SS48: What Investors Should Be Looking For When Assessing a Property

Charles discusses what he looks for when initially reviewing a property.

Watch The Episode Here:

Listen To The Podcast Here:

Talking Points:

Initial observations
- Bones of the property – How good are the items you cannot fix or cannot afford to fix; type of roofs, what year was the property built, the structure itself, cracks in stucco or foundations, ceiling patches, and painting, really focusing on the structure, plumbing,
  - Upgrading units, increasing rent, replacing parking lots, roofs, mechanicals, and exterior painting do not but need to be done
  - Has it been maintained? If not, most likely more deferred maintained than the eye can see that you will not realize until DD
- Location
  - Transportation options
  - Where are jobs located
  - Residential area or commercial or industrial area – residential area while being close to commercial
  - How long does it take for tenants to go to; grocery stores, coffee, restaurants, bars, etc? Walkability?
- The story behind the property
- What is the business plan (are we able to add value)?
  - How dated are the units?
  - What do the nearby comps look like and what are they renting for?
  - What are other units offering? What are they charging for those offerings? What is the payback? i.e., a $600 washer/dryer combo adds $50+ per month in rent. 12-month payback
  - You want to maximize the value-add but not over-renovate.
    - e., Neighboring properties have 95%+ occupancy at $1200 for a 2/2 and the subject property is at $1000; for $5000 per unit, you can reach or slightly exceed $1200 in rents; payback timeframe is about 2 years;
    - what happens if you put $7,500+ into the property and it will not warrant more than $1200; you would be over-renovating at $7,500 per unit.
    - Find the perfect renovation amount that will permit the highest rent and the fastest payback on your CAPEX investment
    - Think the same way for amenities on larger complexes
    - Make sure you are comparing apples-to-apples properties

What is the replacement value of the property?

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what investors should be looking for when assessing a property. So one of the things I first look as my initial observations is looking at the bones of the property. So how good are the items you cannot fix or cannot afford to fix? So type of roofs, what type of you know, what year was the property built in the structure itself when you’re reviewing it as there are there cracks in stucco, the foundations you see, in, in sea class, we’ll see a lot of ceiling patches and there’s not really a great way of patching and painting a ceiling without people knowing about it, unless you do the whole ceiling over, which is rarely done by handymen, when there’s a leak you know, you’re really focusing on the structure and the plumbing and you’re making sure there’s really not water intrusion.

Charles:
There’s not gonna be anything that’s like major. Because if the bones of the property are good, then you can really focus on upgrading the interiors of the property, where you’re gonna be able to increase rent when you’re upgrading units, you’re increasing the rent, right? Replacing parking lots, roofs, mechanicals, exterior painting does not raise rent, but it needs to be done. If these are already done, when you’re buying a property, you can then work on how you’re gonna upgrade the units, amenities other things that are gonna actually increase the rent for the tenant. So how has it been maintained? You know, is there a lot of deferred maintenance than the I can see, and you’re not gonna realize a lot of this until the due diligence is done, but if they’ve cut corners other ways on the property, you can imagine there’s gonna be a lot of deferred maintenance that you haven’t found yet, that it’s waiting for you during your inspection location.

Charles:
What type of transportation options are around? Are there jobs located where your tenants would be working at nearby? Is it a residential area or commercial area or industrial area? You know, a residential area while being close to commercial is probably one of the best bets. So someone’s in a residential area, but they’re easily able to drive or walk to different co commercial establishments. How long does it take for tenants to go to grocery stores? Grab a cup of coffee, restaurants, bars. I mean, what’s the walkability score there. And is that gonna be, I mean, how important that is to your tenants, you know, with new millennials, rental renting it’s very important. It might not be, I is important if you’re dealing with a older an older client base and older tenant base. So what’s the story behind the property.

Charles:
This is very important and brokers always a good broker will always explain this to you because it’s, and, and a lot of, I think newbie investors don’t really care and they wanna look at numbers and they want to look at rents and all that stuff is area very important, but the story behind the property is very important as well. You know, you want to be buying a property that the person has owned for a while. It’s like a perfect story someone’s owned for the while. They haven’t done much work to the property other than regular maintenance to the property, but they haven’t really done renovation to the property. They haven’t really pushed rents. Their rents are under market. They just haven’t been running it like a business. They’ve been running it more like a bank account, which is what traditional mom and pops and owners that are of old, for a own, for a while.

Charles:
Kind of do they don’t really push and get aggressive with the market as syndicators when they’re trying to make returns, cuz there’s usually no other limited partners and it’s just them. What is the business plan? You know, are we able to add value? So with any type of property that you’re buying know exactly what your strategy is and what your business plan would be make sure that the business plan is something that’s gonna be conducive to the neighborhood and to the rental comps that you’re finding in that area. If you’re house hacking, it doesn’t really matter about the value at per se. I mean, you might want to do some work to it. You can raise rents here, there. The main thing for you you’re penciling out is can I, I live in one unit for next to nothing, right? And that’s how you’re doing it.

