March 7, 2019

JF1647: Apartment Financial Statements Part 6 | Syndication School

Final episode of the financial statements segment of the Syndication School series. Theo will be talking about more, you guessed it, financial documents. He’ll finish breaking down the OM today, and finish the episode with useful underwriting tips as it pertains to the entire financial statement series. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:



Free document for this episode:


Sponsored by Stessa – Maximize tax deductions on your rental properties. Get your free tax guide from Stessa, the essential tool for rental property owners.


Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to, or to learn more about the Apartment Syndication School, go to, so you can listen to all the previous episodes.


Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series –  a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks.

Each week we air two podcast episodes that make up a larger series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of the series we will be offering a document or a spreadsheet or some sort of resource for you to download for free. All these documents, as well as past and future Syndication School series can be found at

This episode is going to be part six of a six-part series, so we’re going to conclude the breaking down of the apartment financials series. If you haven’t so already, I recommend listening to part one through four. In part one and two we broke down the rent roll; in part three and four we broke down the T-12. And then of course, you’re gonna have to listen to part five in order to understand what we’re talking about today, because the first podcast we broke down the offering memorandum (OM), and we’re gonna finish up breaking down the OM today, as well as discuss a few things that you want to look for when specifically you are underwriting the deal.

We already discussed what to do when you’re screening deals, but we’re going to conclude by discussing “Okay, so here’s what the OM is. What’s relevant to me when I’m actually underwriting the deal?”

So in part five, the first episode about the offering memorandum, we went ahead and went over the executive summary, we went over the location analysis, as well as the property description. As I mentioned in that episode and I’ll mention again here, whenever you’re underwriting a deal, what you wanna do is you wanna read through the offering memorandum first, but you only wanna read up to the point where it starts to discuss financial information. That’s either the actual financial analysis where they go over “Here’s what the proforma is going to be” (which is the case for this OM) if it’s hard discussing the rent comps… Because you don’t want that information to affect how you underwrite the deal, because again, that information is likely to be biased and is based off of what the broker thinks, and what the broker thinks doesn’t necessarily matter when you’re underwriting the deal. What’s more important is how you and your team think the property is going to operate. But as I mentioned at the end of the episode, there is some useful information in the financial analysis, so you wanna look at that after you’ve done your own financial analysis.

Before we get to the financial analysis, in this particular OM the rent comps actually come first. Then we’re gonna go over the financial analysis, and then we’re gonna quickly go back to the OM and explain what information is relevant to you when you’re underwriting the deal. So if you don’t know what a rent comparable analysis is, essentially it is when you find comparable/similar/like properties in the area, within a few miles of the subject property, the property you’re looking at. When I say that they’re comparable, that means that the comparable property needs to be similar to what the finished product is going to look like. You don’t wanna find a property that’s similar to how the property is now, you wanna know “Okay, so I plan on doing A, B, C, D to my property, so let’s find a property that’s within a few miles of my property that has already had A, B, C and D done to it.”

Now the rental comparable analysis will be included in the offering memorandum, of course, because we’re going over that today, and people have different philosophies on how to approach the rent comps, but what we do is typically we will use the rent comps that were provided by the broker, but rather than use the actual rents and unit rent information provided by the broker, we will seek out that information ourselves.

So we’ll say “Okay, for this particular property there are eleven different rent comps listed”, so we would just look at the names, we’d look over their addresses, determine how many units they are, what unit types they have, what’s the quality of the interiors, what amenities are offered at the property, to make sure that they actually are comparable, and if the unit interiors and the amenities offered are similar to the unit interiors and exteriors of our finished product, then we will find the rent information, and use that to create our own rental premiums.

Essentially, that’s what the outcome of the rent comp analysis is – determine “Okay, right now [unintelligible [00:07:20].10] for $500/month, and I plan on spending 5k and doing granite countertops, and fancy appliances, and whatever it happens to be… How much rent can I demand for that new unit?” That’s what the rental comp analysis is for – I find properties within a few miles, that have those stainless steel appliances, granite countertops, and maybe the same state of the art fitness center and resort style pool that my property has, and then I will determine what  their rent per square foot is, and then based on the square footage in my units, I can say “Okay, I’m gonna get the same rent per square foot as them, so here’s my new rent.” That’s one way.

