May 9, 2019

JF1710: How To Underwrite A Value-add Apartment Deal Part 8 of 8 |

Now that we’ve discussed most of the underwriting process for value add apartment syndication, Theo will cover visiting the property in person. Visiting in person is something you will need to do, regardless of how far away it is. You’re dealing with investors’ money, doing proper due diligence is a requirement. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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“One of the first properties I toured, I went with my wife and thought the property did not need much work. The second tour, I brought the property manager, and she pointed things out that I didn’t see”


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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 know, 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 this series we will offer some sort of document/spreadsheet/resource for you to download for free. All of these free documents, as well as these free Syndication School podcast series can be found at

This week is going to conclude the 8-part series about how to underwrite a value-add apartment deal. As a refresher, what we’ve learned so far is steps one through seven of this 8-step process for how to underwrite a value-add apartment deal. In step one we learned how to read through the offering memorandum; in step two we inputted the rent roll into our cashflow calculator, and if you want to have a starting point for a cashflow calculator, you can go ahead and download the free simplified cashflow calculator for underwriting value-add apartment deals at

Step three is to input the T-12 into your cashflow calculator, step four  is to set the assumptions for how the property will operate once we’ve taken over. Step five is to determine an offer price based on steps one through four. Step six is to perform an online rental comparable analysis, and step seven, which was yesterday’s episode, we discussed how to perform the phone call or in-person rental comparable analysis.

Now, I highly recommend, if you haven’t done so already, pausing this episode and going back and starting all the way back at part one of this series, and listening from there… Because step eight is going to culminate the entire series, and we’re going to talk about that last step, as well as discuss the overall thought process for underwriting apartment deals.

Let’s jump right into it, with step eight, the final step, being to actually visit the property in person. I know this might be a headache and kind of frustrating to do, especially if the property is out of state, or if you’re looking at 5-10 deals at once and you’ve gotta spend an entire weeks’ worth of time visiting properties. But at the end of the day, since we’re dealing with other people’s money, we’ve gotta just suck it up and make that trip out to the property, because that’s going to be the only true way and the best way to get a clear understanding of the property’s current condition, as well as the surrounding market.

There’s other ways to do it – you can call up the property, you can look up the property’s website, look up the property on, you can even do a Google Earth Street View walk of the property, but at the end of the day, your best bet is to actually go to the property, drive around the area, to get a feel for the area, as well as to get a clear picture of the actual condition of the property.

Now, since most of you either haven’t done a deal before, or have only done a few deals, but none of this largest magnitude, you’re probably gonna want to go visit the property with someone else. And again, someone else is going to be your property management company, or your consultant, or a contractor you’ve met… But you’re gonna wanna go out there with someone who actually knows what they’re looking at.

Let me give you an example – I remember one of the first properties I toured; I went there — I actually drove to the property with my wife, and I thought “This is a solid deal.” It’s got  a little bit of deferred maintenance, but nothing that’s gonna cost an extraordinary amount of money. They’re all gonna be simple fixes, and I’ll be able to focus most of my money on improving the interiors, and then if that’s the case and I’ve got this small exterior budget, I’ll be able to get a great return.

So I set up a formal tour, so I could actually get inside of the units, because I hadn’t seen inside any unit yet… And I invited my property management company to come with me. We pull up, and the first thing she says to me is how she is familiar with the people who own this property, so she knows how they operate their property and what to look for.

By the end of the trip, she had ten things that  she saw that I hadn’t noticed, that were essentially deal-breakers, because I’m looking for a deal that doesn’t have as much deferred maintenance and is not gonna require fixing things that are code violations, and stuff like that. So without bringing my property management representative, I might have purchased that property and not been able to meet the returns on my investors, and maybe even lost their money.

That’s why it’s important to go there with someone that actually knows what they’re doing and has experience actually touring properties, so that you can catch things that you would actually miss.

Now, of course, one of the difficult things you’re gonna face is actually convincing the property management company to actually come out to the property with you, because they’re not necessarily going to want to waste an afternoon touring properties with someone who’s never done a deal before… And we’ve talked about how to overcome that objection in previous Syndication School episodes, specifically the series about building a team.

Now, this is gonna be different than the actual due diligence you do after that property is under contract. That’s gonna be much more intensive and require multiple vendors and contractors to come out to the property and do the inspection, and the appraisal, and the environmental summary, and the property condition assessment, that cost thousands and thousands of dollars. This is different.

