Capex vs Opex when looking at a T12

[Jeff Kehl]

I've been thinking about making the jump to larger apartment complexes and reviewing a lot of T12s to understand them. One thing I find very misleading is that they seem to throw a lot of things into Capex, the 9400 series of accounts that I would consider Operational Expenses because they reoccur fairly often. For instance a lot of the expenses for turning apartments such as replacing carpet, painting and repairs. On my properties I always count those as operational because they tend to happen every few years.

Also, they have new appliances in Capex which makes sense to me but that tends to be an on going thing in older apartments so it seems like something needs to be reserved out of the NOI for that. Not to mention reserves for roofs, paving, etc.

I tend to see a lot of T12s that show Opex as 50-60% of Gross rents then they show NOI of 50-40% and THEN they show 20% spent on CAPEX some of which looks ongoing to me.

So my question is this, for folks that evaluate a lot of T12s, do you subtract a portion of Capex as reserves from the NOI before applying cap rate? For instance if they show 50% operating would you subtract another 10% for reserves from the NOI before applying cap rate? On many of the ones I look at doing so makes them only look ok because they have high occupancy. Drop it a little and they would be unprofitable.

Also, when I acquire a new property I find that I get a larger number of turns at first and of course the units need rehabbed. Do you budget higher capex in the first 6 months? 

[Joel Owens]

Hi Jeff,

Back in 2008,2009,2010 you could find class A to B areas and B buildings for a 9 cap.

The really bad areas like a 20 cap.

Fast forward to today and I see syndicators and regular buyers looking at stuff in the real crap hole areas of GA for a 8 to 9 cap. The pro-forma's once you properly underwrite are a 7 cap at best.

The sellers are selling to the uninformed. The tenant base and economy in these areas in boom times are stable but when any blip happens the chaos comes fast. The way I look at it many of these renters in C areas live hand to mouth. When the economy is good they pick up extra hours at work and have 3 to 5,000 extra a year to go eat out, vacation,etc. When the economy starts dipping they are over leveraged on bad debt and their whole world falls apart. Those places the tenants stop paying and mass evictions happen.

Anyone wants to know about an area call or go talk to local hard money lenders. Lot's of them are old school seasoned investors with decades of experience. They have lived it and been through it and now just loan out their cash instead of being active anymore.

I just do not like trashy or average areas no matter what the return. I would like an older building in a nice area because it has redevelopment potential.

I don't want headache for return so I stay out of those areas.

Another investor e-mailed me a prospectus from a syndicator the other day and of course it was rosy. I looked up the crime map and it was pretty bad not just around the property but the area. I told the investor if you put money into that deal you could end up taking a loss or putting more money down the endless rabbit hole never to get it back.