March 14, 2019

JF1654: How To Underwrite A Value-add Apartment Deal Part 2 of 8 | Syndication School with Theo Hicks


Today’s episode covers part four of seven on our value add apartment underwriting strategy. If you didn’t listen to yesterday’s episode, you should. Theo began covering the underwriting process so you’ll want to hear that first. 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  offer  a document, a resource or some sort of spreadsheet for you to download for free, that accompanies those episodes or the overall series. All of these documents, as well as previous Syndication School series, as always, can be found at

This episode is part two of what will likely be a six-part series entitled “How to underwrite a value-add apartment deal.”

If you haven’t already, I recommend listening to part one. It’s actually more of a requirement, because this underwriting process flows one step after another. In part one, which went live yesterday, or if you’re listening to this in the future, the episode directly before this one, we learned what you need in order to underwrite a deal, we summarized the overall seven-step underwriting process, and then we went through steps one and two.

In that episode, I mentioned that we are offering a free, simplified cashflow calculator, so a free underwriting model, simplified version, with this series. I recommend downloading that, either on the show notes of this episode, or at under series number 14, “How to underwrite a value-add apartment deal.”

We were cut short in part one, so in part two we’re gonna start off with step three, which is inputting the T-12 information into the model. As a refresher, step one is to read through the offering memorandum, and step two was to input your rent roll information into the financial model… So step three is going to be inputting the T-12 information into the financial model, and then we are also going to discuss step four – or at least a part of step four – which are setting your underwriting assumptions, so the assumptions for how you will operate the property after it is acquired, as well as some acquisitional assumptions as well.

Step three, inputting the information from the T-12 into your financial model – the information you need from the T-12 that will be inputted into your financial model are the income numbers; those will be the concessions, which are the one-time ongoing rent reductions or fee reductions offered to residents to get them to move into your property. You’re also gonna input the unit expense, which is essentially the market rent that is lost from a unit being used by an employee, or a model unit, an admin unit, an office, a maintenance room, storage… Essentially, anything that’s being used for non-rental purposes, that could be used for rental purposes. If you’ve got an employee living in one of your units at a rent reduction of $100, then your unit loss is going to be $100/month. If you’ve got a unit that could be rented for $700 but it is being used as a model unit, then your unit loss would be $700/month.

You also will pull the bad debt information from the T-12. The bad debt, as a reminder — if you listened to series number 13, the previous series, we went to extreme detail on what all the different line items on the rent roll, on the T-12 are, so I recommend listening to that, because I’m just kind of gonna quickly go over those metrics, not define them every single time… At least not define them in detail every single time. So you pull bad debt from the T-12 –  bad debt is that uncollected revenue from tenants who have moved out of the property. If they owe money on security deposit, if they have unpaid rent and they’ve already moved out, then that’s technically considered as bad debt. If you collect it, great. If not, then you write it off.

You also wanna take  a look at the loss to lease and the vacancy loss that’s listed on the T-12 and compare that to that of the rent roll. Typically, when you get a rent roll and a T-12, the last month of the T-12 should be the same month as the rent roll. So if the T-12 is January 2018 through December 2018, then the rent roll should be for December 2018. And again, that’s gonna be a snapshot in time, a day, a moment in time of what the current rental situation is. So the loss to lease and the vacancy on the rent roll are not gonna be the exact same as the vacancy and loss to lease on the T-12, because the T-12 is for a full month, whereas the rent roll [unintelligible [00:07:18].10] is for a specific time of that day. But they should be close. There shouldn’t be a variance of 50% between the rent roll and the T-12 for the bad debt and vacancy. If there is, you wanna make a note and ask what’s going on, how did they reduce the loss to lease and vacancy by 50% in a couple of days; probably inputting errors, or something is going  on there. And you’re also gonna pull the other income data from the T-12.

So that’s the income data, but there’s also the expense data that you get from the T-12. That’s payroll, maintenance and repairs, contract services, turn and make-ready costs, advertising costs, admin costs, utilities, management fee, taxes, insurance and any other expense.

In the simplified cashflow calculator that you can download for free you wanna input the annual expense. In the T-12 – if you’ve listened to the T-12 episode you know this, but there’s 14  columns; column number one is the actual list of the income and expense line items, and the next 12 columns are gonna be the expenses or incomes associated with those line items for each of the previous twelve months. And the last one will be a total for the year, and that’s what you wanna input into  your cashflow calculator.

Now, similar to the rent roll, sometimes the T-12 will be in PDF form, other times it will be in Excel form. Again, this isn’t a requirement, but it is helpful to have the T-12 in Excel form. So if it’s not in Excel form, it might make sense to convert that to Excel… Because once you have your T-12, in order to determine the various income and expense categories, you’re gonna want to assign a category to each line item.