Essentially, your goal when visiting the property in person is to confirm your renovation assumptions and determine if there’s any major issue at the property that will disqualify the deal from contention… So allowing you to catch those two things before you put the property under contract, and put up your earnest deposit, and spend all that money on the inspections and the appraisals, as well as all the time of going through that as well, and potentially missing an opportunity to find another deal.

Now, you should probably plan to spend half a day to a full day going through this in-person evaluation of the property and the surrounding market. First part is going to be spending your time at the actual subject property that’s the property that you’re trying to buy, and then the next part of your half day can be spent assessing the surrounding area, as well as – if you haven’t done so already in the previous step – visiting a couple of rental comps in person.

Now, make sure you bring a notepad and your smartphone with you, because these are going to be your external memory banks. If you’re gonna be visiting multiple comps, or if you’re gonna be visiting multiple properties within a few weeks’ span, then you don’t want to get things mixed up… So you’re gonna want to have your notepad to take notes, and your camera to take pictures. That way you’re gonna be able to remember everything that you heard and that you saw, because you have it written down and you’ve got pictures of it.

Next – and again, this is something that’s not necessarily super-important; it won’t necessarily sway whether or not you get the deal or not… But if you’re doing the in-person rental comp analysis, this could sway how convincing your Broadway performance is if you are looking in a C-class area, and you go visit the property in suit and tie, because you wanna impress your property management company [unintelligible [00:09:54].10] you’re posing as a resident at the rental comps and you roll up in a suit and tie and you wanna rent a C-class apartment… They’re probably not gonna take you seriously.

So I’m not saying that you should go there and wear basketball shorts and a T-shirt – which you might be able to do if you want to; I guess that could work – but dress based off of the situation. If it’s C-class, maybe  wear a T-shirt and jeans. If it’s a college town, maybe your college hoodie and some jeans. Suit and tie might not be the best approach regardless, but again, to each their own. This is not a requirement or necessary, it’s just something else to think about.

So that’s kind of the upfront planning.

Once you actually arrive at the property, the first thing you’re gonna want to do is – depending on how large the property is, either drive around or walk around the community and take notes and pictures of the exteriors. Now, the purpose of this exercise is to evaluate the condition of those big-ticket exterior items. So you wanna take a look at the roofs and determine if there’s any visible signs of wear and tear, or the gutters and the fascia. Take a look at the parking lots. Is the parking lot recently restriped or repaired, or is it pretty faded and there’s lots of cracks, and you can’t necessarily see any parking lines?

Something else that’s very important is gonna be the landscaping. Take pictures, look and get a general feel of the landscaping. Does it look like they’re maintained really well? Does it look like they’ve just spent a lot of money to improve the landscaping, or are there lots of dirt patches or dry spots with no grass at all, or dying flowers, or the guard rails around certain parts of the garden are falling over, those little wood planks?

Next you’re gonna look at the overall exterior condition, so take a look at the siding, if it’s brick or whatever is it – is the siding falling off? Is the paint faded or was the property recently painted? Take a look at the clubhouse and see, was it recently renovated? Is it very outdated? What types of things are offered in the clubhouse?

Then you also wanna get a feel for the overall amenities. Is there a pool? And the condition of the pool. Is there a fitness center? The condition of the fitness center. Things like that.

Something else you wanna look at too is the signage. That’s going to be the monument sign that should greet you and should notify you that you are at the property. It should be visible, so is it visible or is it not visible? Because you may need to relocate that sign. Is the sign nice? Is the landscaping around the sign nice? Is it aesthetically pleasing, or is it really ugly and it kind of made you wanna turn away the second you saw it?

More than likely, if you’re doing a value-add business plan and you’re buying a property, you’re probably gonna wanna move away from the current reputation, so you’re probably gonna wanna redo the signage anyways, but it’d be nice to have the option to not have to install a brand new monument sign. Maybe just change the wording on there… But that’ll be determined by the pictures you’ve taken of the sign. And really anything else that’s specific to the property.

Something else you wanna take a look at is the external HVACs. You can kind of eyeball those and say “Oh, those are pretty new” or “Oh my god, those are probably the original units to the property.” And really anything else that would be a  big-ticket deferred maintenance item that wouldn’t necessarily be something that would give you the ROI. Replacement roofs – you’re not necessarily gonna be able to market brand new roofs to your residence and then charge $5 more per month in rent for that. So these are things that aren’t necessarily gonna give you an ROI, but these are just deferred maintenance items.

