2. Don’t take the Offer Memorandum at Face Value

The offering memorandum is a marketing package created by the listing broker who wants to sell the property at the highest price possible. In the offering memorandum it’ll have the brokers proforma, so what they are saying the property’s going to operate at is based off of their goal of selling the property. Therefore, while it could be a good buy, you don’t want to just look at the OM. Take those numbers, plug them into your cash flow calculator, and use the T-12 which is trailing 12 months expenses which will show the actual profit and loss on the property and also use the current rent roll, and then use your own stabilized assumptions based on how you plan on operating the property. Don’t trust their rental comps, instead do your diligence, and then come to conclusions.

3. Rental Premiums

When you’re buying a value-add apartment, your plan is to renovate the units to add amenities or upgrade amenities with the purpose of raising the rent. Now, the question is how much can you raise the rent, and that’s what the rental premium is. There is a difference between what you’re going to get versus what the property is currently operating at. To calculate the rental premiums, you at times tend to look at the OM because it’s listed in the proforma by the broker and he might say that this is based on either the rental comps or the proven rental premiums that the owner has already received. Now, that ladder is something you can use by looking at the rent roll but again don’t just trust them, see whether they actually get those proven rental premiums. So if they’ve renovated 10% of the units and they can achieve a certain rental premium, make sure that you confirm it with your proper management company, perform your own rental comparable analysis before just plugging into what is provided in the OM.

4. Rental Comps

There are two parts to this tip.

The first part is that you don’t want to trust the rental comps at face value from the brokers, you want to look at the actual properties first to make sure they are similar enough to the property you’re looking at.

Look at the distance of the property from the market where you want to invest to make sure that it is similar to the neighborhood that the subject property is in. It is very important to understand the market, on a neighborhood to neighborhood, or street to street basis. Sometimes, a map is there in the offering memorandum where the subject property is marked by a star and the rental cap is scattered all over the place, some of them may even be multiple miles away. In certain markets, that could be fine while in other markets where one street over is a C neighborhood or the other street over it’s an A neighborhood, it might be an issue because you need to have a property like this in the market as well as a property that is similar to the subject property.

Question them as to in what period of time did they make the renovations and achieve the rent premiums because in many cases the market just does not have that kind of demand, and the residents are either not able to pay, or choose not to pay the rent so this can easily destroy the business plan you spent such care and hard-work developing. You want the one where they are renovating the units in a shorter period of time, closer to when you’re buying the property, as opposed to fewer units over a longer period of time.

Review the property operations, you need to see who pays for the utilities like fitness centers fees, pet fees, storage lockers fees, etc. Is it you, or the residents, because if you’re looking for a property where the residents pay for utilities and they decide not to, your plan might go wrong. If the utilities are there, the prices of rent will be a little higher as compared to if the residents are paying for them. This might be difficult because it is not listed anywhere. You will have to check with the fellow competitors about the same.

5. Property size and type

You also want to look at the unit type and size. This is big. What is meant by unit type is the floor plan – number of bedrooms and bathrooms, and also square footage, because a 900 square foot 2-bed 2-bath is going to have a different rent than a 1,200 foot 2-bed 2-bath unit. So, when you’re doing the rental comps, you actually want to determine the price per square unit of the competitors, and then use that to determine what the rents could be for your units based on that square footage, using the unit types that are alike. What’s also of the utmost importance is the interior upgrades, make sure that you’re looking at units that are going to be similar to your upgraded unit, and not the current unit, for obvious reasons. It might have been something you didn’t think about, but the units could be upgraded, so you want to know what similar upgraded units are going for on the market.

Then lastly you want to create a checklist of the amenities offered in the community. So, is there a fitness center, is there a sauna, certain ceiling heights, certain types of amenities in the units, things like that. So, create a checklist and make sure that those match up. And if not, then you’re going to need to adjust your rents based on that.

Also, some amenities matter more than others. You’ll just have to have some market knowledge and use some common sense. Is the pool the same thing as having laundry? Maybe, but is that the same thing as having a picnic table area? Probably not. So just talk to your local management company and get an idea from them.

Stay tuned for the next blog where we will be discussing the next five tips.