May 8, 2019

JF1709: How To Underwrite A Value-add Apartment Deal Part 7 of 8 | Syndication School with Theo Hicks

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Theo is picking up where he left off last week with rental comps. You’ll need to have accurate rent comps so that you can set accurate assumptions in your underwriting. Today we’ll learn how to ensure we have good comps, and what to do with them once we have them. 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 are typically a part of a larger series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series we will offer some sort of document, spreadsheet, resource for you to download for free. All of these free resources, as well as the free Syndication School series that we’ve recorded previously can be found at

This episode is going to be part seven of an eight-part series titled “How to underwrite a value-add apartment deal.” To catch you up to speed on what we’ve discussed so far – we’ve gone through a portion of the eight-step process for underwriting a value-add apartment deal. I might have said it was seven steps in the past, but as you know, these things expand as we do the episodes, and I realized that it makes more sense to break a couple of the steps into multiple steps, and that’s what we’re going to be doing. So instead of it being seven steps, it’s now an eight-step process. In this episode, part seven, we’re going to be discussing step seven.

So far we’ve gone through steps one through six. As a refresher, step one is to read through the offering memorandum. That’s the sales package put together by the listing broker. Of course, this only applies to on-market deals. If it’s an off-market deal, you can skip that step and go straight to step two, which is to input the rent roll information into your cashflow calculator. If you haven’t done so already, I recommend going to and downloading that free simplified cashflow calculator model. It’s an Excel template, one tab that allows you to fully underwrite a value-add apartment deal. Then as you get comfortable with the model and as you learn and grow, you can customize it to your liking. But again, step two is to input the rent roll information into that cashflow calculator.

Step three is to input the T-12 information (that’s the trailing 12 months of income and expenses) into the cashflow calculator. Step four is going to be set your stabilized assumptions. Those are the income, expense, purchase and disposition assumptions, based on your business plan, for the deal. That’s going to vary from person to person, and as always, if you’re just starting out, you’ll wanna rely on your mentor or consultant and your property management company to help you come up with the assumptions, or at the very least to confirm these assumptions once they’re set.

Step five is to determine an offer price. If you remember, typically for these larger apartment deals – I’m talking 150, 200+ unit – there’s typically not going to be a listed price. Typically, there will be some sort of statement explaining that the purchase price will be determined by the market, or based on the market… Which means that you underwrite that deal and you input the rent roll, input the T-12, set your assumptions, and as long as all the formulas are correct, you can via an iterative process (plugging in numbers and seeing how it impacts the cashflow calculator) come up with an offer price, based on the return goals of you and your investors.

Step six is going to be to perform that rental comparable analysis. Those have been discussed in the previous Syndication School episode. That requires either using the properties listed in the offering memorandum, in combination with, or instead finding your own properties that are comparable to the subject property, and determining a price per square foot for the rent, and then using that average price per square foot across multiple comparable properties to determine what the rent will be at your property, based on the square footage of each of the various unit types.

That brings us where we are today. In this episode, we’re gonna talk about step seven, which can technically be a step 6.B., but we’re gonna call it step seven, and that’s going to be confirming your rental comps via a phone call.

Then tomorrow we’re going to complete this series with part eight, which is also going to be step eight of the underwriting  process, which is having a conversation around what to do when you are visiting the property in person.

Now, steps six and seven, the rent comps, may be before you determine an offer price. It really just depends on how competitive the situation is, and it depends on the actual deal itself. If the owner has not implemented any sort of value-add renovations at the property already – because for some value-add deals the owner would have started the renovations already maybe on 20%, 50%, 60% of the units, and you can use those rent premiums demanded as your rent premiums. So if they’re getting a $100 rental premium on their two-bedroom units, then you can assume that you’re gonna get that same premium. You’re gonna confirm that with the rental comparable analysis. But if there’s been no value-add program initiated whatsoever, then you’re probably gonna need to do the rent comp analysis first, before you set an offer price.

So steps five through eight are kind of interchangeable… So this technically isn’t a step-by-step exactly how to go through it. These are all the steps that you need to do in order to fully underwrite a deal.

