March 20, 2019

JF1660: How To Underwrite A Value-add Apartment Deal Part 3 of 8 | Syndication School with Theo Hicks


Time to start learning about setting assumptions. You’ll be setting a few assumptions when underwriting value add apartment syndication deals. Theo will be discussing those assumptions, and how to accurately set them in today’s Syndication School. 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.

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

This episode is going to be part three of a six-part series that we started last week, called “How to underwrite a value-add apartment deal.” If you haven’t so already, I recommend that you listen to parts one and two. In part one we introduced the things that you need in order to underwrite an apartment deal, which are a T-12, a rent roll, an offering memorandum and a financial model. We talked about how to get those and what information you actually need to use from those to input in your model, which make up steps one through three of the seven-step apartment syndication process, which is read the OM, input the rent roll data into your financial model, and input the T-12 data into your financial model. To learn how to do that, check out part one.

Then in part two we introduced the next step of the seven-step process, which is setting your assumptions for how you plan on operating the property once you take it over. Then we went over — because one of those assumptions are setting a renovation budget and a renovation business plan, so we discussed 27 ways to add value to apartment deals.

Now, as a reminder, this underwriting process is for syndicated apartment deals, and apartment deals that are value-add. Technically, it would work for turnkey or distressed properties, but the model that we gave away for free, the simplified cashflow calculator, is better for the value-add type deals. Also, as I mentioned, as the name implies, it’s a simplified cashflow calculator, so it’s only one tab, whereas the more complicated version is five, six, seven, eight tabs that all point to a project summary. So what I recommend doing is get comfortable with the current model, and then customize it and adjust it and make it more complex based on how detailed you wanna get with your underwriting. If you wanna make it so that you can do a refinance, if you wanna make it so that you can tweak a few other things, like debt terms, or the income or expense assumptions, if you’re savvy enough in Excel you should be able to do that.

Now that you know the first three steps, you’ve inputted your rent roll data, you’ve inputted your T-12 data, you’ve read through the OM, and you know some of the ways to add value to apartment deals, the next step is to set those assumptions. That’s step four. Setting assumptions is a pretty lengthy process, so we’re not gonna get through all of it in this episode; hopefully, we can cover setting the assumptions in this episode and in tomorrow’s episode, part four.

In this episode we’re gonna focus on setting the first set of assumptions, which will help you determine how much money you need to raise for your deals. Now, if you remember to a previous Syndication School series, when you set your goal – it was a goal based on how much money you need to raise; you said “I wanna make X amount of dollars per year”, and then we did some calculations to determine how much money you would need to raise in order to take down enough apartments to receive a profit split, and acquisition fee, and other fees in order to achieve that goal. Now, this is where we are going to determine how much money you actually need to raise for that deal. Ideally, it’s gonna be at most equal to the amount of money you have in verbal commitments; ideally, it’s 75% or 50% of the number of verbal commitments that you have.

In order to determine how much money you need to raise, there are going to be six different assumptions that you need to make. These are six different things that you’ll need to input into your cashflow calculator, and you should be able to input these into the simplified model that we provided. Let’s dive right into those.

Number one is going to be the acquisition fee. We discussed the types of fees that the general partners and you as a syndicator can make by putting together a syndication, and the acquisition fee is one of those. The acquisition fee is paid to the syndicator for essentially putting the deal together – finding the deal, underwriting the deal, touring the deal, submitting an offer, putting the deal under contract, completing due diligence when the deal is under contract, and securing financing and making sure that the closing goes through smoothly. For that work you can take a fee. Generally, it’s going to be  a percentage of the gross transaction amount; all of the capital contributions, all the money that was put down, the printable balance of the loan, the money you get from the lender, and then any other funds that are required to acquire, renovate, own, operate, maintain, manage the property; so any other costs associated with the deal.

Now, as I mentioned in that episode about the ways that the general partner can make money, this fee can be anywhere between half a percentage point up to 5% of the gross transaction amount, depending on the deal. So that’s number one; that money is going to come from your investors, or if you are putting money in the deal as well, it could be coming from you… But it’s coming from the limited partners, the passive investors in the deal. All of these six things I’m gonna discuss are all things that you’re gonna need to raise money for.

