Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing Most Important Expenses When Underwriting an Apartment Building.
When underwriting an apartment building; there are many expenses that will make up the profit and loss statement; but what are the most important ones? In this episode, Charles discusses the expenses that he reviews first when underwriting a property.
Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing the most important expenses when underwriting an apartment building.
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Charles:
When you are reviewing an apartment, complex’s trailing 12 months of financials, also known as the T12. They’re gonna be possibly dozens of expense lines, all depending on the sellers accounting and bookkeeping practices, if they’re grouping together expenses or if they’re breaking them down.
Charles:
More specifically, first off, if you want to make sure that this T 12 is broken down by month before you start reviewing it, you don’t want to have annual numbers as lump sums for every line item. With all these expenses, there are however, five main expenses that I always review first, while also spending more time verifying their validity before moving forward. I utilize the same initial underwriting procedure if we’re planning on actively purchasing the property as a general partner or passively investing as a limited partner. As any investor in the position. Focusing initially on these five expenses will assist you in underwriting a property. Number one is property taxes. Look online at the tax assessor’s website and review the property’s card, review the value when it was last sold, et cetera. Would also call the tax assessor’s office. Do not give them the address of the property.
Charles:
Speak in generalities about the age, the potential sale price, the general area, the type of asset. After giving them this general information then you can find out what their formula is gonna be to calculate the new value and the new taxes after a sale. What vacancy rate do they use? The expense ratio, what source do they use for their rent numbers? What cap rate? And also confirm the military. In addition, I would speak to a tax consultant and have them determine what they believe the taxes to be one year after the sale as well. This is usually something the sellers broker should have already done, but if you haven’t accepted letter of intent, I’m going to want to verify that the underwriting is similar to what the tax consultant believes to be true. Number two is insurance. Insurance prices are skyrocketing. A review what the broker is giving you and ask for a copy of the quote, but you need to do your own research and pull additional quotes from other providers.
Charles:
This is important because if someone pulled the quote and it’s from 3, 4, 5 months ago, it might not be relevant and accurate anymore. Request the loss runs for the last five years. It shows any insurance claims, and use that for obtaining a new quote. Also, contact the current insurance and see what they would charge for a new policy. For a new owner on the property. I would probably use a number higher than the lowest quote as well, and make sure you have proper annual increases in insurance in your underwriting. The days of 3% annual insurance in increases are over. Lastly, make sure that the quotes and the policies have similar coverages. What we see all the time is properties being insured for under replacement value. Make sure you are getting a quote at the property’s actual replacement value. Number three, property management. Similar to insurance, I’m gonna get my own quote, but use the seller’s numbers as a guide.
Charles:
In addition, certain property managers will break their total management costs into many different line items. You need to review and combine all these to get an accurate number of what they’re actually paying. A broker might throw around a 4% fee, but when you dig in, it is really 5% or 6% when you account for all the extras. In addition, make sure your property manager, if you’ve not used them before, is giving you an accurate breakdown of their fees so you can correctly insert them into your underwriting. Number four is repairs and maintenance. When reviewing the T 12 of smaller properties, you regularly see property owners lump repairs. Maintenance make ready with larger capital expenses like roofs and porches. When you are underwriting the property, you want to separate capital expenses from repairs and maintenance. This will give you an honest overview of the property.
Charles:
You can now see how much money is being spent, maintained the property and how much money has been invested to improve the property over the last 12 months. Lower numbers might signal deferred maintenance at the property. Fifth is utilities. You will see in the sellers T 12, the utility bills for each month. Now I want to verify these numbers. Request the past 12 months of utility bills, water, electric trash, and verify the numbers match. You can also call the local utility company, or sometimes you can find wander super details online. If there are any discrepancies, you really need to be cautious with the rest of the underwriting and with the seller and with the sellers broker. So I hope you enjoyed. Please remember, rate, review, subscribe, submit comments and potential show topics at globalinvestorspodcast.com. Look forward to two more episodes next week. See you then.
Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.
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