If you remember, in step six when you’re doing the rental comp analysis, you performed it online. Essentially, what you did is you had your list of properties – and we discussed how to find those comparable properties – and then you went online to, for example, and you found the rental rates and the square footage for each of the units at your comparable properties. So 1-bed/1-bath, 2-bed/2-baths, 3-bed/2-bath, whatever unit types are at your property – you found comparable properties and determined the rents for those, and you also confirmed that they actually are comps; and again, we talked about that in the previous Syndication School series episode last week.

You calculated a rent per square foot for each of those properties, and then you took an average of all the properties to get an average rent per square foot. Then you multiplied that by the square footage at the subject property to determine what the rent premium will be after you’ve initiated your valued-add business plan.

Now, that’s very important to do, and it provides you with very important information. However, at the end of the day you are trusting in either the rent solicited by the broker, which we said you shouldn’t do, but you’re still trusting in the rents listed online. Maybe on they haven’t updated the rents in a long time, or maybe the unit was listed at that price for a long time and hadn’t been rented, so that means that in the first situation the rents might be a little low, and in the second situation the rents might be a little bit high.

In order to confirm that the rents listed online are actually accurate, you’re going to need to actually contact a representative at the comparable property in order to confirm those numbers.

Now, a problem is you can’t just call up a property and say “Hey, I’m buying a property down the street from you. I’m gonna be your competitor. Can you tell me what your rents are, so that I can figure out how much I can rent my units for?” They’re probably not gonna give you an answer. And that property manager’s leasing agents are told to sniff out those types of people and not provide that information. So instead, we’re going to have to put on our Broadway shoes and do a little bit of performing.

Essentially, you’re going to play the role of  either a resident who is interested in renting a unit, or you are going to play the role of you are calling on the behalf of a family member or friend. You can say that you’re calling for a rental unit for your son or daughter, and ask them a bunch of questions. The goal of this call in this Broadway performance is to confirm the information that you gathered during that online rental comp analysis investigation in step six.

So the first aspect or the first thing you’re gonna need to do is create an Excel document to capture all this information… But being, we’re gonna go ahead and give you that Excel template for free. We actually gave it away already in last week’s episode. I included that on the free document that we gave away with the template for the online rental comp analysis, as well as the template for that amenities checklist, so that you can actually confirm that the comparable properties are similar to the subject property.

But if you go ahead and download that free document, you’ll see that the information that you’re going to be gathering are going to be the rental rates for the 1-beds, 2-beds, 3-beds, 4-beds. Essentially, the rents for any of the unit types. You’re gonna want to get an understand of any rent specials that are being offered, which are the actual concessions. If you remember, back in step three and four, one of the incomes, which is technically an income loss, but is categorized in the income category, is concessions, which are specials offered to residents in order to attract them to your property. Those could be referral fees paid to residents who referred someone. Those could be discounts on security deposits, discounts on rent, things like that. Amenities packages offered is another thing you’re gonna wanna learn about; the unit upgrades, you wanna know about the parking situation, any local points of interest, you wanna get some information about the demand, and then you’re going to take some notes on customer service.

After you’ve done this call, or if you’re in the market you can do this in person, you should be able to obtain enough information to fill out the template and answer those ten things. Now, before we get into how to do the Broadway performance, how to actually obtain the information, one thing you might wanna do first if you don’t really have a background in sales, or cold-calling, or you don’t feel comfortable doing this on the phone, then call up a few properties that aren’t comps, or do a few in-person visits to properties that aren’t comps, and go ahead and do a test run with those. Then also, so you don’t forget, you might want to get a print-out of that Excel document and bring it with you, or have it in front of you when you’re doing the phone call, or at the very least have a notepad in front of you with questions. Or you can write out verbatim what I’m going to explain for each of those ten points.

So in order to obtain the rental data and the demand data, something you can say — and again, you don’t need to use this as a guide or an exact script; if you want to, you can, but you don’t have to. You can adjust this based off of the situation. But you can say “Hi, I’m relocating to the area in the next couple of months, and was calling to see if you have any units available, or if there’s a waiting list.” That right there, number one, it lets you know the demand and the vacancy of that property. If they say “Oh yeah, we’ve got plenty of available units”, then you know the demand in that area might be a little bit lower at that price point. Or if they say there’s a long waiting list, you’ll know that the rents might be a little bit too low, or the demand is really high.