Number one, you’re gonna need to raise money for that acquisition fee. Number two are gonna be the closing costs – the upfront costs that you’re gonna pay in order to close on the deal. Any costs paid to the attorneys for putting together operating agreements and private placement memorandums and things like that, any due diligence costs like paying for the inspection, paying for lease audits, paying for environmental surveys, and things like that.

Now, these closing costs that I’m referring to are different than the fees that you pay to the lender for securing that; that’s something different. We’ll get into that in a second. But for the closing costs, typically if you are the one that are fronting these fees, then you can be reimbursed at sale. So you’re gonna raise this money because you’re gonna be putting your own capital into this; so you’re gonna be paying the attorneys, paying for the due diligence costs… Then once you close, you can take that money raised from your investors and reimburse yourself.

Now, again, this entire series is focused on underwriting 200+ unit value-add apartment deals, and for those size deals typically the closing costs are around $110,000. Typically, to create the PPM, to create the operating agreements, to pay for the inspection reports and things like that – those are typically fixed costs. They might be a little bit less if it’s a smaller deal, but not that much less, which is why we use that set $110,000 fee.

Number three is gonna be financing fees. These are the fees that you actually pay to the lender or the mortgage broker for securing the debt. Any applications fees, any credit reports or background check fees, processing fees, rate lock fees, things like that, things that are paid to the lender – typically, these are going to be around 1.75% of the purchase price. So these are dependent on the size of the project. If you’re doing a deal that’s smaller than 200 units, then you’ll be able to use this 1.75% number. For the closing costs you’re gonna have to have a conversation with your broker and your attorney to figure out how much it’s gonna cost for your particular deal size.

Number four is gonna be the operating account fund. This is essentially an upfront reserves account. These are to cover things like over-spending on your capital expenditure; some unexpected issue came up that you didn’t expect, and then you’ve got a fund to cover shortfalls… If there are unexpected dips in occupancy or a mass exodus of people when you take over the property due to evictions. It can cover unknown or deferred maintenance, paying for upfront insurance or taxes… Essentially, anything that could possibly come up during the first six months of the deal, you’re gonna have a fund to cover that, so that you don’t have to either do a capital call and go back to your investors and ask for more money – especially if it’s your first deal, it’s not gonna look very good – or you’re not gonna wanna come out of your own pocket to cover things like that. Or you’re not gonna wanna have to not distribute the projected returns because you’ve had to use the cashflow to cover these issues that came up.

So for the 200-unit size deals we typically use a flat fee of $200,000, but if you’re doing a smaller deal it’ll be around 1% to 5% of the purchase price.

Number five are going to be the renovation costs. The first four are pretty simple; it’s just you either input a percentage of the transaction amount, or you input a flat fee based off of the size of the deal that you’re doing and the complexity of the project itself.

Number five, renovation costs – they’re a little bit more complicated to determine because it’s gonna be based on what you’re going to actually do to the property. This is gonna be broken down into interior renovation costs, exterior renovation costs, and then a contingency budget.

The first question you’re gonna wanna ask yourself about the overall renovation costs are whether or not they’re gonna be included in the loan. I know we haven’t talked about loans yet – we will talk about that in a future episode – but high-level, the two types of loans are ones that include renovations costs and ones that don’t. So if you’re securing some sort of bridge loan on this property (a shorter-term loan, 2-3 years, maybe with some extensions, typically interest-only), it’s going to include the renovation costs in the loan. So bridge loans are gonna be used for properties where they don’t qualify for the agency debt, which has some sort of minimum occupancy requirement. If you have a deal that’s 80% occupied, you’re gonna have trouble qualifying for an agency loan, so you’re gonna have to do some sort of bridge loan first in order to stabilize the property, reposition the property, and then refinance into an agency loan.

So if you are not including the renovations in the loan, or the renovations are not included in the loan, then you’re gonna have to raise 100% of these capital expenditure costs from your passive investors. If they are included in the loan, then you’re gonna wanna know how much is included in the loan, and then the remaining amount is gonna be raised from your investors.

For example, if they aren’t included in the loan, then maybe you’ll get a loan that’s 80% loan-to-value, so the lender will loan up to 80% of the current value of the property; you have to fund the remaining 20%, and you’ll also have to fund 100% of the renovations. If the renovations are included in the loan – maybe it’s a bridge loan with an LTV of 75%, so they’ll loan up to 75% of the current value, plus they will provide 100% financing on the cap-ex budget, your renovation budget… Or it might be 75% loan-to-value, 75% of the project cost, which is also known as 75% loan-to-cost.