The whole purpose of this is to confirm that the condition of these big-ticket line items align with your underwriting assumptions. If you didn’t expect to replace the roofs and you go there and the roofs are in really bad condition, then you’re gonna have to go back and figure out “Okay, there’s this many roofs. It’s probably gonna cost around this much to repair or replace all those roofs, so now I’ve gotta increase my exterior renovation budget by X amount.” That’s what you’ll do before, so at this point you wanna make a  not that “Okay, the roofs are in bad condition. I need to make a repair.” Then you go back and look at your underwriting and say “Okay, I said I’m not gonna repair the roofs”, and then make that adjustment.

Once you’ve done that and you’ve done your walk or drive around the property, the next step is going to be to visit the clubhouse and find the property management company. For this, it doesn’t necessarily have to be a formal tour. I’ve done this analysis myself, where I just go to the property without actually talking to anyone; I kind of just show up. I just walk into the clubhouse and I start talking to the property management company, as a buyer, but you’ll also do it, again, as a prospective resident.

It works better if you say you’re actually interested in buying the property, because if it is listed for sale, they know and expect people to come around. And you can ask the better questions… Because if you’re posing as a tenant and you ask them what’s the occupancy rate at the property, they’re gonna be like “Why does that matter to you?”

So for this list of questions that I’m gonna go over to ask the property management company, it’s better to actually either be doing a formal tour, or to do this on your own and actually approach the manager as someone who’s interested in investing in the property.

Now, in some cases there might be something written in the OM against this, so it kind of really depends. It’s up to you how you wanna approach this… But the goal is to go to the property management company and before you tour anything you wanna ask them a list of questions about the property’s operations. Technically, you could do this along the way too, because you don’t wanna sit there with your list of questions and be like “Alright, I’ve got ten questions to ask you”, and just go boom-boom-boom-boom. It could be things that you naturally bring up during the actual tour… So again, just kind of play it by ear, because you don’t want it to be too robotic.

Here’s some of the things that you want to know about. You wanna know how long they’ve been with the property; because a property that’s had the same management company for ten years is gonna be different than a property that’s had management changed every few years… Why are they leaving? Is it because they’re bad? And if they were bad, what negative repercussions are still reverberating from those bad managers? Or is it because the owner didn’t wanna fix anything, and there’s gonna be more deferred maintenance… You’re gonna learn a lot about learning how long they’ve been at the property for.

Ask them what the occupancy rate is currently, because sometimes you’re gonna get a rent roll that’s maybe a month or two old, and it’s not gonna give you a clear snapshot of what the occupancy currently is at the property. Ask them how has the property operated over the past year. Again, not asking for specifics, like “What was the NOI?”, because you have that… But just a general, overall feel, like “Oh, things are getting better” or “We’re renovating units and the occupancy has been really strong.”

Ask them what’s been the lowest occupancy since they’ve been at the property. Ask them how many people are calling in each week to rent a unit, to get an understanding of the demand. Ask if the amenities that you saw or that you’ve discovered online are getting a lot of traffic from the residents. Are residents actually going to the fitness center? Are residents actually swimming in the pool? Ask them what’s the overall demographic of the residents. Are they students, young professionals, blue-collar workers, senior citizens, families? Things like that.

Ask them when was the last time the roofs were repaired, and the last time the parking lots were repaired, and the last time HVAC was replaced, the siding was repaired. Ask them also if there’s any deferred maintenance at the property, and about the bad debt situation. Those two things are more just to kind of confirm what you know already, because you’re gonna be asking the broker for this information; or it could be listed in the OM, but you wanna confirm “Okay, the OM says the roof was replaced two years ago. Let’s ask the management company. Oh, the roof wasn’t replaced two years ago. Alright, what else is not true on the OM?”

You can ask them about the crime situation at the property, because that might mean that you need to install security at the property after you take over. Ask them who their biggest competitor is, and you probably wanna visit them, take a look at what they’re doing better than the subject property.

Ask them why people decide to rent here, instead of at the competition, and see what they say. Ask them what types of units are in demand in the area. Say “You’ve done a great job here. If I gave you $100,000, or $150,000, or a million dollars (depending on the size of the property), besides making sure you are compensated for your work, how would you spend it to fix or improve the community?”

And then lastly, “What did I forget to ask you? What else is going on with the property? Anything else that I need to know before moving forward?”

