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# Get out of the single frame
- URL: https://www.smdp.com/get-out-of-the-single-frame/
- Published: 2006-11-01T16:00:00.000Z
- Updated: 2026-10-25T01:12:56.000Z
- Author: Guest Author
- Tags: Opinion, Santa Monica, #archive-import

*REAL ESTATE 101*

*By MIKE HEAYN*

Paradigm shift. You won’t be able to purchase an apartment and run it as efficiently as possible unless you get out of the single family frame of mind.

A lot of new apartment investors look at an apartment building as a set of single family homes on a single parcel. To an extent, these investors are not wrong. However, where the error in judgment takes place is in the way of value. Commercial real estate value is not solely determined by comparable sales and a loan to value, but rather on the property’s current income and future income potential.

When you buy a commercial property, such as an apartment, you are buying an income stream. Think of these kind of investments like an annuity (i.e. — periodic payments). Unlike an annuity, however, real estate is not fixed in its income level. This means you are buying a tangible asset that has tax benefits such as depreciation and should yield a return.

When purchasing an apartment, the first thing to do is find out what kind of financing is available. Every commercial property is different, and thus, the amount of money that can be lent against it varies. Once you have an idea of what financing is available, you will be able to figure out what the overall cap rate is or cash on cash return.

One of the most important factors when figuring out the overall cap rate is figuring out what type of return on investment suits your needs. Do you want a 10 percent, 15 percent, 20 percent or 25 percent return? Heck, you may even want a 50 percent, which may be feasible in other areas of the country. Realistically, though you are going to expect an average to sub-average return in Southern California.

There is no simple way to find out if a property is good enough for your needs unless you run the numbers with the property’s actual income. What you want to know is what the property has been generating for a least a year, what types of expenses the property has, and if there has been any type of capital improvements done. You should not have a hard time getting the income and expenses from a broker or real estate agent. If a broker tells you that only accepted offers will have the income information released, move on. You cannot in good conscience decide if a deal is worth-while or not without knowing the underlining numbers.

Just as all properties are different, so are the investors who run them. If this is your first building, take time to set your priorities — growing value long term, steady cash flow with easy operating, etc. Once you have real numbers figured out for your return on investment, you should know your exit strategy before you get in. Think about your best-and worst-case scenario. What if the market drops 10 percent or 20 percent? Will this affect you? If your property is stabilized and you know your financing well enough, you will probably be fine.

Remember, you cannot change the purchase price, but you can change the financing. It is an income stream you are buying. You will be able to find help with certain association such as the Apartment Owners Association for documents such as leases, estoppels, etc.

In Southern California, you are going to pay a premium for an apartment property. There is a lot, and I mean a lot, of competition out there. There are more dollars from cash refinances and 1031 exchanges than there are deals. Soon, real estate will become the ugly stepchild because of its illiquid nature. Believe it or not, there actually will come a time when sellers won’t be getting five and six offers over the asking price. The real estate market, in both residential and commercial areas, will change. I am not saying that the sky will fall and values will drop drastically, but I am saying, that eventually, the real estate climate will change.

Finally, keep in mind that an emotional attachment to an investment property is not the best way to go about purchasing an asset.

Mike Heayn is a Washington Mutual multi-family loan consultant. He (310) 428-1342 or Visit his web site at www.re101.net.

*Originally published in the Santa Monica Daily Press print edition on November 1, 2006.* [Read the original PDF.](https://s3.us-east-1.amazonaws.com/smdp%5Fbackissues/110106.pdf?ref=smdp.com)