May 2, 2019

JF1703: How To Underwrite A Value-add Apartment Deal Part 6 of 8 | Syndication School with Theo Hicks

Time to cover more on apartment syndication underwriting with Theo. We all know it’s important for apartment syndication. Even if you know what you’re doing, it never hurts to hear how others underwrite, you might learn something new. Today Theo will comer how to run a good Rental Comp Analysis and what to do with it. 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’m your host, Theo Hicks.

As you know, each week we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these series we offer a document, resource or spreadsheet for you to download for free. All of these free resources, as well as past Syndication School series are available for free at

This episode is going to be part six of what’ll likely be an eight-part series now. I know these sometimes off as two or four-part series, and then they end up being eight-part series, but there’s a lot of information to pack into these episodes, so it’s better to have more parts to each of these series, because the more details the better.

This is going to be part six of the eight-part series entitled “How to underwrite a value-add apartment deal.” Now, if you haven’t done so already, I highly recommend – it’s almost a requirement – that you listen to parts one through five first, because each of these episodes builds off of the last, and this is a seven-step step-by-step process for how to underwrite these value-add apartment deals. If you haven’t listened to the previous episodes, then this one might not make total sense… Although this particular episode might be able to be used as a standalone, because it is how to perform a rent comp analysis, or a rental comparable analysis.

Now, I’m sure everyone has heard of a sales comparable analysis, which is what residential appraisers use to determine the value of a residential property. Well, the rent comp analysis is what multifamily investors use to determine the market rent of their units… And in particular for this series – we’re talking about underwriting value-add deals – we are gonna perform a rental comp analysis in order to determine what the market rent of our units will be once they are stabilized, after all of the interior and exterior renovations have been completed.

Now, I believe we talked about this in earlier episodes, but there are a few ways to determine that your stabilized rents – or those rent premiums from how the unit is currently rented to what the unit rental premium based on the current quality of unit and building to the stabilized quality of the unit and the building… One way is to just base it on the rental comps that are provided in the offering memorandum. Typically, the broker will perform their own rental comp analysis, and that’s what they will base their performance on. As you remember, we don’t wanna do that. We don’t want to rely on the broker’s rental premiums, because at the end of the day, the broker is working with the seller in order to sell the property at the highest price possible… So you don’t necessarily want to completely trust that the information is accurate. We’ll talk about that a little bit later in this episode.

Another way is to wait to perform your rental comps until you actually have your rental comp analysis and you actually have the property under contract. So you do all your underwriting, you go ahead and just input placeholder rental premiums, or you base it off of something else… And then once you have the deal under contract, you go ahead and perform a more detailed rent comp analysis.

You’ll also wanna do that because you’ve already put in all this time – and once you have the deal contract, money as well – and you don’t want to have to back out of the deal and lose all that time (and potentially money) because you failed to perform that rent comp analysis early enough to catch some issue, or whatever.

Another way – and this is a way that you could actually use; the first two you don’t wanna use – is to base them on the proven rental premiums that the current owner has received/achieved. Let’s say that you’re looking at a property and it says that the current owner has performed renovations on 25% of the units, they’ve spent 5k per unit, they installed new appliances, new floors and new light fixtures, and they’ve been able to achieve a rental premium of $100 on each of these units. Then you go to the rent roll and you actually confirm that this is true, that 25% of the units are renovated, and that the market rents on the renovated units are $100 more than the market rents on the unrenovated units. Then you can go ahead and assume that if you perform the same level of renovations on the remaining 75% of the units, then you will achieve that same $100 rental premium.

Then the fourth way is to perform your own rent comp analysis, whether to confirm the proven rental premiums by the owner, to confirm the broker’s rental comps, or if the owner hasn’t done any renovations and it’s an off-market deal, to just figure out what the rents are gonna be in the first place, because you don’t have any information to base it off of.

So you’re gonna do a combination of three and four… Even if the current owner has those proven rental premiums, you can definitely assume that that is the case  and go ahead and set your offer price. But then you’re gonna wanna go back and confirm that those rental premiums are accurate. Now, maybe they are accurate, because they’re likely not gonna be too high, because they’re actually getting them from residents, so they’re likely not gonna be too high (they could be). But they could be too low; the owner could be renting out those units at a rent below the market rates. If that’s the case and you catch that, and you realize “Actually, I can raise them by $150 as opposed to $100”, then that’s gonna, again, increase your ability to get that deal under contract, because maybe not every person looking at the deal perform their own rental comp analysis and saw that they could increase the rents by an additional $50, which allows them to pay more for that property.