Another way to determine what the rent premiums are going to be are based on proven rental premiums from the current owner. If you remember, or if hopefully you’ve listened to yesterday’s episode when I was going over the executive summary, it explained that the current owner had already renovated 200 units, spent about $2,000/unit and was getting a $110 rental premium. So as long as I confirm that to be true on the rent roll and the T-12, and actually visiting the property and seeing “Okay, these 200 units were actually renovated”, then as long as those renovations were done within the past couple years, then I can say “Okay, well if I do $2,000 worth of renovations, then I too will get $110 premium.”

Now, for this particular deal, if we were to buy it we would go above and beyond the renovations that they did. Maybe [unintelligible [00:08:45].07] so we’d have to spend $2,000 on the remaining units that weren’t renovated, and then an extra $2,200 on all units to get to our new, higher-quality unit. And since we’re not doing exactly what the owner did, then we’d have to do our own rent comp analysis, because $2,200 worth of renovations will demand a $110 premium, but doing $5,000 will demand more than $110, so we need to know exactly why.

I guess I went over what you wanna do when you’re looking at underwriting for this section, but I do wanna go back over the previous sections and do the same exercise that we just performed.

Going back to the OM, if you go to page 25 (not page 25 of the actual PDF, but page 25 of the OM), you’ll see the first page that discusses rent comps, and what you’ll see is a map that has the 11 rent comps labeled plus the subject properties. So you’ll see subject property number 11, and then “Here’s all the rental comps.”  Two of them seem like they’re right next door, two are about a block away, and then the remaining are pretty far away from the actual subject property. It looks like five of them are close enough, but two of them seem like they’re kind of far away, so I would question whether or not I would wanna use those as my rent comps. One of them is by a lake, and the other one is at the intersection of two major highways, whereas the subject property is kind of dead-set in the middle of a triangle of highways. I’m sure if I visited these properties in person, they would kind of have a slightly different feel to them location-wise, especially the one that has a lake right in its backyard. So I probably wouldn’t use that lake one, just based on looking at this map. But I would still investigate further; I wouldn’t just look at this map.

On the next page it has a data table with all of the 11 rental comps, plus the subject property. In here it has some more information about those properties. For each of these 12 properties we’ve got the year that it was built. That’s gonna be important, because  a property that was built in 1980 is not going to be a rent comp for a property that was built in 2000. And a property that was built in 2000 might not be a rent comp for a property that was built in 2010 or 2015. So if you look at this particular deal, this deal was built in 2002, and some of the rent comps are in the 2000’s – 2004, 2007, 2008, 2008, 2007… But then you’ve got ones that are actually a lot newer. You’ve got a couple of 2016, 2015… So again, that right there is something that I would make a note of in my mind (or if someone else would write it down), and I would want to make sure that I would look at the properties that were built in the late 2010’s to see “Okay, are these a higher quality than my subject property? Will I be able to take a 2002 property and make it look like a 2016 property?” Because if not, I’m not gonna use a 2016 property as a rental comp; I would use a 2002 property that was recently renovated instead.

Next we’ve got total number of units. That’s also gonna be important, especially if you’re looking at smaller multifamilies. If you’re looking at, let’s say, a 50-unit, then you’re probably not gonna want to use a 400-unit building as a rental comp, because your 50-unit property is not gonna have the same clubhouse, the same pool, the same amenities as a 400-unit building.

This particular unit is 250 units, and all the rent comps are between 150 to 450. So at the 450 one – I might wanna look at that and be like “Okay, do they have multiple pools, multiple fitness centers, multiple amenities that would allow them to demand a little bit higher rent than mine, and make the adjustment?”

Next we’ve got average square footage, and the reason why that’s important is because when you’re doing a rental comp analysis to compare like properties you need to find the dollar per square foot. So once it lists out the average square footage, it will give you a market and effective rent. Market rent is what the unit should be renting for based on comparables, and the effective rent is what they’re actually getting. For each of those there’s a rent per square foot.

