While terrible for those losing their homes, the residential foreclosure mess is a boom for apartment fundamentals. As many former homeowners migrate back into apartment living, occupancy levels and rents are being driven up resulting in increased profits for investors.
In addition, because of the lack of capital available for new apartment construction, very little new supply is coming online. Simply put: apartment demand is up and supply is down, a perfect storm for apartment returns to soar.
However, at the same time, many apartment buildings are now facing foreclosure because of falling prices, stricter underwriting guidelines and five-year mortgages becoming due and those borrowers are not qualifying for a new loan.
Here’s an example…
Let’s say you bought an apartment building for $1,200,000, put $200,000 down and took a $1,000,000 loan (83% LTV) on a short term loan so that $1,000,000 would be due in five years. Now let’s say that building was cash flowing $100,000 per year.
For five years, you have great tenants and they pay rent like clockwork. You are thrilled and making money hand over fist. However, as the national economy goes into a tailspin the value of your building is dragged down. But you don’t care because that building is cash flowing like crazy and you have no plans to sell. So who cares what its worth, right? You’ll just collect your rents and hang on until the market comes back even if it takes a few years.
But then you get a letter from your lender reminding you that your five-year loan is coming due in a few months. So you decide to refinance only to find that the value of your building is now only $800,000 and you still owe $950,000 on the mortgage. Additionally, banks will only lend 70% LTV now so based on an $800,000 value and 70% LTV the bank will only refinance $560,000 of the remaining $950,000 on the note.
If you don’t come up with the $390,000 difference, you will lose that building to foreclosure even though it has tremendous cash flow. If you had taken long term debt you wouldn’t be in this situation, but because the note is due, you’re in trouble.
That’s exactly what is happening to many apartment owners. The properties are performing well yet they are headed to foreclosure because they took out short term debt which is coming due.
Expert’s are tracking these numbers and are forecasting many apartment mortgages are coming due and “under water” (more owed than the value of the property). These experts predict a tidal wave of apartment foreclosures on their way.
There is a small window of opportunity to cash in on the opportunity to buy apartment foreclosures, as these property types are rarely distressed. Additionally, interest rates are historically low, making this opportunity even better.
Lawrence Yun, Chief Economist of the National Association of Realtors, predicts a turnaround in 2011. This means there is a very small window to learn about apartments and apartment foreclosures. The tidal wave of apartment foreclosures is coming! There will be thousands of great apartment properties, in good condition, appearing on the market at rock bottom prices.
Will you ride the wave?
If you would like to seize this opportunity and “Make Huge Profits Investing in Apartment Foreclosures” you must join me, and National Foreclosure and Apartment Industry Expert, Investor and Foreclosures.com Coach Michal Ballard, Wednesday, July 28th, 6pm Pacific (9pm Eastern) in our Brand New Professional Investors Webinar & Call.
