“Don’t look for the needle in the haystack. Just buy the haystack.” John Bogle

Return on equity is a term often used to determine the value of public companies. It is calculated by dividing the net income by shareholders equity. It shows a company’s net return on their assets. What about your apartment properties? What kind of return are you getting there?

WHAT IS MY EQUITY. Hopefully you have a good idea of the value of your buildings, but has it changed recently? Have you built an ADU or two? Have you raised rents? Have you done some capital improvements to the property? We are happy to help with sales comps but it is a good idea to know the value of your assets and whether that number is moving up, down or staying stagnant. Have you checked to see how much your loan has paid down? It may have paid down more than you think, which is adding additional equity to your building.

COMPUTING YOUR RETURN. Lets say for example, you own a 5 unit building, purchased 5 years ago, that is worth 2 million. Your original loan was 1,190,000. Assuming you purchased the building for 1.7 million for our example, and you have paid down 125K in principal, your property has earned an additional 125K for you. Your original price of 1.7 million with 30% down (510,000) left you with a loan amount of 1,190,000. paid down approximately 2000 per month or 125,000 over 5 years, leaving a balance of 1,065,000.

Now lets assume the building has increased in value 300K over those same 5 years, This could be due to increase in income by raising rents annually by 100 dollars per unit each year, increasing the income by 30,000. over your 5 years of ownership. Your equity has gone from 510,000. (your original down payment ) to 935,000. That is 510,000 original equity plus 125,000 loan principal pay down plus 300,000 increase in value- an increase of 425,000. Now divide your annual NET INCOME, after all expenses, including mortgage and taxes, by your total equity and you will can see what your current ROE (return on equity) is in your case.

REALITY Even if you sell, there would be costs of sale such as commission and closing costs. You would most likely be subject to a long term capital gain (always check with your CPA, as I am a real estate broker only) However, if you decide to make a change you can defer taxes with a 1031 exchange, move you money into a DST (Delaware Statutory Trust, a group investment vehicle) or even take the partial gain.There are other options as well. Always check with your CPA before selling or exchanging to make sure what you are considering is the best move for you and your situation.

“Always turn a negative situation into a positive situation.” Michael Jordan

What we at PRS PROPERTIES CAN DO. We can give you a good idea of the current value of your building. We can suggest changes you might want to make before sale to give you an idea what type of building you would be able to exchange into. You may decide to stay in the rental business. We are always available to chat. We can give you referrals for professionals, such as lenders, contractors, and engineers, so that you can decide who you feel best with. We can supply you with rent and sale comparable in the area of your properties, so that you know what rental values are in your area. It is important that you know the true value of your rental units, so that you can get them rented right away at market value, or at least as much as possible with rent control restrictions. We can look at potential purchases that you may be interested in to make the property more desirable, and maybe look at potential issues that an insurer might require you to repair.

If you should decide to sell your building, we can help you exchange into a larger or smaller properties. We can even help you move into something with less management responsibilities. We can also help with getting the paperwork together for a refinance if that is your desire. We can also recommend experienced licensed contractors who can perform any repairs or installations you may need prior to selling. We can also look at your building for other easy and inexpensive changes that might allow you to get a higher value. We can help you to get the maximum value for your property, should you decide to sell, or the maximum return if you are planning to keep your building.

We are currently looking for “as-is” properties and are willing to purchase with low rents, deferred maintenance or even with a problem tenant in place. We can offer a 7 day escrow and all cash at closing. Give us a call. We have also put together numerous transactions over the years which involve properties that are not listed for sale. Many investors are currently in 1031 exchanges and need to identify a replacement property before their 45 day identification period runs out.

Should you decide to put your property on the market, we will put together an aggressive, targeted and professional campaign to get your property sold fast. We have been doing this for over 40 years, and we will use all the tools available to bring you the most dollars at closing. If you are thinking of selling or are just curious about the value of your property, don’t hesitate to give us a call.