So it just depends… You’re gonna wanna know going in, have at least an idea of the type of loan that you plan on securing, because if you only wanna get agency debt, then certain deals will be disqualified, because again, not all deals qualify for agency debt… Whereas if you’re open to doing bridge loans, then you can look at deals that have maybe a  little bit higher renovation costs, or maybe a little bit lower current occupancy rate.

Next you’re gonna wanna know what you’re actually going to do to the property from an exterior/interior standpoint, and for ideas on that listen to part two of this series, where we discussed 27 ways to add value… But that’s not an exhaustive list; there’s plenty of ways to add value, and that’s essentially what’s going to set you apart from the competition – when you’ve got a deal, how many different ways can you determine to add value. If you find more ways to add value than the next guy, then you can submit a higher price, which will increase your chances of actually buying the deal. So this is kind of what sets syndicators apart – their ability to identify ways to add value. If you’re starting out, you can definitely rely on your management company to do that.

An example of something that I’ve been doing when I am looking at deals, because sometimes just starting out I don’t want to drag my property management company to every single property tour, because that is something that they probably don’t want to do until I’ve actually proven that I can give them business… So what I’ve been doing is I’ve been following steps 1 through 3, so read the OM, input the rent roll, input the T-12… I don’t skip this part about the renovations; I will just kind of assume that based off of just looking at the deal, how much money I think it’s gonna cost… And I’ll go over other ways of how you can put a placeholder in there in a second, but I wanted to explain the overall process.

So once I put that placeholder number in there for interior and exterior, I’ll obviously go and visit the property in person, whether it’s a formal tour, or just driving it myself and getting in there with the property management company, and I will take a bunch of pictures. Going in I’ll have an idea of “Okay, here are the five things I think I wanna do for the exteriors based on the pictures. Then based on the interior pictures, here are the ten things I wanna do.” So I have a list of that and I make sure I take pictures of all of those items, how they currently stand. If I identify something else, like maybe a roof that looks distressed, I’ll take a picture of that… And I’ll come home and I’ll create a PowerPoint presentation where each slide will have one picture; for example, the first slide will have a picture of a large open green space where I wanna put a dog park.

The next one is a picture of the pool, where I wanna replace all the furniture and lay new brick. Then three more pictures of exteriors… Then I do the same thing for interiors – I’ll take a picture of the kitchen and say “I wanna add new stainless steel appliances, and new countertops, and new floors and cabinet fronts. Here’s the bathroom – I wanna put tile on the tub, I wanna put new vanities, new lights. Here’s the living room – I wanna put new floors in here.” Maybe I wanna put new hardware on the doors, new ceiling fans.

So I’ll make a PowerPoint presentation with pictures of all the things I want to do to the property, and what I wanna do to those pictures, and then what I think the costs are gonna be per unit for the interiors, and then overall for the exteriors. I send that presentation to my property management company and say “Hey, this is the deal I’m looking at right now. I went and toured the property, I visited the property in person, I’ve put together this presentation for you, because I wanted to get your thoughts on not only my actual business plan – will these renovations bring a high enough ROI in this area? And two, are my costs correct?” Typically, they’ll come back and say, “Yeah, everything looks good, but I would say that this costs a little bit high, this costs a little bit low.”

I set these expectations with my management companies upfront. I say, “Hey, I understand that you don’t want me calling on you constantly to go on property tours and look at T-12’s and rent rolls, so I’m not gonna do that. I’m gonna do ample due diligence beforehand”, and I’m gonna put together the presentation that I just explained to you guys. “Will you mind checking that presentation and give me high-level thoughts on whether or not 1) these renovations make sense, and 2) these costs are at least semi-accurate, plus or minus 15%?” As long as they say yes, then I know that I can do that, and they also typically appreciate you respecting their time… So that’s one way to figure out what your costs are gonna be, and it’s a really strong strategy for those who are just starting out.

As you gain more experience, you can just look at an OM and know with a pretty high degree of certainty how much it’s gonna cost to renovate the interior and the exterior, sometimes without even actually seeing the property in person.