What I do is I open up the T-12 and I add a 15th column on the right-hand side, right next to the total, and I will essentially look at all the expense categories and all the income categories – concessions, units, bad debt, loss to lease, vacancy, other income, and then for expenses the payroll, maintenance and repairs etc. All of those — I will assign one of those to each line item on the T-12, and then I want a pivot table so that I will have a table that will have the total concessions, total units, total payroll, total maintenance and repairs… Because sometimes, as I mentioned in the T-12 episode, the T-12 will be categorized perfectly. All the payroll expenses will be under payroll, all the maintenance and repair expenses will be under maintenance and repairs… But more likely, they either have different categories, or some of the expenses fall into the wrong categories. So for me, regardless if the categories are perfect or not, I’ll still go through each line item, assign it a category and run that pivot table.

If you don’t wanna have a pivot table, you can just simply sort that by that 15th column, with all those categories, and then just hover over the cells for each of the categories to get that sum.

Now, a few things to look at when you have your converted T-12. Number one is you wanna look at the total income, total expenses and the net operating income and see how they are trending over the past 12 months. Is the total income increasing over time, or decreasing over time? Are the total expenses decreasing over time or increasing over time? And is the overall net operating income increasing over time or decreasing over time? For each of those, the first one is good, the second one isn’t necessarily bad, but it’s something that you wanna take note of. So total income is decreasing if total expenses are increasing, or if net operating income is decreasing, then you wanna make a note of that for a question to ask the broker.

Now, if one of those are trending in the wrong direction, then you can go into the line items and the categories that make up that overall category and determine, okay, so if the total income is decreasing, let’s see which line item is affecting it the most. Let’s say you determine that “Okay, loss to lease has been going up over the past 12 months, and if you take that away, then the total income is actually increasing”, then you know that something’s going on with the loss to lease. Or if you look at the expenses and see that the maintenance [unintelligible [00:11:10].00] total expenses, and that’s increasing, and you see that okay, well, there’s one $50,000 maintenance or repair cost in one of the months; if I take that away, then the total expenses are decreasing… So what was that expense, what happened? Is that something that’s recurring, or is it a one-time thing that should have been categorized as cap-ex and not maintenance and repairs?

Essentially, you want to look at the overall numbers, the overall income, the overall expenses, the overall net operating income to see if they are trending in the right or wrong direction. If one of them is trending in the wrong direction, then dive into the details to see if you can identify exactly why that is happening.

Some other things to look at – and again, I’m gonna go over some numbers, and these are, again, based on that 200+ unit value-add deal, class B property, class B market… So is the bad debt greater than 1,5%? You don’t wanna see a bad debt that’s 5%. If you do, then you wanna determine why. That might indicate a poor resident demographic, and if you plan on turning over those units and improving the resident demographic, then you’ll know that you’ll be able to reduce that number, but you need to determine exactly why it’s so high before you can determine whether or not that’s something you can fix.

Same for vacancy – is that vacancy rate greater than the market average? If it is, why? Are concessions greater than 3%? 3% is the highest concessions that you’ll wanna see on a property. If it’s higher than that, then you’ll wanna know why. As a reminder, concessions are used to attract residents, so if you’ve got 10% concessions, then something is going on either with the property, or the rents, or the demographic that’s being targeted, so you’ll wanna know “Okay, if concessions are 10% of the gross potential rent, then what’s going on?”, because concessions is a loss.

And as I mentioned, you wanna see if there are any large one-time charges, and if so, what are they? This is for the income and the expenses. One thing that is common is you’ll see Other Income that is really high, and you’ll dive into the details and you’ll see that they are collecting a ton in late fees. And if you plan on taking over the property and improving the demographic and improving the management, then you’re not going to have those late fees, so your Other Income is  actually going to be reduced.

Then also for expenses, as I’ve mentioned, if the expenses are trending upwards or if they are abnormally high – the expenses are 65% of the total income, which is pretty high; typically, it’s around 50% to 55% – then you wanna dive into the line items under each of those larger categories and see if there are any one-time large charges. As I mentioned earlier, I gave an example of a $50,000 maintenance and repair cost during one particular month, and in all the other months it’s $4,000 a month. That’s something that will stand out, and you’ll want to highlight that, make a note and ask the broker what’s going on.

After you’ve inputted all of the rent roll and the T-12 data into your cashflow calculator, you kind of got a snapshot of “Okay, here’s how the property is currently operating”, next you wanna determine how the property is going to operate after you take it over, and that’s when you begin to input  your assumptions.