The subject property here ranks 11th when it comes to the rent per square foot for the effective rent. So the current rent, on a per-square-foot basis, is the second lowest.

And then it will have occupancy. What’s weird about this one is the number one property has a 25% occupancy rate, so that’s kind of weird that that was included on here, but the rest of them are all 90% or higher.

Next it goes in even more details. Before it had just kind of the overall average market rent and the overall average effective rent, overall market rent per square foot, overall effective rent per square foot… Next it’s gonna break it down by unit basis, which is going to be more important to you. You’re gonna wanna do your rent comp on a unit by unit basis, not an overall basis. So you’re not gonna say “Oh, currently my property is at a rent per square foot of $1,24, and the average rent comp is $1,39, so every single unit is going to be $1,39.” It’s not necessarily the case, because in some locations a certain floor plan type is going to rent for more.

It looks like for this case the floor plan with the highest rent per square foot is going to be the one bed/one bath. So it’s got a breakdown of all those 11 rent comps plus the subject property, and it has a unit type, so one bed/one bath is one data table, two bed/one bath is one data table, the other two bed/two bath is another data table, and the three bed/two bath is another data table, so there’s a total of four data tables… And it lists out number of units for each of those unit types, square footage and the rent, and then it gives you a rent per square foot for each of those, and at the bottom of each data table is going to be an average rent per square foot. That’s what you’re gonna wanna use.

So for the one bed/one bath I would assume that I would be able to get $1,31 per square foot. For the two bed/two bath $1,24 per square foot, and so on and so forth. So I use those numbers, multiply them by the square footage of the four different unit types, and then that’s what my new rent is going to be after I implement my value-add business plan.

Then the next part of the rental comp analysis is going to be essentially what the rent comps by floor plan data tables were based off of. So it’s gonna take each of the 11 properties and it’s going to give you a data table that has a breakdown of all the different unit types, the number of those units, the square footage, and then again, the average market and effective rents, as well as average market and effective rents per square foot for each of those properties. Then it’ll give you an average of all of them at the end.

So the page that’s gonna be most important to you is going to be the rent comps by floor plan, page 27, but again, you’re gonna wanna do what they did yourself. So you’re gonna wanna create these four data tables yourself and pull their rental information yourself, and confirm that all 11 of those properties are indeed rental comps. The ones that aren’t – remove them, and add the ones that you found through your investigations.

Sometimes your rental comp analysis is going to be exactly like theirs, whereas other times it isn’t. Maybe they made the OM a few months before listing the deal and the rents have changed in the area. Or maybe an inputting mistake, or maybe they’re just trying to pull a fast one on you, or maybe it was something else. You don’t really know, which is why you always want to trust, but confirm.

So again, you want to either create your own list of  properties, or you can start with a list provided by the broker, step one. Step two is to go to each of those individual properties either websites, or website listing, and essentially make an amenities checklist, which we’ll go over in the underwriting, and write out all the interior amenities and all the exterior amenities, and make sure that those are similar. It doesn’t have to be the exact same. One property has 1,000 foot pool and another property has a 2,000 square foot pool, you can still use it as a comp; there just has to be a pool there. So once you have confirmed that, then you wanna go and find the actual rental information and unit count information yourself.

The last section in this OM is going to be the financial analysis. The financial analysis is going to basically be the broker’s opinion on the projected financials, the projected income and expenses of the property once someone takes it over. So again, this is something that you don’t wanna look at until you’ve actually done it yourself, but it is good to see what the broker actually thinks it’s going to happen, compared to yours; and then any differences, you’re gonna ask the broker and say “Hey, I saw that you said that the year one vacancy is going to be 5%, but I’m getting 10%. What’s your justification for making it 5%? My justification is that the average occupancy in the market has been 90% for the past ten years, so I’m assuming a 10% occupancy. Why are you assuming 5%?” It’s an example; I completely made that example up, but that’s something that could happen, and if you don’t look at the financials ever, then you’re not gonna be able to ask those questions. And if you look at the financials first, then you might just assume that they’re right and then you’ll have no questions because you have exactly what they have.

