March 13, 2019

JF1653: How To Underwrite A Value-add Apartment Deal Part 1 of 8 | Syndication School with Theo Hicks


Theo has covered a ton of details so far for apartment syndication deals. Today we’ll start learning about the actual underwriting process. Steps 1, 2, and 3 (of 7) are covered today, with more to follow! PLUS we’re including a free simplified cash flow calculator for you to practice your underwriting with, can be used along with these episodes to follow along. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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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.

As you all know, each week we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy, and for the majority of these series we will be offering some sort of document or spreadsheet or resource for you to download for free, that accompanies the series. All these free documents, as well as past Syndication School series can be found at

This episode is going to be part one of probably a six-part series entitled “How to underwrite a value-add apartment deal.” By the end of this particular episode you will learn what you need in order to underwrite an apartment deal. We’re gonna quickly summarize the overall process, and then we’re going to start discussing the process by going over steps one through three of the seven-step process that we use to underwrite our value-add apartment deals.

The majority of the things that I say will apply to any size apartment deal – a five-unit up to a thousand-unit or even more units. But whenever I reference a number or a percentage that is common, I’m referring to an apartment deal that is over 200 units, is a value-add deal that’s a class B property, in a class B market. So if you’re not a value-add investor or if you’re focusing on class D or class A properties, the numbers and percentages that I mention will be a little bit different for you. But regardless of which investment strategy or type of property you invest in, this series is going to be an introduction to underwriting, and can be helpful to you regardless.

Let’s jump right in… So what do you need in order to underwrite a deal? Well, in the last series, series 13, I believe, we broke down the three documents that you need in order to underwrite the deal. First would be the T-12, so that’s the profit & loss statement, which is an itemized report of all of the income and expenses at the property. For the T-12 you want to make sure that it is as recent as possible.

When you are looking through deals, the most common T-12 you’re gonna find is the one that’s up to the most recent month. So if you’re looking at a deal in March, then ideally that T-12 leads up to at least January… Because sometimes companies are a little bit behind, and it takes a few weeks to record the data from the previous month. So if you’re looking at a deal in March, the earliest you’d wanna see is it ending in January or December of that previous year. Sometimes they might provide a T-12 for the previous calendar year; so I might be looking at a deal in July of 2019, and the T-12 they provide is just for 2018. That’s helpful, but you’re missing the last six months, and if I was looking at a deal in January 2019 and the T-12 was up to December 2018, then I would wanna get my hands on those six months, because that would indicate to me that not necessarily they’re hiding something, but that something happened in the previous six months that they don’t want you to see.

Next is the rent roll, which we also went over in the last series. For the rent roll, you also want that to be as current as possible. Ideally, the rent roll is from the previous month. If I’m looking at a deal in March, then I wanna see a rent roll that was pulled in February. Again, if I’m looking at a deal in March and the rent roll is from September the previous year, then that would be concerning for me, because it’s not going to be an accurate snapshot of how the property is currently operating… And that’s what we’re using a rent roll for, to figure out how the property is currently operating, so that we can make some assumptions of how we’ll be able to operate it once we take over, and what areas on the rent roll, the T-12, that we’ll need to fix. So those are the first two things you need.

The third thing is for an on market deal only, and that is the offering memorandum. That was the third document that we went over in the previous series. The offering memorandum is that sales package that the broker puts together; it may be biased, but there is still some helpful information in there that can guide you through this process of underwriting.

And of course, the fourth thing that you need is going to be some sort of financial model in order to input all of your data into in order to underwrite the deal properly. Unlike fix and flips or single-family rentals where you can use the 70% rule or the 1% or the 50% rule, for apartments that’s not going to work. They’re too complicated and too complex to do a back of the napkin analysis. You’re going to need to have some sort of financial model that you use. It could be simple, it could be super-complex – it’s really up to you, but you’re gonna need some sort of model… Especially since you’re raising money from other people, they’re gonna want to know what assumptions you made, and they’ll want to ask questions about your underwriting process. If your answer was “Well, I [unintelligible [00:08:09].27] my gut” or “I just did some numbers on the calculator on my iPhone”, that’s not going to give them much confidence in investing in your deal.