The whole point of what I’m saying is that you wanna perform some sort of analysis on your own, no matter what; even if just to confirm that the information that was provided to you is accurate.

Now, there are actually two steps to performing this analysis. The first one is you wanna perform an analysis online, at your computer. The other one is going to be an in-person analysis, which covers the rent comps, but it also helps you confirm your renovation assumptions, as well as analyze the market and a few other things.
In this episode we’re gonna talk about that online analysis, and then next week we’re gonna talk about what to do when you actually visit that property in person. For this episode we’re gonna give away a free document; it’s gonna be an Excel spreadsheet that will help you perform this online rental comp analysis, as well as the in-person rental comp analysis. So it’s gonna be one spreadsheet that will cover what we talk about in this episode, as well as the first episode of next week.

The first step for performing this online rental comparable analysis is gonna be to build a list of comparable apartments in the area. And when you’re thinking about building this list, here are a few criteria you wanna keep in mind, to make sure these properties are actually similar and of like kind.

First is gonna be the year of construction, the year that that property was built. You’re gonna want the comparable property to be built around the same year as the subject property, the property that you’re actually looking at… Because if you are looking at properties that were built much earlier, or much later, they might be too dissimilar. They’re gonna have different levels of deferred maintenance, they might have different unit layouts, they might have different amenities offered, different construction materials… A 1960’s property is gonna be a lot different than a 2000’s property when it comes to quality. So if you’re looking at an 1980’s property, find a property that was built plus or minus 5 to 10 years.

Next is going to be the distance from the subject property. Again, this isn’t gonna be a set number, a set mileage, because it’s gonna depend on the size of the market, as well as the density of apartment communities. But we want them to be close. If you’re looking at a very high-density area, whether it’s 100 apartment communities in a one square mile radius, then the property should be within a mile of the property. But if you’re in the middle of Iowa, then 10, 20 miles might actually be okay.

In some cases, if you’re looking at a property that is very unique, you might have to find a rental comp that’s in a completely different state. For example, if there is some beachfront property in — I actually learned this when I was taking my appraisal class when I got my real estate license… But if you’re looking at a beachfront condo in Cincinnati that’s highly unique, you might need to go to a city like Pittsburgh and find a similar riverfront property in Pittsburgh.

So the distance really varies, but most likely if you’re looking in a major MSA, you’re gonna want the comparable properties to be within a few miles.

Next is gonna be the number of units. The comparable properties should have a similar unit count to the subject property. If you’re looking at a 300-unit property, you don’t wanna use a fourplex as a rental comp, and vice-versa. It comes more into play when you’re under 50 units and then above 50 units. If you’re looking at an 80-unit, you don’t wanna use a 20 unit; you wanna use a 120-unit. But if you’re looking at a 20-unit, a 30 or 40-unit is okay, but you don’t wanna use a 100-unit property… Because the operations are gonna be different, the amenities offered are gonna be different, the expenses are gonna be different.

Next is gonna be the unit type and the unit size. The comparable property should have similar unit types and square footage. Let’s say that you’re looking at a property that has all one-bed/one-bath units and that’s it; then using a property that only has two-bath/two-bed units is not going to be a good idea.

For the square footage, it doesn’t need to be the exact same, but if you’re looking at a property with one-bed/one-baths that are 500 square feet, then you probably don’ t wanna look at a property that has one-bed/one-baths that are 1,600 square feet, or some massive one-bedroom units.

Next is going to be the interior renovations performed at the comparable property. The quality of the interior renovations at this comp should be similar to the quality of renovations that you plan on performing at the subject property. If right now the subject property has a lot of deferred maintenance and it’s got very poor quality, but you plan on going in there and putting in stainless steel appliances, putting in granite countertops, putting in nice floors, renovating the clubhouse, redoing the pool, putting in playgrounds and kind of going the whole nine years, then you’re gonna wanna use a comparable property that has granite countertops, stainless steel appliances, a really nice pool, a really nice clubhouse… As opposed to using a comp that is similar to the quality of how the property currently is.