Now, if the apartment consists of one and two-bedroom units, then you can say “I’m interested in renting a two-bedroom unit. How much do those rent for?” They might say “Our two-bedrooms are $800.” Or they might say “We have a variety of two-bedroom units that range from $700 to $900.” Then you can respond by saying “Okay, that’s a little bit outside of my price range. I was hoping to have an extra bedroom to use as an office… But how much do the one-bedrooms rent for?” That way you’ve got either the actual rent of a two-bedroom unit or a range of rents for the two-bedroom units, and the same for the one-bedroom units.

Now, if the property has one, two and three-bedroom units, you wanna do that same approach as above, so ask about the two first, and then ask about the one second. Then call back a few days later and ask about the three-bedroom, unless you can think of a creative way to get the answer to all three.

So that’ll go ahead and knock off numbers one, two and three, which will be the one-bed rents, two-bed rents and three-bed rents, as well as give you an understanding of demand. Number four is that rent special, so in order to understand any types of rent specials offered, you can ask “Do you currently offer any rent or move-in specials?” For example, maybe there’s a security deposit special that they’re currently offering, so the security deposit is cut in half. Maybe there is some sort of rental discount if you sign a longer lease… So it’s $800 for a one-year lease, $775 for a two-year lease. Or maybe it’s some other type of concession that they’re offering.

Maybe there’s a move-in special that they’re offering, like you get a free TV on signing a lease. Maybe they’ve got a referral program, as I’ve mentioned before, so people that are living there – they might ask you if someone referred you, and if the answer is yes, then that person that did the referral will get $300, or will get a reduction off of their rent. Or there might be a military, law enforcement or first responder discounts… So rents 10% every single month if you’re in the military, if you’re in law enforcement, if you’re a first responder. So that covers that fourth bullet point, the rent specials.

Next is the amenities package. Essentially, you’re gonna want to know what types of amenities are offered at the property from an exterior standpoint, as well as an interior standpoint. Again, the whole entire purpose of this is to confirm the information you gathered during your online analysis, and one of the things you did was to create an amenities checklist. So you went to the website, or, and you determined what types of amenities were offered at that property, and now you wanna confirm that, either on the phone or in-person.

Something you can say is “Something that will weigh heavily into my decision are the amenities that are offered. What are the amenities offered in individual units, and then what are the amenities that are offered property-wide?”

Examples of individual amenities would be the property is pet-friendly, there’s wood flooring, there’s washer and dryers in the units, the kitchens have been updated, you’ve got your own storage/locker outside the unit or somewhere on the property, or maybe there’s a fenced-in backyard in some of the units, or balconies, or patios offer… And then examples of some property-wide amenities would be a fitness center, a pool, online rent payment (which is probably gonna be pretty common everywhere), online maintenance requests (same thing, should be pretty common everywhere), different types of parking situations, different types of common areas that are offered, events offered at those common areas…

Then an important follow-up question is gonna be “Are there any additional monthly fees for any of these amenities, or are they included in your rent?” Maybe the units that have balconies rent for $25 more per month. Or maybe you have to rent out a parking spot for $50/month. You’re gonna want to know about that, because again, if you plan on selling balconies, or if you plan on installing carports, or you’re interested in increasing the other income line item by charging for parking, you’re gonna want to know what the competition is doing. Because if they’re not doing that, then that’s not necessarily indicating demand for that in that market. So that covers number five, which are the amenities package.

Number six is unit upgrades, which is kind of covered in the amenities package, but is more specific… So you can say something like “Have you done any unit upgrades recently, specifically to the kitchens or the bathrooms?” That kind of covers the interiors. And you can ask, “Is that available at all the units? How much does it cost to rent a unit that’s got a common kitchen and bathroom, and how much does it cost to rent one that has an upgraded kitchen or bathroom?” Then ask about any property-wide upgrades – was the fitness center recently renovated? Was the pool recently renovated? Was the clubhouse recently renovated? Things like that.