So there’s a few ways to create or to get a financial model. Number one – I think this is the best way – is to actually create it from scratch. If you have some Excel experience, you know how to do formulas, basically — and if you know how to do formulas, you can look up the rest in order to create a cashflow calculator. That’s the best way to do it, because you will know your model inside and out, and it’ll help you troubleshoot it if there’s any errors, it will help you communicate the results of your model and what’s going on in that model to other people… And just overall, what you’ll learn about the underwriting process just by creating your financial model will be invaluable to you.

Now, you’re likely not going to be able to just create one from scratch if you’ve never even seen an apartment cashflow calculator before, so the other option, on the other end of the spectrum, is to purchase a model from someone. There’s lots of syndicators out there that will sell you their financial model for some sort of fee, or if you join an apartment syndicator’s mentorship or client program, then they will have a cashflow calculator provided for you. That’s still a really good way to get a model. It’s probably second best to actually creating your own from scratch, but again, creating your own from scratch is gonna take some skill and experience… So what is best is either to get your hands on a model, no matter how complex or simple it is, and start working with that, and then over time, as you begin to understand that model, you can tweak it, customize it, so that it fits your particular need and where you’re at Excel-wise.

Now, since this is Syndication School and we give away lots of free stuff, the free resource for this series is going to be a simplified cashflow calculator. This calculator definitely allows for some flexibility, but there’s some things that it will not allow you to do, and if you want to change it, you’ll have to do it manually. So go to, or the show notes of this show, and download the simplified cashflow calculator. As I mentioned, I would start with that, and practice underwriting deals with that to get an understanding of how the inputs work, how the formulas work, what the various data tables are the various outputs are, and then from there you can add extra tabs, or you can input more detailed data and add some formulas in order to make it as flexible as possible for you. But if you need a model, the simplified cashflow calculator can be used to fully underwrite an apartment deal, and it can be used in tandem with this seven-step underwriting process that we are going to go over in this series.

So the overall process for underwriting a deal that we’re gonna go over, the seven-step process, is first you’re going to read through the offering memorandum. Step two is you’re going to input data from the rent roll into your model. Three, you’re going to input data from the T-12 into your model. Step four is you’re going to set your underwriting assumptions for how you will operate that property after taking it over, as well as some acquisition assumptions as well. Step five is to determine an offer price – set an offer price based on the previous four steps and inputting all that data into your model. Step six is to perform a rental comp analysis in order to confirm or determine what the rental premiums are going to be. So depending on the deal, you might do the rent comps before determining an offer price, but typically, when you’re looking at value-add deals sometimes there will be some sort of value-add program that was implemented or initiated by the current owner, and depending on that process, you can use their proven rental premiums as your rental premiums. In that case, you can set your offer price and then you can confirm those rental premiums by performing a rent comp analysis.

Then step seven is going to be to visit the property in person to confirm or adjust some of the underwriting assumptions that you’ve made, that you kind of just put a placeholder in your model until you can actually get out to the property and see its condition, see the surrounding market and see the comps, and things like that.

As I mentioned, in this episode we’re gonna focus on those first three steps. That’s going to be reading through the OM, and then that is going to be inputting the rent roll and the T-12 information into the cashflow calculator. Now, before we go into that, just a few things about the actual assumptions that you’re going to be inputting, which again, we’re not gonna go over until the next episode, but I did want to kind of introduce those and discuss some things to look at.

So your assumptions are gonna be based on how the property will operate once you take over, and those are gonna be based on how the property is currently operating, as well as market information you’ve obtained from your management company, the broker, mortgage broker, a vendor that you’re working with etc. It needs to be a combination of those two things. It can’t be just based on how the property is currently operating, and it can’t just be based on your research. You need to say “Okay, the property is operating like this currently. Here’s what I plan on doing to the property, and once that’s done, here’s what the property will look like after all of those renovations and operational improvements are implemented.”

When you’re going through the underwriting process and you get hung up on an assumption, don’t worry about it too much, don’t fret, don’t spend hours and hours trying to figure out how to make that one assumption as perfect as possible, because you’re not gonna have perfect information at this point. Right now all you have is an OM, a rent roll and a T-12, which is important information and is required to start the underwriting process, but you’re still gonna do some further investigations on your own, you’re gonna need to visit the property in person, you’re gonna need to ask questions to the vendors that are maybe implementing the improvements, or the property management company, to hone in on the assumptions.

