting rent, analyze the 4 P’s:
People
Product
Promotion
Price
Course 8: Financial Management

32. Course 8: Financial Mgmt Chapter 2
Determining pricing
Conduct a market analysis
Use an automated revenue management system
Course 8: Financial Mgmt Chapter 2

33. When to consider a rent increase
When any floor plan remains 95% or more occupied or that remains full even when the community turnover ratio averages below 55%
When rents fall below levels indicated by a comparative rent analysis
Anytime a community is full
Upon owner request
Course 8: Financial Mgmt Chapter 2

34. Rental increases: Current residents
Increase rent as leases expire, OR
Increase rent selectively on expired leases using a quantifiable, non-discriminatory standard (years of residence or number of previous renewals)
Consider a renewal rate that is slightly lower than the new market rate as an incentive to stay
Provide 60 days notice prior to the effective date of the increase
Course 8: Financial Mgmt Chapter 2

35. Managing Occupancy: Reports
Rent roll
Delinquency report
Deposit/Income reports
Concession report
Demographics report
Course 8: Financial Mgmt Chapter 2

36. Managing Occupancy: Methods
Calculate occupancy trend
Manage lease expirations
Calculate turnover ratio
Course 8: Financial Mgmt Chapter 2

37. Course 8: Financial Mgmt Chapter 2
Expenses
Fixed – property taxes, insurance
Variable –utilities, turnover costs, etc.
Capital- appliances, HVAC, etc.
Replacement Reserve Account
Debt service
Course 8: Financial Mgmt Chapter 2

38. Course 8: Financial Mgmt Chapter 2
Cost Benefit Analysis
Potential Expense
Dollars
Time
Image
Potential Benefit
Income
Employee satisfaction
Market position
Course 8: Financial Mgmt Chapter 2

39. Course 8: Financial Mgmt Chapter 2
Accounting Practices
Budget control log
Invoices
Purchase discounts
Check request or payment vouchers
Petty cash
Resident records
Resident security deposit
Collection of former resident accounts
Course 8: Financial Mgmt Chapter 2

40. Course 8 Financial Mgmt Chapter 2
Skill Check #2
Chapter 2: Adding Value to the
Investment
Course 8 Financial Mgmt Chapter 2

41. Course 8: Financial Management
Chapter 3
Economic Analysis of a Property
Course 8: Financial Management

42. Course 8: Financial Management
Economic Analysis
When analyzing a property, ask
How well has a property performed over a specific time period?
Where does a property stand at a given date in time?
Course 8: Financial Management

43. Course 8: Financial Mgmt Chapter 2

44. Course 4: Fair Housing

45. Course 8: Financial Mgmt Chapter 3
Accounting methods
Accrual- records all income and expenses in period they were earned or incurred, regardless of when received or paid
Cash- records all income and expenses when they are actually received or paid
Course 8: Financial Mgmt Chapter 3

46. Course 8: Financial Mgmt Chapter 3
Cash Flow
The amount of money left after all sources of income are collected and operating expenses, capital expenses and debt service have been paid
Often referred to as the operating statement
Course 8: Financial Mgmt Chapter 3

47. Gross Potential Rent (GPR)
Current rent charged at 100% occupancy- combines the sum of occupied units at current lease rents plus vacant units at market rents
100% of possible income
All other income and expenses measured and evaluated as % of GPR

48. Market Rent
Total annual income received if 100% of all units were occupied and paying market rents

49. Loss to Lease Variance between market rent and lease rent
Market rent that is “lost” due to lease rents at rates lower than the market rate
For many companies it is a separate line item on the operating statement

50. Loss to Lease Example
Annual market rent of $1,375,025 with a loss to lease of $125,700 has a loss to lease of 9.1%
125,700/ 1,375,025= or 9.1%
GPR of $1,249,325; market rent of $1,375,025 less “loss of $125,700

51. Vacancy, Concession, and Collection Loss (VAC)
Total value of rent loss from vacant units, concessions given, collection losses from bad debt write-off, rent loss from non-revenue units
Standard for uncollectible/bad debt- 2% of GPR
VAC can be higher than10% of GPR

52. EFFECTIVE GROSS INCOME (EGI)
GPR less vacancy, concessions, and collection loss. Also called net rental revenue or total rental income
Represents all rent and only the rent income at the property
GPR-VAC= EGI

53. OTHER INCOME(OI) Income from items other than rent
Laundry, cable, parking, amenity charges, pet fees, application fees, administrative fees, lease premium fees, late fees
Fee policies established by owner or manager
Up to 10% of GPR- NAA survey in % of GPR or $753 per unit

54. GROSS OPERATING INCOME (GOI)
EGI + OI = GOI
Property’s total revenue
Available to pay property’s operating expenses, capital improvements, and debt service

55. OPERATING EXPENSES(OE)
All expenses fixed and variable incurred in the course of managing the property
Controllable and uncontrollable expenses
Capital expenses and reserve for replacement costs are not typically considered operating expenses

56. NET OPERATING INCOME(NOI)
GOI-OE=NOI
Applying cap rate to NOI allows you to determine property value using the income approach