This is step four, and it is going to be the most important step of the underwriting process, because again, this is where you essentially make your money. Every syndicator who looks at a deal is gonna see it differently, and probably input different assumptions based on what they can do with the property, and the value-add opportunities that they have identified. So you want to make sure that you are spending an ample amount of time and investigating in order to determine the property assumptions.

At the same time, you don’t wanna spend too much time and kind of go crazy and spend hours and hours investigating one small assumption, because that is kind of a waste of time… And no matter how much research you do at this point, you’re not gonna have perfect information, therefore you’re not gonna have perfect assumptions. So if you have difficulty with one of the assumptions, make the best assumption possible and put a placeholder number in there, or put a placeholder number in there and make sure you make a  comment in that cell to speak with your management company or the broker or the mortgage broker or the contractor, whoever it is that can help you finalize that assumption.

Of course, at the end of the underwriting process you’ll want to run all the assumptions by your property management company. Then once you put the deal under contract, you’re going to pull a whole lot of due diligence reports to either confirm or adjust and revise these assumptions. So for now, in this early point in the process, you’re gonna be relying a lot on the information provided in the OM, you’ll be relying a lot on how the property is currently operating, and you’ll rely a lot on your own knowledge and experience underwriting deals, which again, takes time… So if you’re just starting out, make the best assumptions you can.

You’re probably gonna have a million questions to ask, which is why you’ve kind of prepared your management company for that, and they know where you’re at; you didn’t lie to them and tell them that you’ve done all these deals before, because at this point you need to rely heavily on them to get these assumptions correct… And if you tell them upfront that you have all the experience, and you’re asking all these simple, basic questions during the underwriting process, then they’re gonna know that you were lying to them.

Before we go into these actual assumptions, I know I kind of set up this episode to be all about assumptions, but I’m gonna change it up a little bit, and before we get into the first set of assumptions, which are used to determine the equity required to close on a deal, I think we’re gonna talk about that in next week’s series, and instead we’re going to go over some of the ways to add value to the apartment community… Because at this point, a lot of the assumptions are gonna be revenue and expense increases, percentages and closing costs, financing fees, acquisition fees, and things that are important, but things that are pretty simple to input… But what’s gonna be more difficult is to determine what your business plan is actually going to be.

So what is your value-add business plan going to be? …from a physical perspective, not an operational perspective. So what physical improvements do you plan on making to the property? How long are they gonna take, and how do you determine which ones you’ll even do? How much are they gonna cost, how long is it gonna take, and what will be the new rents demanded with those renovations and improvements? But before we do all that, you need to figure out what you’re actually gonna do.

I want to go over a list – this is by no means exhaustive; these are just examples of ways to add value to apartment communities – in order to essentially determine which ones to use, besides running it by your management company and discussing with the broker what they think is the best business plan for this deal… You’re gonna wanna look at comps. You’re gonna wanna look at the rental comps that are provided in the OM, as well as rental comps you find on your own, and see “Okay, for these comparable properties, their interiors are this, their exteriors are this, their amenities are this, and here are the rents that they are demanding. Okay, if I input these rents and the cost of those same upgrades, then I’m able to meet my investors’ returns.” We’re gonna go over a lot more about comps in later series, but for now I just wanted to mention how do you determine what renovations you should do to the property.

The last thing we’ll do in this episode is we’ll go over this list of ways to add value to apartment communities. They’re broken into two different categories and they’re simple opportunities – opportunities that don’t cost a lot of money on your end. Then we’re gonna go over some more — not advanced, but more expensive value-add opportunities, that have a higher cost upfront, but it might be paid back, depending on the market.

For example, you don’t wanna put a wine bar in a property that has a demographic of blue-collar workers, because they don’t really care about that. Again, these are very simple and basic. You might know all these already, but I’m gonna go over them anyways.

Number one is to add washer and dryer. Simply installing a washer and dryer into either all or a select number of units will allow you to demand a premium on those units. The premium, again, will be based on the rental comps, and the premiums for all of these will be based on the rental comps.

Another option is to either create a laundry room and install coin-operated washer and dryers, or if there’s an existing laundry room, to renovate it, and put in nice countertops, nice floors, clean it up a bit, maybe put a TV in there… So that’s one.

Number two is new appliances. These could be, depending on the area, stainless steel appliances, or just black appliances. Those are refrigerators, dishwashers, microwaves and/or stoves. And instead of doing it to all units, you can offer black appliances in some units, and then have premium units where you have those stainless steel appliances, and charge a rental premium for those units.