So for this particular OM, the first page kind of summarizes the investment. A lot of stuff in the OM you’ll realize is a repeat; so again, it’s got the date and year of construction, number of units, rentable square feet, average unit size, occupancy, market rent and rent per square foot.

Next it kind of summarizes, “Okay, so based on our underwriting, year one – here’s what your gross income is going to be. Here’s what your operating expenses are going to be. After your reserves, here’s what your net operating income should be.” And then it also has some tax information, so how they are calculating their proforma tax rate, and then it has this particular one, kind of an income trend. It’s showing you “Hey, if you look at the T-6, compared to the T-3, compared to the T-1, income has been going up in a one-to-one relationship. Again, they might just pull random data points like that. Maybe instead of total income trend it’s vacancy, or maybe it’s rent, or maybe it’s something else that is trending good.

Then right here at the bottom left of this investment summary page it says that “We are basing all of our assumptions on someone coming in there and renovating the remaining units at the same cost as the owner, and getting the same rental increase that the owner received… As well as we think that if you put in new appliances, washers and dryers in certain units, and it’ll cost you $3,000 and you should be able to get an extra $75 in increases.”

On the next page it is comparing the T-12 to their proforma. As you will see, this will be pretty familiar to you, because you’ve already looked at the actual T-12… But on here it will have the Trailing-12 month information for gross rent, and the vacancy, the concessions, other income, all the different expenses… Essentially, everything we went over in the T-12 interview. On this particular one it says “Here’s what it was like for the last 12 months, but look, for the past six months it’s been getting better. And for the past three months it’s been even better, and for the past one month this is an amazing deal now!”

Then they’ll compare that to the proforma. They’ll have essentially their year one, their stabilized proforma, so what’s it’s gonna be like once that property is stabilized; same information, so all the income and expense line items that we went over in the T-12, and it will break it down for the year, on a monthly basis, on a per-unit basis and on a per-square-foot basis. For the expenses, it will give you a percentage of the gross income.

Now, what’s interesting is that on the page where they discuss either a comparison of the historicals of the proforma or just the proforma, then they’re going to have a list of their assumptions for the proforma. I just think it’s interesting to read through those and compare their assumptions to my assumptions. For this particular deal they say that, for example, market rents are growing 5% in year one, 4% in year two, and 3.5% in year three. So for me, for every deal I typically assume only a 3% annual increase, but they might be including the rental premiums here as well. So they’re saying that “Okay, you’re gonna implement your value-add business plan and you’re gonna have the biggest increase in year one, but then you’re gonna do a little bit less in year two, and then it’ll go back to that 3% in year three.”

Something else, they say that the gained loss-to-lease is going to be 1% each year, but if I go ahead and look at their historicals, it looks like it is pretty similar to what they did before, so that’s a good note.

Another example – on-site payroll was $1,200/unit, right on board with our assumptions. They say that the bad debt is going to be 0.3%. So I’d look at their bad debt and be like, “Okay, well you’re saying there’s gonna be $11,000 in year one, but no matter what combination of Trailing 12/6/3/1 they look at, it’s between 50k and 85k. So I would probably set it closer to those numbers, just because that’s what it’s currently operating at… And then I hope that I can burn that off, but I don’t want to assume that I can just automatically burn that off because the broker told me I can burn it off. That’s an example of a question I would ask the actual broker.

Essentially, what you wanna do is read through all of their proforma notes, their proforma assumptions, and then compare them to your assumptions and see “Okay, why are you making that assumption, when I’m making this other assumption myself?”

On the next page it has a 10-year cashflow. On the page before it just says “Hey, here’s what it’s gonna be like in year one.” Now they’re saying, “Hey, here’s what it’s gonna be like every year for the next ten years”, and they’ll also include whatever their growth assumptions are. For this particular case, as they said before, 5%, 4%, 3.5% for the market rent growth, and then market rent growth by 3% each year thereafter.