Now, all these questions are 1) to confirm the information you know already, so see if you can uncover any new pieces of information, but also you are going to want to determine “Hey, this property management company has turned things around here, and is doing really well, and is answering these questions great, and when I asked them what they would do if I gave them a bunch of money, they gave me some great ideas… Maybe I wanna keep them on as managers, rather than bringing in someone else.” So these questions accomplish a lot.

So as you go through this list of questions, the next thing you wanna do is ask if they have a clubhouse, for a tour of the clubhouse. Take notes and pictures along the way, and in your notes and in your pictures you’re looking for things like the condition of the clubhouse, what are the types of amenities that they offer, is there a kitchen, is there a sauna, is there easy access to the pool? Is there a conference room/business center? You’re gonna determine the level of updates or renovations that they have in the clubhouse, to determine you don’t need to do anything, or you need to actually do some renovations.

Again, all of this is to confirm your renovation budget. Going in, you thought that you could just spent $100,000 on the clubhouse; maybe after touring it, you realize you don’t need to spend anything. Or you realize you need to spend five times as much.

Next you’re gonna want to actually tour some of the units. You’re not gonna be able to tour every single unit at this point, nor do you really want to… But typically, they’ll have some set units or a model unit for you to actually take a look at. While you’re touring these units, again, take notes and pictures.

Things you wanna look for are how the conditions of the units, the interiors, compare with the unit type that the property manager said was in demand. If they say that their highly-renovated units are in demand, and all the units they show you are actually the really nice units, then is it necessarily true? Because if the unit is vacant, and you’re looking at one of the nicer units that they claim are in demand, then why is there no one living in there?

Something else that residents like are big closets, so take a look at the closets and see how large they are; if they’re walk-in closets, even better. You also wanna see things like open floor plans. Those are kind of in demand right now.

One of the most important things you wanna see is what’s the level of renovation in the unit, and does that align with your underwriting assumptions? At this point you said “I need to maybe install new appliances, and I need to replace the floors, and I need to install new cabinet doors and new lights”, and you’ve got a budget for that. But you actually see the unit and realize that a lot more needs to be done, then you’re gonna have to make a note of that and go back and adjust your renovation budget.

Then lastly, just write down what’s the main highlight or selling point of the unit, just for your remembering. Like, “Alright, the best thing about the unit is the open floor plan.”

After you tour these units, the actual evaluation of the apartment community is completed.

One more thing about touring the units – again, you’re gonna be seeing a model unit most likely, or a vacant unit that’s recently repaired, or looks really nice and clean… Something you  can do is ask to see the worst unit at the property. That way you can get an idea “Okay, what they’re showing me is probably the best they have to offer, but what’s the worst? Because if I’m basing my renovations off of assuming all the units are like this, and then when I actually do the unit walk, when I put the property under contract, this is really the only nice unit, then you’re gonna be in a little bit of trouble. So something you can ask too is to see the worst unit at the property. Maybe they’ll show it to you, maybe they won’t. If they don’t show it to you, then at least you can ask “How does the worst unit at the property compare to this unit?” It’s probably not gonna be the full truth, but there should be some kernels of truth in there, and you can get an idea of how they respond, and whether or not the unit is decent, needs to be upgraded, or if it’s a complete disaster. And then how many units are like that.

Once you’ve done this tour, thank the property management company, the property manager you’re speaking with for their time, and prepare for the next step of the evaluation, which is going to be to get in your car and drive two miles north, two miles to the south, two miles to the east and to the west from the property. Preferably have this mapped out before you actually go to the property tour, and take notes and pictures of what you see. Ideally, don’t this while you’re driving, because I don’t want anyone crashing their car and then referencing this episode in some sort of lawsuit. So when you’re gonna be taking your pictures, either have someone with you, or stop your car, do it at the red light, or whatever.

Things you wanna look out for is what’s the distance between the apartment and the closest retail center. Is it a new retail center or is it an old retail center? What is the demographic of the people that are walking around this area and does that align with the demographic of people at your apartment community?

Something else you can do too is to find the closest place, like a Starbucks, or a Chipotle, or a Walmart, or a McDonald’s, and see how far that is from the community… And same thing – is it new or is it old? Is the demographic of people that are walking around similar to the demographic of people that are supposed to be in demand at your property?

