Here is the first post in many to come on analyzing residential income properties. This is directly from my course on property valuation and analysis.
Learning Objectives of this Post on Analyzing Apartment Buildings and Residential Income Properties: Data Collection and Income & Expense Analysis
Identify sources of data
Describe the components of an income & expense sheet
Understand how to arrive at Net Operating Income (NOI) from Gross Scheduled Income (GSI)
The first step to accurately determine the market value of a real estate investment is a solid program of data collection and analysis. Each property will have its own unique considerations
All should at least begin with:
Overall condition of the improvements
Type of construction
Overall market conditions
Income and expense analysis
Legal requirements, zoning etc
Comparable property data
This list is broad in scope, but it’s a good foundation for the data collection plan. The data collected from the market on comparable type property will be used to determine the appropriate capitalization (CAP) rate and make market comparisons in a later step. Unsure of what a Cap Rate is? Check out my blog post that explains everything you need to know about this powerful valuation metric. The next step is the actual collection of the data.
The data required for the analysis is obtained from many of the same sources as the information used in residential sales.
Multiple Listing Service (MLS), Costar, Loopnet, Commercial Agents & Property Owners, Public records
Chamber of Commerce
Local Housing Authority
Local Council of Governments
Tax assessment records
This should give you an idea of a few of the possible sources of data and the steps to begin the data collection process. Once the data has been collected the next step is the analysis of the data.
The Operating Report (Profit and Loss Statement)
When analyzing a real estate investment, we begin with an existing operating statement, also known as a profit and loss statement. The operating report will consist of both income and expense items attributable to the property. In the first step of the analysis, we will only be concerned with the cash income and expense of the property. We will consider depreciation and other non-cash benefits in a subsequent calculation.
Gross Scheduled Income
The gross scheduled income is the amount of money that the property would produce on an annual basis if it were fully occupied. Included in gross scheduled income would be any income attributable to the property from non-rent sources.
What types of sources can be included for determining gross scheduled income?
These sources could include income from laundry and vending machines, parking and storage fees, as well as other owner operated concessions.
When analyzing the gross income, consideration is given not only to the existing rents being charged, called contract or current rent, but also economic or market rent, which is the rent the property would command if it were available for rent in the current market. An adjustment can be made to the gross income if the market indicates that market rent differs from the actual rent. If such an adjustment is made, that should be plainly noted on the operating statement (see loss to lease).
Vacancy & Collection Losses and Effective Gross Income
The chief component in the calculation of effective gross income is the vacancy and collection loss rate. Most properties are not expected to remain fully rented for the entire period of ownership. When a tenant vacates, often there is at least some rental income lost during the turn over period due to repair or remodeling time. In addition to this consideration, one must face the reality that there may be a situation where a tenant becomes unable or unwilling to pay rent as agreed. In this circumstance there will be some rental income lost.
The vacancy and collection loss is usually expressed as a percentage of the gross annual rental income. There are several generally accepted methods for determining the amount of the vacancy and collection loss
None of these things by themselves will probably give you a 100% complete picture but combining different resources the picture will become much clearer.
Historical data and market analysis are perhaps the most accurate, because typically published figures for the community are an average, and may not be representative of the property you are analyzing. Once the appropriate rate has been developed, the loss is subtracted from Gross Scheduled Income to derive at Effective Gross Income.
Gross Scheduled Income $12,000
Vacancy and Collection Loss (5%) (600) Effective Gross Income $11,400
Gross Operating Income
To figure the gross operating income you go through the following steps:
Gross Scheduled Income
– Vacancy & Credit Loss
= Effective Gross Income
+ All Other Income (garage rent, laundry income, vending, etc)
= Gross Operating Income
The figure derived from this process is what we will call rental income. This is the actual income received after taking into account vacancy and credit loss against potential income.
Other income can come from a variety of sources. In apartments, it is quite often laundry, but it could be rental on furniture for furnished apartments, garages, etc.
The resulting figure of gross operating income is all the income left over after subtracting out the above mentioned items. It is your actual income in hand before expenses. Therefore it is a very important number.