And then lastly it’s going to be the amenities offered, which I’ve kind of hinted at, but… The quality and type of amenities offered at the comparable property should be similar to the quality and the type of amenities that are offered at your property, that you’re looking at purchasing, once it’s fully updated.

Most of the factors we’ve talked about kind of hit on that, but for example if you’re looking at a property that has a pool, then you want your comp to have a pool. If you’re looking at a property that doesn’t have a clubhouse, then you don’t wanna look at a rental comp that has a clubhouse. Same thing with the playgrounds, barbecue areas… Any amenity – you wanna make sure that those are the same at the subject property and the comparable property. Now, it doesn’t have to be the exact same, but the large ones should be – the clubhouse, the pool, the fitness center; those should be. But if the only difference is the barbecue pit area, then you can still use that property as a comp.

Those are the main things to look at. There are a couple other things you wanna look at too, like the types of fees that are charged to the tenants – who pays for utilities, who pays for water, are there pet fees, is there utility fees, things like that. But overall, those factors that I discussed should be enough to help you have a better idea of how to actually find a comparable property.

Now, a really good way to help you have a visual comparison of the subject property to the potential comps is to create an amenities checklist. Essentially, you go in Excel, you create a list of all of the interior and exterior upgrades that will be offered at your property once it’s fully updated, and then make a column and create rows for each of those. On the columns you’ll put your subject property pre-renovations and post-renovations, and then check off “Okay, right now I’ve got these ten amenities, and then once I’m done I’ll have all 20.” Then create a column for each potential comp and do the same thing – go through and check off “Okay, they have 18 of the 20 that my property will have.” Or “This one has five, so I’m not using that one.”

You can find all that information pretty easily if you just go to the actual apartments’ website. They should have some sort of section that talks about amenities offered. I might even be able to find it at But overall, you wanna take this checklist and use that to eliminate properties that aren’t comps, and to keep the properties that are comps. This amenities checklist will be included in the free document you’re getting, so… If what I said didn’t make 100% sense, it will make perfect sense once you actually see the document.

Now, for those other factors I discussed besides the amenities – the interior renovations, number of units, distance, year built – since you’re first starting out, you’re likely going to want to talk to your property management company or your mentor/consultant to see what is an acceptable range/distance from a property, number of units, in order to qualify as a rent comp.

Now, if you remember, way in the beginning – I think it was in part one – when I talked about reading through the offering memorandum and how you want to stop at the financial analysis section, because you don’t want that to impact how you underwrite the deal, this is the time where you wanna go back to that, and in particular you wanna go back to their rental comp section, and instead of having to find all of your rental comps from scratch, you can start by using the rental comps that are listed by the broker. So you can go ahead and input those into your amenities checklist, and go ahead and perform that analysis I discussed, go to their website (or and figure out what amenities are offered, to make sure that they actually are like properties.

A few other things you wanna look at  – three things in particular that you want to look out for when you’re looking at the broker’s comps… Because again, the broker is trying to sell the property, so they might use really nice comps to bump up that rent premium. So the first thing you’re gonna look at is how far are the comps from the subject property. For example, Joe was looking at a property where the rent comps were in a completely different neighborhood; and since he was local to the area, he knew that one of the comps was located in a neighborhood that had a lot of college graduates, while the subject property was not a place that had a lot of college graduates.

So you wanna make sure — and again, it’s based on the size of the market and the density of the market, but you wanna make sure that the comps provided by the broker are close, in the same or very similar neighborhoods. They don’t have to be in the exact same neighborhood as long as that neighborhood has  similar demographic.

The second thing you wanna look out for is the year the property was renovated. Sometimes you’ll look at properties that have those proven rent premiums, so they’ve renovated 25% of the units and they’re getting a $100 rental premium – then you ask them, or you look at the rent roll to see when those units were last leased. That will help you know when they were most likely renovated, but your best bet is to ask when they were renovated… And you find out that those 25% of the units were renovated over a five-year period.

Well, if a unit was renovated five years ago and they’ve had the same rent at that unit for 3-4 years, then that’s not going to be the same as the rent that they could get today, or if you renovated that unit today.