So whenever you come across such an assumption that you’re kind of stuck on, just put something in there as a placeholder, just make it as accurate as possible with information you have, and then insert a comment into that cell explaining this is an assumption that you made based on minimal information, and “Here are the questions I need to ask, the information I need to uncover in order to get that assumption to be more accurate.”

At the end of the day, once you are done with your model and you’ve gone through all seven of these steps, you’re gonna want to run all of the assumptions by your management company, because they’re the ones that are gonna be operating the property, managing the property, and likely implementing the business plan that you want, and they need to approve the assumptions before you actually buy the property… Because if you say that you can reduce some expense by 10%, and the property management company has never seen that, and then once you close on the deal, you send them your budget, they say “Hey Theo, this expense you have here is not gonna be reduced by 10%. It’s actually gonna go up by 10%, or stay the same.” That’s gonna affect your returns to your investors. So you wanna make sure that you confirm all of these assumptions with your management company.

Now, that being said, let’s dive into the seven-step process. Again, we’re gonna go, at most, one through three in this episode, depending on time. And remember, as I said in the beginning of the episode, any numbers or percentages that I use are based on a deal that’s over 200 units, is value-add, and is a class B property in a class B market. If you are looking at a deal smaller than that, or a different investment strategy, or a different property class or market class, some of the numbers might be a little bit different, some of them will actually be the same. I’ll differentiate once we get to the point where we talk about those assumptions.

Step one is to read through the offering memorandum. As a refresher, the offering memorandum is that sales package that’s created by the listing broker, that’s explaining the ins and outs of the investment. Essentially, you want to read through the OM and first take some high-level notes on the deal – where is the deal located, what’s the total number of units, what is the date of construction, and then again, since we’re discussing value-add deals, you wanna know “Is this a value-add deal?” Typically, when the property is sent to your inbox for the on market deal, or when you look it up online, it’ll say “value-add deal”, but you wanna go in there and confirm that it actually is a value-add deal, and see in their executive summary what they say about the value that can be added to the property. Is it a value-add deal because of the outdated interiors, or outdated amenities, or is it something else, like a really high loss to lease, or some other operational improvement that can be made to the property?

So a few questions that you wanna ask yourself, and take notes on all of these, is 1) has the current owner started renovating the units? Have they initiated some sort of renovation plan on their own? And if they have, how many units have they renovated and over what period of time were those units renovated?

If you remember, in the previous episode I mentioned that it’s important to understand over what period of time the renovations were done, because if you have 20 units that were done in the last two years, then those rental premiums are not going to be something you can trust, whereas if they renovated 20 units in the past two months, then you can trust in those rental premiums a lot more.

You also wanna know how many units were renovated, because you wanna know if there’s enough meat on the bone for you to implement your value-add program. For us, if we see a deal that has more than 50% of the units already renovated, then that is not enough meat on the bone and we will most likely pass on that deal, unless there is some sort of other value-add opportunity, or if we plan on renovating the units to a greater degree.

Next you wanna see — okay, so they’ve renovated this many units, over this period of time, so we’re confident in the rental premiums… So what is that premium that they’re demanding? And again, later on in the underwriting process I’ll explain that this is a rental premium that you can potentially use as your own. You’ll have to ask a few more questions and we’ll get into those later on in the series.

Next you wanna know what renovations were actually performed, because sometimes they’ve done a full upgrade on a few units, and then you can look at that and say “Okay, I’ll just renovate the remaining units to that same degree.” Sometimes they might have renovated a percentage of the units fully, but you plan on going above and beyond that… So on the units that were renovated, the costs will be a little bit lower than having to renovate the entire unit. And sometimes they might have a combination of renovations, so you might have a unit that’s a premium unit, and then you might have one that’s fully upgraded, but not to the same degree as the premium unit. Then you might have some units that were partially renovated, so maybe they just replaced appliances.