The next step in the analysis process is to determine the total operating expenses for the property. Like income, expenses will be analyzed on an annual basis. The investor will do a detailed analysis of the expenses of a given property, so it benefits the practitioner to have done a thorough analysis in the beginning.
It is important to carefully analyze all categories of expenses to accurately portray the financial condition of the property. There are different categories of expenses, depending upon the type of property you will be analyzing, however all expenses are segregated into two basic categories, fixed expenses and variable expenses.
What are three fixed expenses and 10 variable expenses?
A list of typical fixed expense categories will include
Landscaping and service contracts
Any expense that does not change from month to month
What determines a fixed expense is the fact that the expense will not vary in response to changing levels of occupancy.
Mortgages are not part of operating expenses and are categorized elsewhere.
This group of expenses is not difficult to document for your analysis, but be careful to consider the fact that these expenses may not be the same for a new owner; i.e., the building insurance may go up and most likely the real estate property tax may be reassessed upon transfer.
Real Estate taxes can be one of the largest expenses so make sure to calculate any new tax increase or decrease in your analysis.
This category of expenses is much longer, and categories to consider will vary depending on the type and size of the property under analysis. This category will include all of the expenses necessary to maintain the income stream of the property and to provide agreed upon services to the tenant. To attempt a comprehensive list of all expense categories for all types of properties might be impossible and, certainly, is beyond the scope of our study. We will discuss the more common types of expenses in some detail, remembering that each property has unique characteristics and may include its own unique expense categories.
Many properties will be managed completely by off-site personnel. The cost of off-site management is determined and subtracted as an expense of operation. It should be noted that a management expense is a valid deduction from income even if the owner is managing the property. There are many firms specializing in this field; they usually charge between 4% and 10% of the rental amount.
Payroll On-Site Personnel
Resident management is used when the day to day activities of the property require constant supervision. A resident manager is sometimes given free or reduced rent. If that is the case, you must include the managers unit rent in gross scheduled income, then enter the amount of free rent as an expense. In California, if a property has 16 or more units it is the law to have a resident manager on site.
This would be for other management costs. For instance, office and administrative expense, performance bonuses paid to an on-site manager, and any health insurance or retirement plan contributions would be listed here.
Taxes – Workers’ Compensation
Whenever there is an employee, there are various taxes the employer is responsible for. Among these are: Social security tax, unemployment tax, as well as local, state and federal income taxes. These taxes are payable by the employer, and in addition, the employer is required to withhold some amount from the employee’s pay and forward it to the IRS.
Repairs and Maintenance
This is the total amount of repairs and maintenance necessary for the year. This would not include any money spent on capital improvements. A capital improvement is any improvement which substantially increases the useful life of the property. If you find a property which has not had any maintenance expense in the recent past, you will probably find a trade off in the overall condition of the property.
This is probably the most difficult portion of the operating statement to complete accurately. This information is most easily obtained from the owner. NOTE: If the owner is paying the utility bills and is then reimbursed by the tenant, the full utility cost will be listed here and the amount reimbursed to the owner would be listed as other income (this is referred to as R.U.B.).
Accounting and Legal
This is the amount for the bookkeeping required on the property. It will include any amounts paid for payroll reporting or for monthly profit and loss statements. This should also include any legal expenses associated with evictions, drafting of leases, etc.
Advertising, Licenses and Permits
Many larger properties will have ongoing advertising expenses. At the very least there will be some cost at each vacancy. This includes the amount spent for advertising, as well as any licenses or permit charges; e.g., city business license, pool inspections, and/or housing code inspections.
This might include supplies for the vendors mentioned previously: Bug spray, batteries for smoke detectors etc.
That’s right! There should always be a category for those expenses too insignificant to warrant their own category. This would include any additional expenses which were not accounted for elsewhere in the analysis.
These are services which are supplied by outside vendors not already accounted for under fixed expense categories. These are additional services such as maintenance contracts, design services, appraisals and as many others as necessary.