Loss to lease is gonna be 1% forever, they say. Vacancy is gonna be 5% forever, they say. Other income growth is gonna be 3% each year, and then based off of that they can pain an overall picture of what the net operating income is going to be each year for the next ten years, or five years, or seven years… It kind of just varies.

So that’s kind of like their proforma, and then they’re gonna go over what they’re basing it all on. You’ll see here they’ve got another unit mix data table, with all the unit types, and what the annual market rent is, and then what’s the monthly rent, and then based on their most current rent roll and the rent per square foot. Then another data table that shows “Hey, as you go up in unit size and number of beds/baths here’s how much more rent we get.” Then they also have a pie chart that shows a breakdown of the actual unit mix. It looks like they have half two-bedrooms, and then about a fifth three-bedrooms, and then the rest are gonna be one-bedroom units. Essentially, this is a snapshot of the most current rent roll, as it states on there.

For this particular deal, that’s all they have on here. We’ve got the investment summary page, where it says “Hey, here’s what your year one income is going to be.” They’ve got their comparison of the T-12’s, T-6’s, T-3’s, T-1’s to their proforma and what assumptions they made. Then the have the 10-year cashflow, same thing, comparing the T-3 in this case to year one through year ten. Then for some reason they decided to give a current snapshot of the rent roll.

Now, in some cases there might be a lot more information in this section. They might include information on debt, what type of debt they expect on the property, an insurance quote that they got, maybe they might have a data table of the cap-ex breakdown… So it really depends, but overall, the information that you’re gonna need from the OM, as I mentioned, is 1) look at the rent comps and see what they’re using and confirm that they’re correct, and after that essentially you’re gonna wanna compare all the information they have in their OM to your information.

You’ve already done your location analysis, so does their location information line up with yours? Did they include information that maybe you didn’t know about? Maybe there’s a certain school that was listed on some sort of top ten list that you didn’t know about, and that’s great information that you can include when making your investment summary.

For the actual property description you wanna use that information in order to kind of screen it against your investment criteria, see if the deal makes sense. For example, for me in Tampa it’s not good to have properties that don’t have a concrete slab construction. So I’ll look at the property description, and if it says that the foundation is made of wood, then I will automatically disqualify that deal from contention.

The property description stuff can also give you an idea of the different amenities at the property, maybe amenities that you add, or maybe different fees you can charge for certain amenities. Then for the financial analysis section, besides the rent comps, you’re just gonna wanna kind of after you’ve filled out your cashflow calculator, compare their proforma to your proforma, and then any discrepancies you identify, you wanna go ahead and ask that listing broker “Hey, why are you making this assumption? I’m making this assumption because of a, b, c and d. Am I missing something? Is there something you can shed a light on, so I know that I’m making the correct assumption?”

Then you also wanna run all of this stuff by your management company to confirm all of your underwriting, which again, we’ll talk about either in the next series… Or it might not actually be the next series. We’re gonna dive into everyone’s favorite topic, which is underwriting. So in the next series or the series after we’ll go over that, and we’ll reference these T-12’s and rent rolls and offering memorandums.

The point of this series – I just wanted to introduce you to those three different documents, so that the underwriting series wasn’t gonna be 20 parts long. This six-part series was based on breaking down those financials, and all this information you’ve learned in this series, as well as all of the previous series too, will be used during the underwriting series.

Until then, I recommend listening to parts one through five, as well as downloading the T-12, downloading the rent roll and downloading the offering memorandum and reading through it, maybe relistening to the episodes with the document in front of you, so you kind of grasp it… Because you’re gonna need that information when we underwrite deals.

So listen to those episodes, download your documents, and listen to other series at Download our other free documents there as well… And again, I appreciate you guys listening, and I will talk to you tomorrow on Follow Along Friday.

    Get More CRE Investing Tips Right to Your Inbox

    Get exclusive commercial real estate investing tips from industry experts, tailored for you CRE news, the latest videos, and more - right to your inbox weekly.