Shortcuts to Analyze Value-Add Apartment Deals?

Question

I've seen plenty of shortcuts to analyze apartment deals, but not quite for value-add strategies.

It takes me at least an hour to properly analyze a value-add apartment deal, and I'm curious if others have come up with shortcuts to determine if a deal really warrants the full analysis. Is there a way to quickly tell if a deal warrants that hour long investment? Is there a key metric that you look at to determine if a deal is worth more of your time?

Ben Leybovich · Answer

I think you are right. It takes time.

Now, there are disqualifiers, of course, which cause you to trash the opportunity in 5 seconds. Such as wrong location, mechanical set-up, vintage, unit mix, etc. However, if you don't trash it right away, what you're left with are 4 aspects of value add that have to synergize:

1. Price

2. Debt

3. Lift

4. Budget

Price is beside the point. The debt is a function of in-place numbers, which you need to break down and organize such as a lender would. Lift is a function of the market and the asset, which takes a minute to figure out. And, budget is a function of the business plan, which you won't know until you know 2 and 3.

So, if you can do it in an hour, good for you. Takes me longer.

Evan Polaski · Answer

Hi @John Casmon

At a past employer, we had a "quick and dirty" model we used for potential acquisitions.  It took about 10 minutes to plug in high level assumptions: purchase price, in-place and market rents, in-place expenses OR expense ratio, rough cost per unit rehab.  It was prebuilt and layered in company averages for GP level items, like fees and debt costs.

The idea was to do a quick broad brush review of the OM to see if we were in the ballpark before sending to UW to flesh out the model on a more granular level.

Greg Dickerson · Answer

It really depends on the deal but in most cases I can review the OM (assuming it's complete) and do a little research on the area to decide if it warrants deeper look in about 30 minutes and without using any spreadsheets. Of course I've been at it for 23 years so I know the business extremely well and can spot a deal pretty quick when I see one.

Jonathan Farber · Answer

@John Casmon - this is something @Ryan Daigle and I have been working on for some time now.  There are a lot of calculators for turnkey properties but not a simple/quick version to evaluate value add deals.  We’ve been using the Michael Blank tool for the last few months and operating out of 2 or 3 columns to evaluate the “as is state”, the “version of the truth” (same rent roll but conservative expenses) and the future operating scenario.  These don’t take that long to plug in.  After that, depending on which business model we are trying to execute, we calculate offer price to meet our projected numbers.  This process takes about 20 minutes now after some practice.

Andrew Hogan · Answer

Hiring an acquisition's manager :)

John Casmon · Answer

@Evan Polaski @Greg Dickerson @Jonathan Farber thanks for the responses. My current approach is a quick review of the area to ensure we'd want to invest there (1, 3, and 5-mile demographics), and then using general expense ratio as a placeholder (between 45-55% depending on the vintage of the asset). If it looks like it might be a winner, I underwrite the whole deal.

Curious if anyone is combining any rules or other shorthands like GRM + 70% rule (for rehabbing) to determine if a deal is worth underwriting.

Shortcuts to Analyze Value-Add Apartment Deals?

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