Charles:
It’s gonna be a different business plan for someone that’s coming in and buying that property for a strictly investment property. So with the business plan, you know, how dated are the units, this is where you can add actual money and increase rents. You know, that’s where you put the money in and you’re gonna get it back in 1, 2, 2 years, maybe three years within four years. So they’re great returns when you’re putting money into the units, what do the nearby comps look like and what are they renting for? Okay. So when you’re building out your business plan, you know what they are, what are other units offering? You know, what are they charging for? And then what is the payback like we’re talking before, usually when you put money into apartment you know, we wanna raise the NOI so we can raise the value of the property, but we also wanna look at the payback.

Charles:
You know, if you’re putting $4,000 into a unit and you’re gonna be raising rents by a hundred dollars a month you know, you know, that that payback is gonna be there just over three years. If you’re putting a washer and dryer combo into a unit and it’s $600 for that combo and it adds $50 per month, I mean, it’s a 12 month payback. It’s a fantastic return on an investment. So these are all things that you want to look into and be aware of and put into your business plan. If it, if it works out, knowing that comps is that do people have wash and dryer comp are people getting $50 a month? You know, maybe they’re getting a lot less than that. Maybe they’re getting a lot more for it. So it’s, it’s good to know what is being included and comparable complexes within as close as possible to your unit, but you know, usually within like a mile of it and really less than that, the closer, the better is that’s when, you know, it’s the most realistic it’s it’s the most accurate you wanna maximize the value add, but you don’t wanna over over renovate.

Charles:
So neighboring properties have, for example, let’s say 95% occupancy plus at $1,200 for a two two, and this subject property is at a thousand dollars. So for $5,000 unit, you can reach slightly exceed the $1,200 in rents. Your payback timeframe is about two years now, what happens if you put $7,500 into the property, but it will not warrant. You know, it’s not gonna warrant more than 12. Well, you’re over renovating that property at the $7,500 per unit. So this is really important when you have a property manager and that you’re looking at and you know, your comps. So you can pass this by your property manager and go, listen, do you think I can achieve this rent with this type of finishes in there? And if they say yes, if they say no they’ll know if you find a good property manager, that’s in your area, they’ll know exactly what you can achieve rent wise and what the finishes have to be at.

Charles:
They’re also gonna know, Hey, you know, take into consideration. You might not be thinking that that property has this yours doesn’t okay. So now you have to take that into consideration yourself during your underwriting and during, when you’re putting together a business plan, cuz there’s some things you don’t wanna get into major changes. It’s not gonna push rent. Now, of course, if you’re getting into a property and it requires roofs or mechanicals to be changed or fixed or anything like this replaced you’re gonna have to put that into your budget, but just know there’s no money that’s there. You’re not, you’re not gonna charge someone more money because their AC works right. Or because their roof doesn’t leak or their bathroom doesn’t leak. These are just normal things that have to have to work correctly. So find the perfect renovation amount.

Charles:
That’ll permit the highest rent in the fastest payback on your CapEx investment. I think the same way for amenities on larger complexes. So I’m gonna do over a fitness center. I’m gonna change. They have this huge office, I’m gonna change part of the office into a fitness center. I’m gonna put we have extra land, we’re gonna put a dog park in. We’re gonna renovate the pool area. You know, what’s going to, what are the com your competitors doing? It’s very simple. You know, you’re gonna go, you can mystery shop your competitors, know exactly a square or footage know exactly. Know exactly the the amenities know exactly the finishes and not just in the units. That’s what you’re gonna see on like apartments.com and stuff. What the finishes are. You have to actually walk it because you might say, you know what, this is a much nicer common area.

Charles:
These hallways are much nicer. You know, they don’t have pictures of that. Let’s just say on on, on the website that thing you have to welcome and you have to get the feeling for, cause that’s what your tenants are gonna do. They’re gonna do the same thing. You have to make sure you’re comparing the apples to apples on properties. The last thing I like to know too is, especially when we’re in an inflationary area, like now time, what is the replacement value of the property, right? If I was gonna build this property today to this standard, what would it cost? And obviously if you’re buying below that there’s gonna be some sort of opportunity in most markets. And cuz if it’s gonna cost a lot more than what you’re buying it for, it’s gonna be something where you know, that clientele that you’re renting to probably can’t afford the new product. And you also are putting a moat around your property because obviously you can’t build that same property for what you’re buying it for. So I hope you enjoyed please remember to rate, review, subscribe, submit comments, and potential show topics at global investors, podcast.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.