All Forum Posts by: Tom Lafferty

I mainly just run different scenarios on the analysis spreadsheet I use.  I will model decreasing or stagnant rents, decreasing occupancy, and increasing cap rates.  I also play with projected expenses to see what the returns look like if expenses come in higher than expected.  In addition to cash in cash returns and capital gains at sale, I also look at the debt coverage ratio to see if the property can support its debt service in these scenarios.  

Great information @Brian Burke, thanks.  I definitely remember the conversation we had regarding one of your deals here.  I think about that every time I'm looking at one!  

How are you going to manage this property?  If you plan on professional management, get a PM engaged in the process asap.  Every property is different, and its always better to have actual records, but not always possible.  It that property has a recurring sewer issue, or something like that, you may have higher then normal R&M expenses.  You will hopefully have a camera run in the sewers to help mitigate that risk, but its only one example.  Your PM should be able to get pretty close to what it will cost to operate IF they run similar properties in the same city.  

On the income side, I would physically go out and visit the comparable properties, if they exist.  Since this is a small property, there obviously won't be an office you can go visit, and you're probably going to have to pretend to be a potential renter.  but find out what they're going for, what condition they're in, and what their occupancy is like.  That will help you come up with your pro forma.  If everyone has available units, you will probably want to increase your vacancy numbers.  If everyone has a waiting list, it'll be the opposite.  

Looking for input from those who have actually owned multifamily property during a downturn in the market.   I've heard a lot of theories about how different classes are affected by changes in the market.  We typically buy C class stuff, and I constantly hear discussions about how C class won't be affected by all the new construction, because "they're not building anymore of those," or "where do you think everyone has to move when jobs go away," and any number of other conversations.  The flip side is that as A class overbuilds, they drop their rents, and  B tenants are able to move up a class, and the trickle down effect hurts everyone.  

I'm in the DFW area, and even though we didn't get hurt as badly as other areas, when I look at the data, there was definitely a drop in rent growth and occupancy during 08 and 09.  It wasn't terrible, but it was there.  As a result, I always stress test my numbers for a drop in performance.  I'm looking at a deal that is in an A or maybe even A+ area, and wonder if it needs to be stressed to a greater degree than the usual C class deals, or stressed less because its such a good location.  To be more specific, this is NOT a new construction, super nice, $2000/month property like we have popping up on EVERY corner in DFW.  It is an old, but desirable property in a great area.  Its rents are significantly below the newer stuff, so I think we have a cushion there.  I do know that the property will always have a lot of people wanting to lease, I just don't know how hard to stress the rents in this situation.  

I know there's no concrete answer to this question, but hoping someone with a lot of experience (hello @Brian Burke!) can provide some direct experience.  

Totally agree with @Tom Mole and @Account Closed. Sellers, even very professional ones, often "groom" their income statements (same thing as P&L or T12) when they know a sale is coming. This could even be two years in advance if their goal going in was to rehab, increase NOI, and then sell. They can put all kinds of things below the line that would normally be considered operating expenses. They might do this themselves if self managed, but even large 3rd party management companies will change their accounting practices in preparation for a sale if the owner so desires. As an example, they may be rehabbing units, and all paint can be entered as a capital expense, not as a makeready expense, which you WILL have going forward. So the line item for makeready, or painting if broken down that way, may be very low or not even there. If you don't know to look for it, you may underestimate that going forward. Thats a small one, but there are all kinds of things that can be handled the same way.

Its not just Loopnet either.  Any OM that you get from a professional broker is going to be full of misinformation.  It was already mentioned, but taxes can be a HUGE number.  I toured a property yesterday and will be submitting an offer on it.  The broker shows the taxes in his pro forma as $201,792.  There is even a nice little note explaining that they've accounted for a 5% increase in property taxes for the new owner.  Sounds reasonable, no?  In our area, we typically budget for taxes to go up to 80% of the purchase price, but lately its more like 90-110%.  In this case, 80% puts taxes at $309,787.  Can you imagine getting an unexpected hit of $108,000?!  This is not uncommon either,  it is the norm.  If they're willing to fudge something that they absolutely KNOW for a fact is going to be that far off, imagine how far off anything else can be.

Another common one is utilities in a property with low vacancy. We just closed on a 78 unit property that has 25 vacant units. In my initial analysis, I was using actual T12 numbers for electricity and water. I absolutely know better, but didn't catch it until the second look. When the property gets leased up, guess what will happen to the utilities? They'll go WAY up! We're changing from an all bills paid model to a RUBS, but still, that would have been a huge mistake.

Just make sure you have someone else who knows what they're doing look over your numbers before getting tied up in something.  There are SOOOO many ways to get burned in a multifamily transaction that it is not even funny.

Are they leaving some items off the P&L?  A lot of small properties don't have payroll, management fees, etc.  depends on how you're going to run it too.  I wouldn't even try to use rules of thumb, as there are two many variables.  You could have two identical properties, with one stuck in a horrible electric contract and the other on a great rate.  Or one could have had water conservation done while the other hasn't.

It seems to me that smaller properties just don't have the same level of management in a lot of cases, and they're just not accounting for a lot of things.  Or at least not that they'll admit.

Unit turns were by far my biggest challenge on the first one.  We used our maintenance guy for most, but he had a full time job so it was mostly nights and weekends, so downtime was a huge issue.  We were paying $13/hr though, so it really did offset the lost rent.  He also had the issue of taking great pride in his work, which is awesome, but not terribly congruent with a C class unit turn.  I had the same issue but gradually came to the realization that there had to be some compromises when you're talking about an $800/mo apartment!

@Mindy Jensen I wouldn't be jealous just yet!  I'll try to post some updates as we get units back online, but I'll be plenty worried until we can prove out our projections....

@Mike Dymski, on the 32 unit, I had an agreement with the management company of the property next door to ours.  I was not paying them for full third party management, just a fee to share their leasing person.  She was running two properties that were on either side of ours, totaling 72 units.  With our 32 she was at 104, which is perfect for a single full time person.  I was still the asset manager and was very hands on, but at least had people on site to deal with everything.  I did have bids from a few 3rd party companies for full management that were very appealing (5% fee which is great for a 32), but it hurt the returns enough that I wasn't going to be able to get my investors the returns I wanted.  There is a whole discussion on this exact topic at the following:

https://www.biggerpockets.com/forums/432/topics/112360-management-options-for-32-unit-apartment

Its funny to look at it now, as I can't believe its been over two years.  I was REALLY worried about how it was going to go at that point.  We've since sold the property, and I now have an enormous appreciation for 3rd party management companies.  I found an incredible one for this 78 unit, and they have been SO helpful I cannot even tell you.  They're also managing the rehab entirely, which was not expected initially. 

I completely agree with you though, management for anything up to about 60 units, or really even 80, is very difficult.  You can hire a part time person, but everyone I know who is doing that has challenges finding good people that will stay in a part time job very long.  A manager living on site could be a great option, but obviously has its own challenges. 

For maintenance we found a tenant living at our property that was very skilled and we paid him hourly on a contract basis for maintenance at our 32 unit.  We budgeted $15k for a PT manager in the beginning, and $15k for part time maintenance, and we beat both.  The leasing agent we were sharing cost us $14k/yr, and maintenance ran about $10-$12k/yr. 

Check out ResMan.  I used it for a 32 unit property, but it is used for everything from a few single family units up to management companies with 1000's of units.  It was $1/unit/month last time I checked, but I have heard it may be $1.50 now.  It is a full-featured PM application and extremely user-friendly.  If a google search doesn't pull it up, try "resman Ensoware."