Apartment Management: The Property and Location

PROPERTY LOCATION

Virtually every discussion dealing with the subject of real estate quickly outlines the importance of a property’s location; this manual is no exception. Basically, location will dictate most of the success or failure of a given property, not the skills or programs introduced by the owner or manager.

You can apply the basics that I will outline in this manual to a routine property in an excellent neighborhood and be very successful. On the other hand, you can heap imagination and energy onto a property in a declining or marginal location and realize only limited success.

For those unseasoned real estate investors and developers who disregard this warning, a natural trap awaits. The lure involves the fact that properties and land in poor locations are comparatively inexpensive and, thus, appear to be bargains. Realizing that it may be difficult to find buyers for their poorly situated real estate, sellers are inclined to take back financing or offer other purchase incentives. To many novices, a lower price and special purchase arrangements present an irresistible offer. Nevertheless, poorly located property is seldom a bargain and usually produces mediocre profits at best.

As a property manager, you will frequently be offered opportunities to increase the value of investment real estate by applying your creative skills. You must understand that even the most highly skilled property manager will find it nearly impossible to overcome a poor location. Every property can be improved, but the real turnaround success stories always start with ailing properties in choice locations.

THE PROPERTY

The nature of the management style required for different properties is clearly influenced by several factors. The type of structure that is typified by the development (e.g., low-rise or high-rise structure, town-homes or suburban garden apartments) is one such influence. The stage is set further by the property’s character: Design, unit mix, unit layout, and equipment package shape the character of a property. Regardless of how poorly a property is located, designed, or equipped, there is nevertheless an optimum level at which it can be operated. That is the point at which income is at a maximum and expenditures are at a minimum. The property manager must take the necessary action to reach this point and produce the greatest possible net operating income.

Property Type

Height is a good starting point to distinguish different types of apartment buildings. Where land is relatively cheap and the developer is under little or no pressure to increase the number of housing units per acre, shorter buildings can be constructed and spread out over a large area. As land costs increase, the developer starts to think of getting more units onto a piece of land, so taller buildings are constructed. In this manual, buildings of various heights are identified as follows:

• Low-rise. Buildings with one to five stories. If the building has an elevator, it is an elevator building. If it has no elevator, it is a walk-up.

• Mid-rise. Buildings with six to nine stories. Elevator service is assumed unless otherwise stated.

• High-rise. Buildings with ten or more stories.

Unit Size, Area, and Layout

A prospect setting out to rent an apartment is interested in a number of apartment measurements: unit size (number of rooms), unit area (square footage), and the apartment layout (functionality of the space).

Apartment size is expressed by the number of bedrooms and bath rooms that a unit contains or by its total number of rooms.

A small apartment without a bedroom is referred to as an efficiency or studio apartment. (In some parts of the country, a studio unit means a small apartment with two levels.) Most often an efficiency apartment contains a small walk-in or Pullman kitchen (a kitchen built along a wall), a combined dining and living room area (that also serves as a sleeping area), and a bathroom. A larger efficiency apartment — the convertible — has also become very popular. The identifying feature of a convertible is an unusually large living room in an “L” shape or with an alcove that serves as a sleeping area.

There is a prescribed way to make a room count. The kitchen, no matter how small, is considered one room. A bathroom that contains a toilet, wash basin, and tub or shower stall is a full bath but is not included in the room count. A bathroom with just a toilet and basin is classified as a half-bath and is not included in the count either. A living room is counted as a room, as is a separate, formal dining room. A living and dining room combination is counted as one and one-half rooms, unless the combined space exceeds 300 square feet, in which case it is counted as two rooms. Dining or dinette space smaller than 100 square feet is regarded only as a half-room. Each bedroom with its own separate entry off a hall is counted as a room. A den or family room is counted as one room, too. Outside patios or balconies are not included in the count, nor are closets, no matter how large.

The following example illustrates this room count method:

An apartment containing a combined living-dining area, a kitchen, a bed room, and a bath is referred to as a one-bedroom apartment. The presence of one complete bathroom is assumed and not mentioned, unless one is not included, or unless more than one is provided. The room count then is as follows:

Living Room and Dining Area = 1½ rooms

Kitchen = 1 room

Bedroom = 1 room

Unit size = 3½ rooms

Many apartment managers have adopted a short-cut method to determine an apartment’s room count. This approach assumes that all apartments contain two and one-half rooms plus bedrooms. An efficiency apartment, for example, would equal just two and one-half rooms since it has no bedroom, while a one-bedroom apartment would be equal to three and one-half rooms: two and one-half rooms for the apartment plus one for the bedroom. This system is much easier and surprisingly accurate.

