How do you project earnings for a multi-unit apartment building in an area with declining population?

Recently I have been looking at several properties in the areas surrounding Detroit. The properties and pro-forma numbers for the properties are adding up well. The main difficulty comes when looking at the population numbers of the surrounding areas. The numbers are declining, not at any alarming rate, but steadily.

How can I be sure of the continuing value and productivity of the property? Is there any way to reassure myself in a situation of this type? Any further research or questions I can ask?

Any and all suggestions would be greatly appreciated.

You can't be absolutely sure. You'd have to project lower rents than competing properties so that your building stays full compared to others that lose tenants. But as a consequence, other area building owners might lower their rents to re-attract renters. If you are buying at a "low enough" price, you should be able to ride out the long-term cycles until the area stabilizes.

Yep it's all about the acquisition price you get it at. You also have to have defined exit strategies.

If it's an older building later on it could be renegineered or demoed for something else where you could sell for a profit.

What are the current vacany rates running in the area? How much competition do you have to rent out the place?

With homes being cheap some renters are opting to rent a home for the same price an apartment costs and do a lease option or purchase on it to buy later. It's not just about population patterns and migration trends as there are other factors involved. If it's close to the city it's better as alot of people are migrating closer to the cities from semi-rural and rural areas to save on gas costs.

This is why if you are a developer and your going into an area you don't know you partner with local people. For instance in Ga in some areas I could tell you things that would take you months find out going on your own. When you are competing to do development projects,find the deals,or redo something I will know the are and have the local knowledge.

So I guess what I am saying is even for me it's good to always partner up with someone and throw them a bone for that market knowledge. It will really help you in the long run. I work with many developers and they always choose specialists to work with in whatever area they are looking at.

Cave Man and Super Realtor: thanks for your detailed replies.

Cave Man: your reply talks about "long-term cycles." Could you point me towards resources I could use to try to find that data?

Super Realtor: you say "it's all about the acquisition price," which I completely agree with; the reason I want to project income is because that projection will determine my acceptable acquisition price.

The issue of exit strategies is a good one. I don't know much about reengineering or demo'ing. My ideal exit strategy is to build enough equity in the place that I can sell it and trade up to a larger complex.

I think I can use LoopNet to find vacancy rates, but it doesn't break down total vacancies into homes vs. rentals. Can you suggest a resource with which I could do more detailed research??

I see the wisdom in partnering with a specialist. Do you have advice on how to find one, and what kind of bone, as it were, to throw? I understand that a good tip for waiters and waitresses is 20%, but I have no idea how the tip calculator works for this other kind of thing. :)

Thanks again, you've both helped a lot.

Let's just say we have a saying in development "plan for the best,EXPECT the worst!"

Many developers building new projects ran pro-formas off of numbers from the boom times and didn't see the downturn coming.

So there acquisition price was inflated based on x and x happening. Now that it didn't happen they are being foreclosed on or renegotiating with there lienholders for more time to figure out a solution to the economy.

Demoing is where you take an old structure in a GREAT location,demo it after getitng the new use rezoned and approved,and then building the new structure on it.

Reeingenering is taking a building suffering from one use and refacing it,adding onto it to change it,or changing it's use for a new purpose.

The value isn't usually th ebuilding itself but the location and the multiple possibilities that you can do with it. When we drive around and look at buildings or land we don't look at what it is but it could become. That's where the value and money is.

As far as acquistion price alot of commercial sellers are holding on to prices from years past. It's like any other business you have to find the deal.In Ga we have some of the fastest growing counties in the top 100 in the nation.

If you would like to look at investment property here pm me and I would be glad to help you reach your goals.

good luck

As far as Detriot goes there taxes are really high so if you purchase plan on hiring a tax attorney to fight and get your assesments reduced.

Super Realtor: You've hit the nail on the head when you mention Detroit's taxes. Beyond even the multi-unit situation, I would like to find someone to fight the taxes on my single family properties. Do you know where to search to find a tax attorney to fight assessments?

I've done some very rough math to try to come to a valuation of the property. Can someone tell me if I'm doing this right?

The main difficulty is trying to come up with a projection of earnings given a declining population. I decided to try to do the math using vacancy rate.

The local government census for the area I'm looking in stated that in 2000 there was a 4.3% vacancy rate, and in 2008 it was 6.1%. That's a change of 0.225% more vacancy each year.

Looking at the profit and loss statements of the property, I saw that it was claiming a loss of $33,753.75 due to vacancy yearly. This worked out to 8.5% of gross potential rent lost due to vacancy.

If I take the change in vacancy rate from the local census--0.225% per year--and use that to project the vacancy rate for this property in 2018 (ten years from now) I get a vacancy rate of 10.75%. That works out to a cash loss of $42,672.13.

Given which, my attempt to value the property will be based on my projections of its performance ten years out. I will use this number, the gross potential rent, and the stated CAP rate to backwards calculate my offer.

Does that make sense?

Yes but how much were they taking to pay the owners and retirement and medical benefits etc.

We find this when doing business brokerage they will only claim to make 20k a year but when you figure in the deductions of taxes and salary,medical,and retirement there profit is really in the hundreds of thousands.

It's been a long day so your post isn't making sense. If your numbers tell you at a 10 percent vacancy you are losing money then you are overpaying for the property as your offer would be based on ACTUAL numbers not what the seller is pawning off in fantasy land. You should still make a healthy profit with a 10 percent vacancy.

There are different software companies that have programs that do this for you and are very cheap.

What I would look at is how much space is planned to come on the market in the area you want to buy? If the area is depressed,ok,or booming if there is a need there you will do fine. It's when new projects go up everywhere it will keep your rents from increasing down as everyone will pay the premium for th enew place and NOT the old one.