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🔢 Underwriting Apartments

Modeling

The numbers matter. It takes about 1 day when starting out to model one apartment, now takes 1 hour.

💡 Price/unit for quick maths

Offering Memorandum

Not available for off-market deals.

Finding comparable properties sale and rent price in last 6 months

  • ☐ Median Rent
  • ☐ Median Sales/unit
  • If value add apartments,
    • Have the owners already started renovating, then use updated rental comparable
    • Use Rentometer/apartments.com for other apartments in the neighborhood with similar amenities/age

Debt

  • ☐ Interest rate. Stabilized 2-4%, bridge loans 4-6%, hard money 8%+
  • ☐ Floating (Libor) or fixed
  • ☐ Length
  • ☐ Amortization
  • ☐ How long is the loan?

Current Debt on Building

  • ☐ Assumable? Good if low interest rate
  • ☐ Prepayment Penalty?

Rent Roll

Who actually lives in your building and what are they paying. You're going to need rent roll in excel, be efficient at copying from PDF or Tabula. Use this to calculate possible rent.

💡 Double check that the building isn’t majority 1 bedrooms, you’ll have a much harder time hitting 90% occupancy since turnover will be much higher

  • ☐ Rent roll in excel
    • I use a thing called tabula for pdf to excel
    • Unit types
  • ☐ Number of units
  • ☐ Current rents & Market rents
    • Make sure remodeled units actually getting rent premium
    • Compare sold comps and then compare rent rates on apartments.com
  • ☐ Concessions
    • Model units
    • Free rent
    • Limit to 3%
  • ☐ Loss to Lease
    • Is it higher than 5%? Why
    • Usually a bit behind bc natural rent increases

T12

Financials on building over last 12 months. Use this to calculate possible expenses and figure out how the property operates under you

  • Ask property manager if numbers are even possible
  • Don't use former T12 for Stabilized Expenses
  • Usually keep 250/unit in reserves
  • ☐ Bad Debt
    • Uncollected revenue from tenants that moved out
    • Money owed on security deposit
    • If high bad tenant demographic, less than 5%
    • Recovered rent is added back under Other Income just as a standard
  • ☐ Vacancy Rate
    • Get average for a city, higher in rough neighborhoods
    • Usually 5% nationally
    • Anything more than 10% vacancy is sign of bad location or bad management and you won't be able to get stabilized loan for it
  • ☐ Other Income
    • Laundry, application fees, late fees
    • If high late fees, will drop when improving tenant base
    • Keep an eye out for large 1 time payments
  • ☐ RUBS (sometimes added to other income)
    • Utility bill back
    • Charge tenants portions of the rent back if not separately metered
    • Easier to do flat fee on small properties. We charge 45-55% in Jacksonville
  • ☐ Expenses Ratio (bulk of the work)
    • Usually around 50-55%, 65 is high
    • Fill out the dashboard with stabilized data
  • ☐ Rent Increases
    • Look up rent increases over the last few years
    • Conservatively: usually around 2% on average but not more than 4%, even if higher in the past
  • ☐ Rehab costs and timeline
    • Hard to calculate for the average person
    • Just make sure they have at least 10% contingency on repair budget
    • 10k for just interiors of each unit assuming it doesn't need any updates to mechanical/going behind the walls
  • ☐ Replacement Reserves
    • 200-450/unit/year and lender required. We paid 300/year because we had a 70s building
    • Drawn down for cap ex

Financing

How much money do I need?

  • Usually needs 35% of purchase price to close
  • Includes down payment, closing costs, reno, improvement and your fees
  • Cardinal Style Apartments will reduce your max LTV to 65% as of 2022.
  • ☐ Loan
  • IO, interest only months
  • Amortization months after IO, when you're paying principal too
  • Prepayment penalties, penalty index rate which is a percentage of total loan and defeasance service fee is cost to end the loan. Yield maintenance is based on income lost from interest earnings
  • LTV or LTC, Loan to value of purchase or Loan to cost of total project percentage you're borrowing
  • Financing Fees, .5%-1% for lender and same for mortgage brokers

Master lease will not let you refinance out

Purchase

  • Franchise/Transfer tax
    • Paid in TX for properties making more than 1.1M in revenue
    • Figure out for your area
  • Closing costs
    • 3% of purchase price generally
    • Reports/title/legal
    • Property tax and insurance escrows as closing costs
  • Cash reserves
    • usually smart to hold 2-3 months of reserves in cushion
  • Interest reserves.
    • For projects starting off with little or negative cashflow, input 150-200% of negative cashflows as an escrowed holding account.

Stabilization

  • How long will it take to stabilize?
    • 2 years for bigger buildings where you want to maintain high occupancy and cashflow
    • More aggressive if a large portion of the units are already empty

Sale

Exit cap rates

Disposition fee

  • Charged for selling property

Tips and Tricks

  • Conservative:
    • Reduce number of units you can renovate in time, like 4-6 vs 10. Essentially doubles the time it will take you to stabilize
  • RealtyMogul Founder conservative numbers
    • 10% contingency on cap ex and to expenses
    • Exit cap rate at least 1% higher than enter
    • Reduce number of units you can renovate in time, like 4-6 vs 10
      • Essentially doubles the time it will take you to stabilize
      • Increase vacancy and bad debt
  • Joe FairLess numbers (200 apts, B market, B property)
    • 2-3% rent growth on even places like Mesa

Numbers to watch out for

Capture Rate

  • Percentage of Qualified Households in PMA that property must capture to fill units
  • Total number of units/number of households

Absorption rate

  • Rate at which vacant prop is leased
  • Rate of sales of lots or units in a subdivision

Disposition value

  • Probable price to be sold at
  • Check quarterly from a broker

Penetration Rate

  • The penetration rate is defined as the percentage of Qualified Households in the PMA that the property and similar existing and proposed competing properties must capture to fill all units and achieve stabilized occupancy. Further, the capture rate is calculated by dividing the total number of units in the competitive inventory (including the subject property and current and proposed relevant competitive properties) by the total number of Qualified Households in the PMA.
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