The area of an apartment is stated in terms of its rentable square feet. This measurement is determined by multiplying a unit’s length by its width. No deduction is made for partitions, plumbing chases, or other small niches. Neither should an apartment’s square-foot area include balconies, patios, or unheated sun porches.

To a seasoned renter, an apartment’s layout is really more important than its area in square footage. When comparing two apartments of identical area, one is often more functional than the other. Some layouts simply accommodate furnishings and belongings better than others and are more desirable because of their distribution of space. An example of this is the two-bedroom split layout; this type of apartment has enjoyed great popularity in the 1980s and is expected to remain in favor throughout the 1990s. Unlike the standard two-bedroom apartment that contains one larger and one smaller bedroom, the two-bedroom split layout features two equal bedrooms, two equal baths, and closet facilities that are separated by the living and dining area and kitchen. In addition to providing equal sleeping quarters, this layout affords a greater degree of privacy for residents than the standard two-bedroom unit with bedrooms that are next to each other. This makes it ideal for roommate situations, parents and a growing child, or visiting relatives, or space for a den or stereo room.

Unit Mix

Almost every apartment building or complex contains a number of different-sized units. This distribution, whatever it is, is referred to as the unit mix. The unit mix can greatly affect the character, ultimate use, direction, and success of a particular property type. Any one of the property types described would take on a different character if it contained only one size of dwelling unit. For example, a building with only efficiency units would have a distinctly different resident profile than one with, say, only two- bedroom units.

A building’s location and intended market should influence the builder’s decision when establishing the optimum unit mix. Differing economic conditions also affect the desirability of and demand for particular unit sizes. An example of this can be seen during periods of a depressed economy, when efficiency apartments and convertibles enjoy their greatest demand. Many people decide to scale down their living accommodations to small apartments in desirable buildings rather than moving to one- bedroom apartments in older, less-expensive buildings or losing privacy by taking in roommates to help share costs.

During periods of especially high inflation, even the mainstay one- bedroom apartment suffers vacancies as people opt for efficiency units, two-bedroom units with rent-sharing roommates, or a return to their parents’ homes in an effort to save money. Families requiring two bedrooms will settle for apartments with one bath and the two-bedroom split unit will out-rent the standard two-bedroom apartment. Likewise, two- and three-bedroom townhouses will be in short supply as occupants wait for the economy to improve before purchasing a home.

At any point in time, economic conditions will affect the demand for the various types of units, and, therefore, the definition of the optimum unit mix will always be changing. Obviously, no one unit mix will remain at the same level of demand continuously. The goal is to provide a wide range of unit types, in varying percentages, to sustain a healthy occupancy and demand over a rental building’s long life.

The long-range plan for the property also has an impact on the unit mix. If, for example, the developer had the idea of eventually converting the property to condominium ownership, a specialized unit mix would be advisable.

Managers seldom have the chance to establish the unit mix of a development. Still, they should be aware of the differences of each and the respective advantages and disadvantages of one opposed to the other.

Non-yield Space

Every apartment building contains some non-yield space. This space costs money to build and is essential to the operation of the building, but it does not produce direct revenue. Obviously, the less non-yield space, the better.

The ratio between a property’s gross building area (length times the width of the structure(s) times the number of floors with living space) and the rentable area (the sum of the areas of all the apartments) is termed the building’s efficiency factor. For example, a building with a gross building area of 100,000 square feet and a rentable area of 85,000 square feet has an 85 percent efficiency factor.

Efficiency Factor = Rentable Area / Gross Building Area

= 85,000 square feet / 100,000 square feet

= 85 percent

Efficiency factors of apartment buildings vary for a number of reasons. Some architects are more skilled than others at minimizing non-yield space. On the other hand, a designer may intentionally provide more non-yield space than is necessary in a luxury building in an effort to establish a feeling of opulence through conspicuous waste (e.g., large lobbies or extra-wide corridors).

Generally, the most efficient housing type is the townhouse built on a slab. Its efficiency factor is usually in the mid-90 percent range, with losses due only to the exterior wall thickness and any outbuildings such as storage, laundry, or recreation facilities. High-rise and mid-rise buildings have comparatively lower efficiency factors than walk-up apartments. This is due to their greater proportion of interior common spaces plus their large, more sophisticated, and space-consuming mechanical equipment areas.

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