Now, more specifically for the interior costs, when you’re doing a value-add business plan, it’s typically going to be between $4,000 and $7,500 per unit in renovations. So if you’re doing a lower-end renovation, it’ll be in that $4,000 range; if you’re doing a higher-end renovation – stainless steel appliances, granite countertops, new floors, new cabinets – then it could be in the range of $7,500/unit. Now, these are just generalizations; on some units it might be way below this range, on some units it might be above this range, depending on how many units were already renovated by the current owners… But just in general, most likely the costs are gonna be around $4,000 to $7,500/unit for the interior renovations.

As I mentioned before, I went through my whole entire spiel about the PowerPoint presentation I put together and how I kind of determine what renovations I wanna do… But before I do that, in order to determine what level of renovation to do to the property, what types of improvement to do the interiors, a couple of questions to ask and a couple of questions that I ask myself are 1) what is the cost associated with each interior upgrade? As I mentioned, I’ll make a list of all the interior upgrades I think I need to do, and then typically there’s some sort of per-unit cost associated with that. Let’s say I wanna replace all the cabinet fronts, and new hardware – that could be around $1,200 to $1,400 per unit. [unintelligible [00:19:53].10] around $1,200 per unit.

Again, if you’re just starting out, you’re likely gonna have to get this information from your management company, after you’ve made your best assumption possible based on some of the research you’ve done online.

Next question you wanna ask yourself – what percentage of the units have already been upgraded? …assuming units have been upgraded, obviously. So what percentage of the units has the current owner already upgraded, and to what extent? Ideally, the owner has renovated less than 50% of the units to its full potential, because you won’t have enough meat on the bone if 75% of the units are renovated and you’re only doing 25%. But it can also be a combination of renovations… Maybe 25% of the units have been fully renovated, but then another 25% have been partially renovated, and then maybe another 25% have just had their appliances fixed. If that’s the case, okay, I’m gonna have to mostly fully renovated 25% of the units, but it’ll cost a little bit less. I’m gonna have to take 25% of the units from partial to full, and then I’m not gonna have to do anything to 25% of the units.

Or if you plan on going above and beyond in that scenario, then the only difference is you’re gonna have to renovate all of the units, and the ones that are “fully upgraded” by the owner, you’ll have to do a little bit more to get that to the level of upgrade that you want.

Now, assuming the owner has renovated some units, the next question you wanna ask yourself is what period of time were the units renovated? Let’s say it’s a 200-unit apartment community and they renovated 100 of the units; was that done over ten years, so ten units a year? Or was that done over the past couple of years, so maybe 4-5 units per month?

The reason that’s important is because if you have a property that has 100 units renovated over ten years, then the rental premiums are not gonna be as accurate as a property that has 100 units renovated over a couple of years. If it was the former, which means that they were renovated over ten years, then you’re not gonna be able to trust those premiums, and you’re gonna need to rely more on your own rent comp analysis, which we’ll go over in a later episode in this series… But if they were done over the past couple of years, then you can have more faith in those rental premiums; those rental premiums are more proven.

The next question to ask yourself is what are the rental premiums achieved? What rental premiums are they achieving on their partially upgraded units, their fully upgraded units, and any other type of upgraded unit that they’ve done – what premium are they achieving? That way you’re gonna determine, okay, so if I’m going from partial to full, what is gonna be the new premium? Is the ROI worth investing that money into fully upgrading those units? Are they really getting that much more for the fully upgraded units? If the answer is yes, then obviously you’re gonna want to fully upgrade all units. If the answer is no, then maybe they’ve over-upgraded, or something else is going on in their management. So that’d be a good question to ask – if the spread between the partial and the fully-upgraded units is low, ask them “Why aren’t you getting higher rents for those fully-renovated units, and why did you even renovate those units in the first place? Why didn’t you just stick at partial?”

And the last question — not necessarily a question, but the last thing to think about is if the offering memorandum doesn’t have an answer to the five questions, then add those questions to your list of questions for the broker.

So that’s the interior. Next is going to be the exterior costs, which we’re actually going to discuss in tomorrow’s episode. Tomorrow’s episode will start with the exterior assumptions, and then we’ll discuss the contingency, and then we’ll discuss the fifth thing that you need in order to determine how much money you need to raise, and then we will start discussing the other assumptions that you’ll need to set in order to fully-underwrite a deal.

Until then, if you haven’t done so already, listen to part one and part two, because if yo didn’t, this episode is probably a little bit confusing. Make sure you go to or check out the show notes of this show to download your free simplified cashflow calculator. Thank you for listening, and I will talk to you tomorrow.

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