So it’s important to understand what percentage of the units were renovated, and to what degree, in order to determine your interior renovation budget, which we’ll go over in tomorrow’s episode.

Other information to look at in the OM would be debt. Does the current owner have debt on the property? If they don’t, that’s something good to know, because you could leverage that potentially offer some sort of creative financing. If there is debt, then you wanna know if that debt is assumable, and if the debt is assumable, what are the terms of that assumable loan – what is the interest rate, what are the number of years remaining on the term, is there a pre-payment penalty? Things like that.

Then you also wanna look at the market section of the OM and determine “Okay, is this a really good submarket, or is this kind of a rough area?”, which can be determined by the crime rates and demographic information.

You also wanna know if it’s a blue-collar area, or a white collar area. That’s gonna determine the rental premiums you can demand, and likely the level of renovations you’ll want to perform. Then another good exercise to perform is to use Google Maps Street View function and drop that little pedestrian guy directly on the property. Look at the property to see its condition, because the Google Maps picture is likely not going to be as pretty as the pictures that are included in the offering memorandum.

I can tell you from first-hand experience there’s many times where I’ve seen a property go for sale, and I looked through the offering memorandum and the pictures are beautiful, the landscaping looks perfect, everything looks freshly painted… And then I go to the property and realize that they had some professional photographer going there that took pictures from the perfect angle, and you get there to realize the property is in pretty bad shape. So Google Maps can be helpful for that; just make sure you check the date, and make sure that the date is in the past couple of years, and you’re not looking at a picture from ten years ago.

At that point in the OM you’ll likely run into the financial analysis, the proforma section, and when you’re underwriting a deal you wanna stop there, because you don’t want the broker’s proforma or the broker’s assumptions of how that property will operate when someone takes it over to affect the assumptions that you make.

Once you’re finished reading through the offering memorandum and taking your notes, which should take between 15 to 30 minutes, step two is to input the rent roll information. When I say “input the rent roll information”, you’ve gotta remember you have your financial model; if you take a look at the simplified cashflow calculator, there are sections that are highlighted where it says “Hey, input data here”, and all the formulas are already set up, so you don’t need to do that yourself. It would make sense to maybe go through the formulas just to understand how things are being calculated, but… That’s why I mentioned that, because if I say “input rent roll”, well, what are you inputting it into? You’re inputting it into your cashflow calculator.

So the information that you need to pull from the rent roll and input into your cashflow calculator are the unit types; these should include ideally renovation statuses. That’s A1 for one bed/one bath unit, A2 for the larger one bed/one bath unit. Then if one of those one bed/one bath units are renovated, then there might an A1R and an A2R. If some of the units are fully renovated and others are partially renovated, there might be an A1 for the standard, basic unit, an A1R for a fully renovated unit, and an A1P for a partially renovated unit. Essentially, you wanna figure out “Okay, here are all the different unit types at this property”, and then for all those unit types you wanna determine what the occupancy status is. Essentially, are they occupied or are they vacant, or are they being used for some other purpose, like an admin unit or a  model unit.

You’ll wanna know what the square footage is for each of those unit types, the total number of units for each of the units types, and the average market rent and the average current rent for each of those unit types.

Now, sometimes the rent roll is sent to you as an Excel document, other times it’s sent to you as a PDF. This is not a requirement, but it’s very helpful to have the rent roll in PDF form. That way, you can kind of manipulate and rearrange and organize things and use Excel formula functions to calculate certain things that I’ll go over in a second. But of course, you can technically do it on the PDFs, just using your handheld calculator or inputting certain pieces of information into excel… But to streamline the process, I recommend that you convert the PDF to Excel; if the rent roll is already in Excel, you don’t have to worry about that. Then you wanna organize it such that each unit is its own row.

Typically, on these larger properties, when you convert the rent roll to Excel you’ll see that each unit might have four, five, six rows because of the various charge codes. There’s a rent charge code, then there’s a pet fee charge code, or a rent subsidy charge code, or a parking charge code… All of those charges are important, but the most important and the one that’s relevant at this point is the rent charge code.