At the end of the day, Chipotle, McDonald’s and those types of places have done some pretty in-depth market analysis before they opened a new location… Again, you don’t wanna just buy properties by Chipotles; you still have to do your underwriting analysis and your market analysis, but that is a positive sign, if there’s a Chipotle or a McDonald’s or a Starbucks nearby, if that’s a demographic of your property, of course.

And then the last thing you wanna do is, if you haven’t done so already in the previous step, go ahead and visit those rent comps. You’re going to either — again, if you haven’t done the phone call or in-person rent comp analysis yet, then you’re gonna wanna do that there… Or you’re just going to want to drive around the property and take pictures of the exteriors, because you already have an idea of the interiors as well. Just kind of do what you did for the subject property, so look at the big-ticket items, look at the amenities, and determine how those compare to the subject property in order to confirm that it actually is a comp.

Again, if you haven’t done that phone call or in-person rent comp analysis yet, you’re gonna do that and pose as a resident, or pose as someone who’s looking for a unit for their son or daughter, and go ahead and tour some of those units to get an understanding of the interiors, compared to the renovation plan you have for the subject property, to make sure that those are aligned.

After that  you can go home, go through your notes, go through your pictures, and go ahead and compare everything that you actually uncovered to your current underwriting assumptions, and make any adjustments if necessary.

Now, one thing that I like to do, especially if a property management company, or contractor or consultant doesn’t agree to tour the property with you, is to at this point, while you’re actually at the property, go ahead and take a picture of all the things that you think you need to do to the property. When you’re driving around the property or walking the property, take a picture of the roofs, take a picture of the siding, take a picture of the HVAC, take a picture of the parking lot, take a picture of the landscaping, the signage, the siding. Anything that you think you need to do renovations to.

Same thing for the interiors. When you visit that unit, take a picture of the kitchen, take a picture of the bathroom, take a picture of the water heater, take a picture of the floors, take a picture of the closet, the lights… Things like that. Anything that you think you’re going to need to renovate at the unit. Then same thing when you’re walking the clubhouse.

Then when you go home, what I do is I make a PowerPoint presentation… So I do a slide with “Exterior renovations”, and then each of the slides after that are pictures of the roof. Then I say that “There’s this many buildings. The roofs are about this size. I think it’s gonna cost this much to repair. Here’s the siding. There’s this many buildings; I think it’s gonna cost this much to paint. Here’s the parking lot. The parking lot has this many spaces, it’s this big. Here’s how much I think it’s gonna cost to repair.”

Once I exhaust all my exterior items, I do the same thing for the interiors. So I go “Interiors. Here’s a picture of the kitchen. I think we’re gonna put in new countertops, new appliances, new lights, new cabinet fronts. Here’s how much I think it’s gonna cost. For the bathrooms – I wanna put in new vanities, I wanna tile the tub, I wanna put in new floors, and a new mirror. Here’s how much I think it’s gonna cost.”

That way you can send that to your management company (send a video of you walking the unit as well) and say “Hey, I know you couldn’t come, but I wanted to go ahead and put this visual presentation together for you. I’ve got pictures of all the different things that I had included in my renovation budget, as well as my projected costs. Can you please go ahead and take a look at the pictures and let me know a) do I actually need to fix this? And b) am I in the right ballpark with these prices, or am I just way off?

Again, it’s not gonna be as good and as accurate as them actually coming with you in person, because again, you’re only taking pictures of what you’re gonna actually see… But it’s much better than just trying to do the whole thing by yourself.

Once you’ve done that, and you’ve gone home and you’ve confirmed everything, or changed and made your adjustments, the next step is to determine if you’re ready to submit an offer on the property, which is what we’ll talk about in the next series.

So it’s been long overdue, but this concludes the 8-part series on how to underwrite a value-add apartment deal. To reiterate – step one, read through the OM; step two, input the rent roll into your cashflow calculator; step three, input the T-12 into your cashflow calculator; step four, set your assumptions; step five, determine an offer price; step six, perform an online rental comparable analysis; step seven, perform a phone call or in-person rental comp analysis, and step eight is to visit the property in-person. And I guess, technically, step nine is to go ahead and review all the information that you gathered from step six through eight in order to confirm or adjust any assumptions that you have made.

So to listen to parts one through seven, to listen to other Syndication School series about the how-to’s of apartment syndications and to download the free documents for this series, which is the simplified cashflow calculator and that rent comp template, go to

Thank you for listening, and I will talk to you next week.


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