So you wanna make sure that the renovation timeline is close to your timeline. If you plan on renovating 75% of the units in two years, then they should have renovated 25% of the units at a maximum of a year; ideally less than that. Ideally, they renovated it really quickly, because 1) that will show you that “Hey, I can get these rents”, but it also shows you that there is a demand for those, as opposed to renovating 25% over five years – you don’t know if those rents are actually reflective of the current market, and you don’t know if there’s going to be demand for those units, because there were enough available at one time to prove that.

Lastly, you wanna take a look at the operations of the comparable properties to see if they match up with the operations at the subject property. For example, something else that you may come across is you’ll look at the rent comps section and let’s say the subject property – the owner currently pays all of the utilities. Then you look at the rent comps and you see that half of them the owner pays all the utilities, but then the other half of them the renters pay the majority of the utilities, except for let’s say water.

Well, if the owner is paying all utilities at the subject property, those rents are going to be higher than at properties where the renters pay all of the utilities… So that’s not going to be  a good property to use as a rent comp analysis.

So once you’ve kind of gone through those three questions and the comps kind of pass that initial smell test, then you can use the free rent comp analysis. If they don’t, then you’re gonna have to find your own properties. But regardless of whether you use the broker’s rent comps or your own rent comps, you’re gonna want to do your own research and find out what the actual rents are on your own. Just because the actual apartment community is  a comp doesn’t mean that the rents that the broker listed are accurate.

Once you’ve created your list of properties, then in the Excel document that we’re giving you for free you’re gonna wanna go ahead and input a few pieces of additional information. First, you’re gonna wanna put the property name, the property address, the year built and the number of units. Then next you’re gonna wanna go ahead and determine what are the rents for each of the various unit types at these comparable properties. The best way to do this is going to be just, because typically they’ll have their units listed for rent, and you can pull the data from there.

For unit types you’re gonna have one-bed/one-bath, two-bed/two-bath, three-bed/two-bath, whatever unit types are offered at the subject property. Then for each of those units you’re going to want to input your square footage for your property, as well as the current rents, if the current owner has implemented the value-add program and has proved rental premiums. Then you wanna do the same thing for your comps. For example, at comp one they’ve got a one-bed/one-bath that’s 700 square feet, that’s rented at $600/month, and then they have a one-bed/one-bath at 800 square feet that’s rented at $700/month; you’re gonna enter both of those. Same thing for rent comp 2, rent comp 3, rent comp 4… And you wanna do the same thing for the two-beds, the three-beds, and if they have, the four-beds.

Once you do that, then you can determine what is the average rent per square foot for each of those unit types. So for the five, or six, or ten comparable properties, what is the average rent per square foot for their one-bedroom units, what’s the average rent per square foot for their two-bedroom units.

Once you have that average rent per square foot and you know what the square footage is of your units, you can determine what will be the approximate rent of the subject property. Then you can take that and you can compare that to the proven rental premiums that the owner did, or the rental premiums that the broker calculated, and see if they were accurate. But if they were accurate or weren’t accurate, regardless, you wanna use the actual data that you pulled.

At the end, you should have a renovated rental rate for each of the unit types at your property. If you want to, you can round the number up or down based on how aggressive or conservative you want to be.

That concludes the online portion of your analysis. The next step is going to be to go ahead and actually visit the property in person and do a secret shopping of sorts to confirm that the rents you found online are actually accurate, as well as to gather other pieces of information that are going to be important to confirm your rental premiums, as well as to confirm a few other aspects of your underwriting process. That’ll be it for this episode. We’ll discuss that in-person analysis next week.

Just to summarize what you’ve learned this episode – we went over the step six of the seven-step underwriting process, which is performing the online rent comp analysis, which is essentially finding like apartment communities in the area in order to determine what the average rent per square footage is, in order to use that number to calculate what you can rent out your fully-renovated units for once you’ve implemented your value-add business plan.

In the meantime, if you haven’t so already – which you probably have – you can go ahead and listen to parts one through five of this “How to underwrite a value-add apartment deal series.” Or you can go ahead and go back to some of the older Syndication School series about the how-to’s of apartment syndications… And make sure you also go to download your free document. You can do all of these things at The free document should also be in the show notes of this episode.

Until then, thank you for listening, and I will talk to you next week.


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