Number three, you can offer appliance upgrade packages. For units that already have those newer or nicer appliances, you can charge a rental premium. If you buy a property and you see that half the units have stainless steel appliances, the other half have black appliances, but the rents are the same, once those leases expire you can charge a $50, $100, $200 or whatever the market demands for those units.

Number four, you’re gonna do appliance rentals. So rather than actually putting those appliances in the units, you can offer them for rent. Not appliances as in refrigerators and microwaves, but smaller appliances like vacuums or carpet cleaners. Again, you could charge $10 for someone to rent a vacuum or a carpet cleaner for their unit. Not only will you get that $10 extra per month per unit in rent, but also it’ll reduce your turnover costs, because you’ve got tenants who are actually taking care of those units, so it’s a double benefit.

Number five would be to upgrade the light fixtures. Spend $100 or $200 per unit to install nice light fixtures in the kitchen, maybe put a new ceiling fan, put new light fixtures in the bathroom… Pretty quick renovation, pretty cheap, but it’ll make the unit look a lot more aesthetically pleasing, and you either will be able to demand more rent, or at least lease those units faster.

Number six will be new hardware. If you’re installing brand new cabinets — this isn’t super relevant, but an inexpensive way to make a unit look better is to replace the hardware on the kitchen cabinets – new handles, new pulls for the drawers, you can install new hardware on the vanities in the bathroom, you can install new door handles, you can install new sinks, toilets, faucets, shower heads, curtain rods in the units… These are all pretty cheap – $50, $100 to do, but it makes the unit look a lot better, and it’ll allow you to demand a premium or rent those units faster.

Number seven would be implement a RUBS (ratio utility billing system) program. The contractor comes in and determines how much of the utilities each unit is using, and then you’re able to bill back a  percentage of your water expenses, your sewer expenses, trash, electric, gas, back to your residents.

Number eight is parking. There are a lot of different ways to charge for parking. You can charge for guaranteed spots, you can do reserved parking in some areas, and the rest is kind of free for all, and if you can’t find a spot you park on the street. You could also install carports and charge money for those. If there’s already a parking garage or units with garages, you can charge money for that. You can charge money for, again, guaranteed or premium parking… There’s lots of ways to charge money for parking, so if you look at a deal and they’re not charging for parking, then you could do that.

Another one is pet fees. If you do decide to allow pets at your property, then you can charge a fee for that. If you see the current owner does allow pets, but is not charging a fee, that’s a way that you can instantaneously add value.

Ten would be location or view premiums. In these larger apartment communities some of the units might be closer to the fitness center, or the clubhouse, or the pool, some of them might have a backyard view of a fountain, or a forest area… For those units you can charge a little bit more based on some sort of unique view or location. Another example would be a unit on the first floor, as opposed to units on the second floor. At the end of the day, you could literally go unit by unit and offset rents by $5 here, $10 there, based on where they’re at.

Number eleven is a bike rack rental. This is one of those market and resident demographic dependant amenities, but if you’ve got a lot of millennials or gen X-ers at your property, then you can install bike racks and rent them out for a monthly fee.

Another one is a clubhouse rental. If you have a large clubhouse, with an office space, or a large gathering room, then you can offer to rent that out to residents for the night to host a birthday party, or a baby shower, or a wedding rehearsal, or really anything, whatever they wanna use it for.

You can also upgrade your property management software. That’s number thirteen. This one is not a super value-add, but having the best property management software out there will help you calculate the market rents more accurately, which will help you reduce that loss to lease and make sure that you’re renting your units at the highest cost as possible.

Then the last simple value-add opportunity on here are short-term leases. Again, this could mean a lot of different things. You could charge a fee for people who are month-to-month, you can charge extra for people who are signing three or six-month leases, you could offer a unit via like an Airbnb or work with [unintelligible [00:23:54].26] housing provider and offer short-term leases that way, and charge an extra fee.

These last ones, 15 to 27, are going to be some more advanced, more expensive opportunities, but still things that can have a really high ROI. Number 15 is kind of general and demographic-based amenities. When you are looking at ways to add value to your apartment community, then you might wanna consider determining which amenities you want to offer based on the resident demographic that you want to offer. That’s the current one, or the one you want to demand. From a generational perspective, millennials prefer to live in a resort-style living experience; they value convenience and flexibility, and will often seek out apartment communities that have higher tech amenities and services.

If you are looking to attract the millennials, then you can do things like offering free coffee in the common areas, make sure you’ve got a high-speed Wi-Fi internet, have USB charging points in the units, make sure the clubhouse and the fitness center are very modern, maybe even offer some fitness classes for them.