Now, sometimes all the rent charge codes will be the first charge codes listed, and all the other one are below it, so you can simply delete the rows for any other charge codes… But most likely it’s going to be all over the place. Sometimes it might be the first one, sometimes it might be second one, third one, fourth one… So you’re gonna want to rearrange it such that each unit is its own row, and the only charge code that’s there is the rent charge code. The other charge codes are included on the T-12 and we will be inputting those into our cashflow calculator from the T-12; the pet fees, month to month fees, any other fees that have been charged to a resident is listed on the T-12, and we will use that and not  the charge codes on the rent roll.

So that might take some time, depending on your skills in Excel. Once that conversion is done, then you can do a pivot table to essentially get a data table that gives you all the unit types and all the metrics that I’ve mentioned before.

Now, a few things to note, because additionally from the rent roll you’re gonna be inputting the loss to lease, as well as the vacancy loss. The loss to lease is the total market rent minus the total current rent for occupied units only. So in Excel you need to make sure that you’re not including the vacant units or the admin model units in your loss to lease calculation, because the market rent is going to be $700, but since it is vacant, the current rent is going to be zero. And if you include the vacant units in your loss to lease calculation, then you’re going to essentially account for vacancy twice – once in your loss to lease calculation and once in your vacancy calculation. So again, just make sure that you’re doing the market rent minus the current rent for the occupied units only.

For the vacancy, you are inputting vacancies loss, not a vacancy percentage. So we’re not looking at physical vacancy. It’s kind of like economic vacancy, but essentially it is going to be how much market rent is being lost due to vacant units. Essentially, sort your rent roll Excel document by occupancy type, and then add up all of the market rents for the vacant units, and that’s going to be your vacancy loss.

A few things again, because as we’re doing this process, we wanna take some notes for questions to ask brokers and vendors and your property management company… For the vacancy, you wanna know “Okay, is the current vacancy higher than the marker average?” If it is, you wanna know why. For loss to lease, is the loss to lease outside of 3% to 5% range? Essentially, when you think of loss to lease, if you assume rents increase by 3% each year, then your loss to lease is likely going to be 3%… Because if I sign a lease today, at say $1,000, and then the next 12 months that same unit is worth $1,030, that person is still at $1,000, because they signed a 12-month lease. So by the end of their lease, there’s technically going to be a $30 loss to lease that you’ll recapture by re-signing their lease or putting a new tenant in there… But you’re most likely going to be running at around a 3% loss to lease, or maybe 5%, depending on how fast rents grow.

If it’s outside of that range, the loss to lease is high for a reason other than the natural rent growth. So if it’s outside of 5%, then you’ll wanna know why. If it’s really low, then  something also might be going on, either with your calculation or in the information they’ve inputted into their rent roll, and you’ll wanna know why it’s low as well.

You’ll also want to compare the total number of renovated units on the rent roll to the total number of renovated units that were listed on the offering memorandum. If the offering memorandum said that they’ve renovated 45 units so far, then you’ll wanna see 45 units that were renovated on the rent roll.

Similarly, you’ll wanna take a look at the rental premiums, and make sure that the rental premiums on the rent roll align with the rental premiums on the offering memorandum. If they say that for those 45 units the rental premium demanded was $110, then it better be $110 on the rent roll as well.

And then lastly, after you input loss to lease, vacancy and all of the unit information, just check to make sure that the gross potential rent on the bottom of the rent roll matches the gross potential rent on your financial model, just to make sure that you’ve inputted everything correctly and that all of your formulas are correct.

I wanted to go into the T-12, but we’re at the 30-minute mark now, so we will start tomorrow’s episode by going over step three, which is inputting the T-12 information, and then we will continue on to step four and discuss the beginning stages of inputting your stabilized assumptions for how the property will operate when you’re done.

So as a summary of what we learned today – we discussed the four things you need in order to underwrite an apartment deal: the rent roll, the T-12, the offering memorandum and your financial model. We went through step one, which is read through the offering memorandum, as well as step two, which is to input data from the rent roll… As well as some questions to ask, things to look at when you are taking your notes and creating your list of questions for brokers and property management companies and vendors.

Until then, I recommend listening to some of the other Syndication School series about the how-to’s of apartment syndications, as well as downloading that free simplified cashflow calculator at

Thank you for listening, and I will talk to you tomorrow.

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