How to Maximize Your
Apartment Investments

Question: I own five duplexes in the Tulsa, Okla., metropolitan area. I have refinanced the mortgages on the properties several times to use the capital for the acquisition of small apartment complexes. With my high debt service on the duplexes, they still create cash flow of about $34,000 per year. I estimate that I have about $200,000 in equity in the properties, and I'd like to sell them and buy another apartment complex priced close to $1 million. But when I run the economics on the properties I've seen, my monthly cash flow only increases by about $1,000 to $1,500. I want to grow, but would like to double my cash flow with my next acquisition. What should I do?

-- Chuck, Tulsa, Okla.

Chuck: As I'm sure you've discovered, moving from duplexes to apartment buildings is a big change. With a duplex, value is usually determined the same way it is for homes -- by market comparisons. But apartment buildings are a horse of a different color. With these properties, values usually are determined by capitalizing the rental income. Put simply, the higher the income, the more they're worth.

The key to investing in larger apartment buildings is to uncover one with a low rental rate and find a way to raise the rents. When you raise the rents, you not only increase the value of the building, you also improve your cash flow.

But finding such properties isn't easy. Most apartment-building investors look for buildings that have been neglected by their owner -- where deferred maintenance has prevented them from raising rents. They buy, improve and increase rents. It's the quick way to bolster your bottom line.

Another method is to raise the gross-income multiplier. This is an arbitrary number that, when multiplied by the gross annual rents, produces a value for the property. Different types of properties have different multipliers. The key is to convert the building from a lower multiplier to a higher one. This can be done by improving the property or the quality of tenants.

Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Tips and Traps When Renovating Your Home," (McGraw-Hill, 2000).

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