From a gen X perspective, they also prefer the high-tech home furnishings, but they also prefer to have some sort of concierge services, as well as family-friendly features, because gen X-ers are gonna have their families. Those are things like playrooms, or playgrounds, daycare, areas that offer family-friendly activities, maybe you can offer finger-painting or costume parties… Additionally, gen X-ers also want to have easy access to washers and dryers, as well as fenced in backyards.

And then baby boomers, who surprisingly make up a decent chunk of the renter pool, they want larger living spaces, so they want larger units, as well as larger common areas. They want state of the art fitness centers and they want fitness classes, as well as social gatherings. Some of these are amenities that you can offer, but other ones are more of different events you can host at the property.

Again, just figure out  “Okay, this is the demographic”, either age-wise or income-wise, and then do some investigation to figure out what that income level of that age, that demographic wants, and make sure you have that offered at your property.

Number 16 is you can install patios or balconies. You can build patios on the ground-level units and build balconies on the second, third, fourth, up to whatever level units, and charge a premium for those units. So figure out what the absorption rate is for those types of patios and balconies in the market and then build that many. Or if there already are balconies and patios, if they’re not on every unit, then you can charge a premium on the units that they are on, and if they are on every unit, then you can still charge a premium on all units for those. And if the current owner isn’t, that’s a really quick way to add value.

Similarly, you can do fenced in yards or patios. So if they have a backyard but not patio, you can either put one there and fence it in. This increases the privacy, as well as the value of your apartment community, and you can do that on a select number of units and charge a rental premium.

Number 18 is carports, which I’ve already mentioned. If there aren’t carports there already, you can build carports. Again, don’t build one for every single unit. You’ve gotta build a select number, so there’s demand for them, and then charge a monthly or yearly fee for those.

Number 19 is extra rooms. If you’ve got extra-large units, you can add bedrooms, add bathrooms, add a dining room, living room, sunroom, by erecting walls in those units, or adding on to existing units.

Number 20 is a dog park. If you have a pet-friendly apartment community and if there’s a large green space, then you can fence it in and add some of those dog obstacles. Make sure you have those poo bag stations… And you can create a dog park. You can even add a dog washing station too, and have it be coin-operated, or charge money for that, and then you can have different events where people can bring their dogs out, and they can play together, and your tenants can meet each other… Everyone loves dogs, right?

Number 21 is storage lockers. You can install storage lockers in the clubhouse and rent them out for a yearly fee, or you can do the Amazon package lockers as well.

Number 22 is vending machines. It’s pretty simple – buy or rent a vending machine and install them in your common areas.

Number 23 is billboards. Depending on the traffic to your property, as well as the building codes, you can install a billboard and lease those billboards out to local businesses.

Number 24 – you can have daycare, after-school or summer programs, if that demographic if family-oriented. You can also in your clubhouse put a coffee  shop or little convenience mart. I’m not talking about building a Starbucks or CVS, but just a small shop or a cart that offers coffee and snacks… Similar to what  you find in a hotel lobby.

Number 26 is a fitness center. So either renovate or construct a fitness center and offer free fitness classes there, like aerobics, spin, yoga, whatever else people are doing these days. Those classes will be free, but you’ll be able to demand a premium overall at your community for having a fitness center.

And then 27 is just miscellaneous, so really anything else you can think of – other advanced or luxury upgrades that you can offer for free, with those cost built in the rents, or have a monthly, annual or one-time amenity for things like a car sharing service, 24-hour concierge, cooking classes, dry cleaning or laundry service, free Wi-Fi, an iCafé, package delivery management, personal shoppers, pet grooming, rock climbing wall, rooftop terrace, spa or massage center, tech or business center, a wine cellar… Really anything else that you can possibly think of would fall under the miscellaneous category.

Again, as I mentioned, whenever you’re looking at a prospective deal or determining how you’re going to add value to an apartment building that you already have, refresh yourself with this list of 27 ways to add value, and determine if it makes financial sense to implement those value-add opportunities, again, based on the property type, the market, renter demographic, as well as the rental comps in the area… And make sure you confirm the rental premiums that you believe you can demand with these new amenities by having that conversation with your management company.

That concludes this episode, where essentially we finished up what should have been finished up in yesterday’s episode, which is inputting the T-12 information into the financial model, and then we went over 27 ways to add value to apartment communities.

Now, in next week’s series we’re gonna continue with this, “How to underwrite a value-add apartment deal”, by going over step four of the seven-step underwriting process, which is setting those underwriting assumptions. Until then, I recommend listening to part one, downloading your free simplified cashflow calculator, as well as listening to some of the other Syndication School episodes that we’ve already done, and checking out those free documents as well. All those can be found at

Thank you for listening, and I will talk to you tomorrow on Follow Along Friday.


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