Last two month we saw how we select our markets and sub-markets. This is last part of the series where we list all aspects of how we select our properties.
Note: The information is provided only for education purpose only. Don't make any purchasing/ investment decisions based on the blog or any content in this website. Please consult professionals in every area before proceeding.
1) Property Characteristics like Year of construction, Roofs (Pitched or Flat), Type of construction (Concrete Block or Brick or Wood Frame), Exterior Deferred Maintenance
2) Location/ Area Characteristics like School District Ratings, Crime in the area, Proximity to Major Retail, Vehicles per day (VPD), Single Family Home Prices nearby, Median Income in the census block, Demographics mix in the census block
3) Number of Units
4) Unit Mix
5) Number of Renovated vs Classic units and Rent Difference
6) Rent Roll, move-ins and Occupancy History
8) FEMA Flood Zone
9) Rental and Sales Comps
10) Ability to add/ update amenities
1) Property Characteristics
The first thing we get a deal in our desired market/ sub-market as per our previous 2 months blog posts to our desk, we look at the property characteristics.
What is the year of construction of the property? Is it in the 1960's or 70's or 80's or later is really important because of several reasons like 60's and 70's have higher maintenance costs, asbestos, wiring and plumbing issues because of materials used at that time.
Flat roofs have lower life expectancy than pitched roofs.
Is it concrete block or brick or wood frame construction. Concrete block will stay for really long time where as wood frame has lot of upkeep.
What is the exterior deferred maintenance on the property? As an operator you want to see if all external issues are fixed and go ahead and renovate the interiors of the property to increase rents to the market.
2) Location Characteristics
The next thing we see is the exact census block and see how the crime is, can median income support the rents you are planning to increase to, demographic mix, nearby single family home prices, school ratings, vehicles per day in nearby freeway/ street, proximity to major retails and some even do the Starbucks rule.
3) Number of Units
The number of units makes really important difference on how you want to operate the property. If its less than 80, you might not have ability to put onsite staff and you have to find a property manager who can operate without onsite staff. If its 80+ and preferably 160+ you have greater economies of scale to operate it efficiently and economically.
4) Unit Mix
The unit mix is crucial as you don't want to buy a property with 80% of 1-bed room units. Ideally you should see a even unit mix of 1, 2 and 3 (or even 4) bedroom units.
5) Number of renovated vs classic units and rent difference that is achieved
If higher number of units are already renovated, its a turnkey property and you have to rely on market rent growth or burning the loss-to-lease to increase value. Instead having lot of classic units with ability to increase rents to market will give you enough cushion to play the game effectively.
6) Rent Roll, Move-ins and Occupancy history
Analyze the rent roll diligently or outsource this to a financial due diligence company. Because of lot of the times when you see lot of move-ins in the last 2 to 3 months, there might be a chance that seller just filled in people with concessions and/ or even bad quality tenants to reach higher occupancy before selling. Historic occupancy will give you lot of insights of the property performance.
Utilities and how they are charged is key component in selecting/ future operations of the property. Is electricity directly paid by tenants? Is water/ sewer is directly paid or sub-metered or rubbed back (RUBS - Ratio based Utility Billing System) to tenants? Is RUBS already implemented or can be implemented? (Because RUBS is market/ sub-market driven and you cannot enforce it if everyone else is doing all-bills-paid system). Do they charge for trash or can you implement value-trash feature? Utilities is one of the biggest expense in operating a MultiFamily. You shouldn't dabble or take a wrong decision in underwriting a property in this aspect.
8) FEMA Flood Zone
Please take 10 seconds to go to FEMA website and put the address to see if the property is in flood zone or not. This will save you a lot of time/ money/ effort.
9) Rental and Sales comps
Analyze Rental comps using Costar, Rentometer, Zillow, Padmapper, Craigslist etc tools to make sure the current rents are below market.
Analyze Sales comps using Costar, Reonomy, Assessor websites to verify if you are buying in-line with sales happening around the area
10) Ability to add/ upgrade amenities
If you especially looking at workforce housing and renters by necessity, you have to make sure what amenities that you can add/ upgrade. Can you add washers/ dryers in each unit? Do you have space to add children play area, bar-b-q, dog park?
With Gen-X, WiFi area, co-working spaces, bike parking, gym and fitness center, game rooms, hangout spots, vending machines, laundry drop off, mailbox pickups etc are getting popular.
Hope you enjoyed our series. We will do a webinar and also a mini-course on these 3 parts.
Happy the 4th,
We at Zovest Capital, invest in value-add and new development of Apartments in growing markets to provide passive cash-flow to our investors.