57. OPERATING EXPENSE RATIO
Expense to income ratio
Evaluation tool to measure property performance and expense control
% of GPR used to pay operating expenses
Ratio depends on age, location, property type, and expense classification
OE/GPR= operating expense ratio
2010 NAA survey showed national OE ratio of 40%

58. CAPITAL Expenses (CE) Also called capital improvements
Includes non recurring expenditures like appliances, roofing, carpet replacement, etc. intended to add to the life of the property and its fixtures
Tax benefits, depreciation, cost

59. DEBT SERVICE Mortgage or loan payment- principal and interest payment
Fixed rate mortgages usually have level monthly payments that amortize the loan

60. Break-even Occupancy Ratio
(OE + DS) ÷ GOI
1,803,800 +1,278,000= 3,081,800
3,081,800 ÷ 4,359,000 = 71%
Course 8: Financial Mgmt Chapter 3

61. Break-even rent per sq. ft.
(OE + DS) ÷ total square feet
$1,803,800 + $1,278,000= $3,081,800
$3,081,800 ÷ 760,000 = $4.05
Course 8: Financial Mgmt Chapter 3

62. CASH FLOW CALCULATION Gross Potential Rent (GPR)
-Vacancy, Concessions, collection losses (VAC)
= Effective Gross Income (EGI)
+ Other Income (OI)
= Gross Operating Income (GOI)
- Operating Expenses (OE)
= Net Operating Income (NOI)
- Capital Expenses (CE), Reserve Payments (RR), and Debt Service (DS)
= CASH FLOW

63. Course 8: Financial Mgmt Chapter 3
Activity #1: Cash Flow
Calculate the cash flow of the NAA
Apartments
Course 8: Financial Mgmt Chapter 3

64. Course 8: Financial Management
The General Ledger
Provides more detail of major financial statements
Chart of Accounts
Know cut-off date for invoices to be submitted
Course 8: Financial Management

65. Course 8: Financial Mgmt Chapter 3
Skill Check #3
Chapter 3: Economic Analysis of a
Property
Course 8: Financial Mgmt Chapter 3

66. Course 8: Financial Management
Chapter 4
Budgets
Course 8: Financial Management

67. Course 8: Financial Mgmt Chapter 4
Purpose of a budget
To estimate expected income and expenses to determine what occupancy levels will be needed to cover expenses and provide a return on investment
To monitor the property’s performance
To evaluate performance of personnel
Course 8: Financial Mgmt Chapter 4

68. Course 8: Financial Mgmt Chapter 4
Lease-up Budget
Special attention paid to activities and costs associated with attracting residents, signing leases and generating income
Information used for projecting expenses depends on your and your supervisor’s previous experience
Course 8: Financial Mgmt Chapter 4

69. Course 8: Financial Mgmt Chapter 4
Modernization Budget
Reflects larger allocations for capital expenses and labor
Must be flexible if the work is dependent on contractors schedules and vendors supplies
May include periods of no rental income while work is being done in part or all of the building
May be prepared separately from the operating budget of a property and be for a short time only
Course 8: Financial Mgmt Chapter 4

70. Stabilized Operating Budget
Reflects varying expenses from month to month
Examples:
Utilities for heating would be higher in winter months
Utilities for cooling would be higher in summer months
Snow removal would be posted only for winter months
Course 8: Financial Mgmt Chapter 4

71. Tips for developing budgets
Use round numbers
Use current figures
Prepare early
Seek input
Extrapolation/Annualization
Course 8: Financial Mgmt Chapter 4

72. Course 8: Financial Mgmt Chapter 4
CAM Responsibilities
Managing the budget
Analyzing variances
Explaining variances
Recommending action
Course 8: Financial Mgmt Chapter 4

73. Course 8: Financial Mgmt Chapter 4
Skill Check #4
Chapter 4: Budgets
Course 8: Financial Mgmt Chapter 4

74. Course 8: Financial Management
Chapter 5
Property Valuation
Course 8: Financial Management

75. Course 8: Financial Management
Property Valuation
Is the process of determining the value of a property in order to make financial decisions regarding the property
Course 8: Financial Management

76. Course 8: Financial Mgmt Chapter 5
The Cost Approach
Estimates the current cost of reproducing or replacing the improvements, minus the loss in value from depreciation due to age, condition or obsolescence, plus land value
Important when there is no market activity and a sales approach cannot be used to value a property
Course 8: Financial Mgmt Chapter 5

77. The Sales Comparison Approach
In this approach, the market value of a property is directly related to the prices of comparable competitive properties
Most useful when there are several similar properties in the local market that have been recently sold or are currently for sale
Course 8: Financial Mgmt Chapter 5

78. The Income Capitalization Approach
This approach uses methods, techniques and math procedures to
analyze a property’s ability to generate income and
convert future earnings to present-day dollars
Course 8: Financial Mgmt Chapter 5

79. Direct Capitalization
Value = NOI/Overall capitalization rate
Course 8: Financial Management

80. Course 8: Financial Mgmt Chapter 5
Skill Check #5
Chapter 5: Property Valuation
Course 8: Financial Mgmt Chapter 5