All Forum Posts by: Seth C.

@Brandon Hall. Thanks, you were the one I meant to reference for your thorough post!

@Kenneth Hynes,

Thanks for the informative post! 

On a practical level I suppose I need to see the costs in any one month, and if they are below a certain threshold compared to the property size, I should perhaps bring them up because they are probably too small to qualify as capex. Otherwise there is no way to know without a due diligence discussion with the seller.

 @Kenneth Hynes:

On MF, capital expenditures are below the line. They are not part of NOI, which is used to calculate the cap rate and thus offering price of a property (you had better not use cap rate to calculate its value to you!), but they come above before-tax cash flow.

Well we need to take it from the horse's mouth here, but it is not so clear what the horse is saying!

At any rate, one of the cases involved a hotel doing extensive replacements, and it makes it look like rent-ready work that replaces like for like (ie is not not an upgrade from carpet to hardwood, etc.) is considered normal maintenance and not capitalized. It would be great if a CPA or lawyer commented, but I don't know who to tag ;).

Looking at P&Ls I see a lot of stuff that is placed in capital expenses that seems like it should be in maintenance, ie above the NOI line--but I don't know completely what the industry standards are.

There are things like carpet replacements, or vague "interior repairs", exterior repairs, electrical, etc.

So, Where do we draw the line, and are there any good resources/lists that can help on this one? Do you just deal with those vague items in due diligence with an amended offer?

Thanks! Seth

Not so much. Residential is largely based on comps so this works. I could have a larger MF that has an NOI that is 70% of what I think it can make after rehab. Thus ARV stabilized value * 70% leaves me with that same value. There is no discount taken for the 12-24 months I worked to get there, the opportunity cost of my investment, or the risk I took doing so. In most scenarios I would be better off buying a smaller turnkey for the same cap rate.

@Pat L.:

Reading between the lines, you are saying there is not really a set percentage, but once you get to the point of value-add, to make it work the seller needs to be distressed and willing to look beyond cap rates and NOI.

I am really interested in 20+ unit properties. Would you say that holds true in this space, or is there a way to keep the discussion on the level of cap rate discounts and/or rehab costs with a multiplier (1.5x or 2x?) to close the deal? 

Thanks, Seth

When looking at an investment with value-add rehab, obviously we need to take market cap rate and discount for the actual costs of repairs. But there is no reason to take on the risk, time, lost rent, and work for the same return as a turnkey.

My question then is how much do you discount and how do you phrase that discount? That is, do you discount x dollars, or require a better cap rate, etc., and how much? It obviously depends on the work required, but some typical scenarios would help!

A quick note on NAA numbers. Those are for very large properties (274 unit average), and are often owned by institutions big enough for in-house management, maintenance, and even rehab. Their numbers are much better than what one might do in the 20-100 unit space. Example: Good luck on finding 2.8% management that doesn't wind up 2.8% of nothing! The same is true for repairs, for insurance, utilities, etc. Even the numbers on this thread tend a bit to the larger complex economies of scale.

@Michelle Watt, I meant software dev, sorry! It is all a cost-benefit thing. I find that the excel work is more tedious than educational, so I am still deciding whether to pay up and move fast or do the ground up work. I have never been required to use it and would rather use a proper programming language, but my investors will require excel, so I am stuck. I definitely agree that the books quickly can't add much unless they are read while you are actually doing things. But get beyond your comfort zone of the analytics and talk to brokers, etc. You learn very fast that way.