Again, not necessarily “Is there a new roof?”, because that’s gonna be kind of weird, because residents shouldn’t necessarily care about there being a new roof… This is more focusing on the actual upgrades, so that you can confirm whether or not you can increase your rent, or whether there’s demand for things like  a new fitness center, new clubhouse. That covers number six, unit upgrades.

Number seven is gonna be parking. Ask them “What’s the parking situation? Do I have a free spot near my unit? Are there garages?” Again, this is gonna be based on information you got online. If it says there’s garages available, ask them “Are there garages available? How much would it cost to rent?” That covers the parking situation.

Number eight is gonna be the points of interest. Again, you’re out of state and you’re relocating in the area, so you don’t know the area… So you ask them what are some popular attractions or points of interest that are within a few miles of the property, and ask if there’s anything worth noting that is within walking distance – is there a local coffee shop that everyone likes to frequent? Is there a strip of bars or restaurants in the immediate area? Because again, all those things impact the rent, and impact whether or not it is a comp or not.

If you call in and they say “Oh yeah, you can walk to an area that’s got a bunch of bars and restaurants”, but at your subject property you’ve gotta drive there [unintelligible [00:19:24].12] slightly different and you might want to try to find a comp that’s also within driving distance and not walkable to that area.

And then really for number nine, demand, most of those questions kind of cover demand… So questions about rent specials will let you know how in demand the units are. The same with the upgrades, amenities packages, parking… Anything that’s done at the property that they charge for indicates demand.

Then that last step, which is the notes on the customer service – once you hang up the phone or once you get back to your car after visiting it in person, take a few minutes to make some notes on the quality of customer service that you actually received, just because this is most likely going to be your competition once you’ve taken over the operations at the subject property… So you’re gonna want to know – are the property managers at my competition amazing, or are they not so good, and not very friendly?

So once you’ve gathered all that information, essentially you want to compare the information you get on the phone or in person – compare that to the information that you gathered during your online investigation. Do the amenities match up? Do the unit upgrades match up? Do the rents match up? If they don’t, then you’re going to go back and adjust the rents, or you might have to actually eliminate a property as a comp on your rental comparable analysis.

Then once you’ve done that for one property, you’re gonna want to repeat that same process for the remaining rental comps that you have on your list. At that point, you can be pretty confident in your rental premiums, because you’ve done the online investigations, and you’ve confirmed everything either on the phone or in person, so you can say essentially without the shadow of a doubt that this property is a comp or this property isn’t a comp. And you can say without the shadow of a doubt that these are what the rents are, and these are what the other fees are, here’s the demand, here’s the customer service, here’s the amenities, everything like that.

Once you’ve finished that step, the last step in the underwriting process is going to be to actually visit the asset in-person to perform some pre-offer due diligence. That’s going to be discussed in the next episode, and then in the next week we’re going to talk about how you actually submit an offer, or how to determine whether you wanna submit an offer, and then how to actually submit an offer on one of these deals.

But again, tomorrow we’re gonna talk about the last step, step eight of the “How to underwrite a value-add apartment deal” process, which is going to be to actually visit the property in person for due diligence purposes. This is going to be different than you visiting the rental comps, so you might actually want to do these at the same time. You visit the property and then you visit the rental comps afterwards, or you make it a weekend trip where you visit this other property first, and then you spend an afternoon going to half the rental properties, and then the next day you go to the remaining rental properties. Or you can do the rental comps on the phone and just visit the subject property in-person. It really depends on what you wanna do, but we’ll talk more about that tomorrow.

Until then, I highly recommend if you haven’t done so already, listening to parts one through six… Because if you haven’t, then much of this episode might not necessarily make a lot of sense, because this episode is built off of those previous six episodes.

I also recommend going and downloading the free documents that we’ve given away for this series so far, which is that simplified cashflow calculator and that rent comp spreadsheet. We also have free documents from the other Syndication School series. All those free documents and the past Syndication School series can be found at

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

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