Here is a list of the more common expenses in alphabetical order. Some of them we list without explanation because they are rather obvious:
Accounting and Legal expense
Licenses and permits
Miscellaneous and other expenses Property Insurance
Payroll and Workers Compensation
Real Property Taxes
Repairs and Maintenance
Utilities (Such as the electric bill)
Total Operating Expenses
This is the total of the expenses calculated. This is not to include vacancy or credit losses. Remember that what we are attempting is to give as accurate a picture as possible of the property’s financial condition. The property’s value will be dependent upon the ability to produce income, so it is important to be as accurate as possible in estimating both income and expenses.
The total operating expenses are now subtracted from the effective gross income.
Effective Gross Income $11,400
Total Operating Expenses (4,500)
Net Operating Income $ 6,900
Net Operating Income (NOI)
The net income that a property is capable of producing will be one of the first indicators of the worth of an investment. Later when we begin to apply the capitalization rate to the property, the NOI will be used to estimate total investment value.
The calculation of the net operating income does not take into consideration the effect of any potential financing of the property. This may seem odd at first, but in consideration, it will not take long to realize that the property should have a value that is completely independent of any financing that an investor might use to acquire that property.
Measure NOI correctly in order to properly value property
NOI is arrived at as follows:
Gross Operating Income
– Operating Expenses
– Capital Expenditures
Net Operating Income
The sales proceeds that come from divesting yourself of a property are as follows:
– Selling Expenses
= Net Sales Proceeds
– Adjusted Basis _
= Taxable Gain
– Depreciation _
= Capital Gain / Loss
Having discussed the income and expense analysis in detail, we will concentrate on the balance of the data and other considerations. The property will be analyzed for the following:
All of these considerations will be compared to other investments available in order to determine the appropriate rate of return and measures of value for the property being analyzed.
Test Your Knowledge: Data Collection and Income & Expense Analysis Questions
1. What is the chief component in the calculation of effective gross income?
2. How do you come to Effective Gross Income?
3. Circle the following that are considered an operating expense:
Property taxes Insurance The owner’s income taxes
Mortgage debt service Payroll taxes Utilities
4. How do you arrive at NOI from Gross Operating Income
5. How do you arrive at the capital gain / loss from the sales price?
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A question was poised on the SDICA forum that I thought would be a good one to address.
The question was, “what steps can I take to minimize my risk of buying and owning an apartment buildings right now”?
Ask and you shall receive. Here is what I am doing to keep my properties operating effectively.
You’ve heard the old saying in business it’s easier to keep a client than to get a new one. Well, your tenants are your clients, and unless you’re grossly under-rented, you need to retain as high a percentage of possible of your current apartment tenants.
Keep a reminder in your calendar for 60 days before their lease expiration, so you can talk to them about renewing. If they are going to move, it’s best to find out as soon as possible. It’s helpful to find out why because sometimes you may be able to convince them to stay if its an issue that is rectifiable.
Have a Nicer Product or Better Rents (Or Both)
Start by spending money on items that are unsafe or may cause emergency calls. These issues will happen, and if possible deal with them before it becomes a problem. Being proactive goes a long way. It also saves a lot of money and aggravation not to get calls at midnight.
When making improvements to the units, some of the best ways to get maximum bang for your buck is to:
Paint the unit – Two-tone color choices (wall color and white ceiling) are always a good idea. This will cost more initially, but once it is complete you will rarely ever have to paint the ceiling. You also want to paint the base, case, and doors a nice white color in semi-gloss. The more you can make the place feel like a home rather than an apartment the better rents and retention you will get.
I like to make sure the texture looks well-done. It does not have to be perfect, but you definitely do not want patches everywhere.
If you’re looking for a good painter, I highly recommend TruLine Painting. I’ve used them on all of my projects and they really do a great job of giving my units a quality facelift.
Update the interior doors & hardware
Flooring – I like to use as much tile and or laminate (the stuff that looks like wood) as possible. It costs a little more the first time but lasts 5 times as much as carpet and you will probably get about 5% more in rent.
Get ahead of the game
If you have vacancies coming up get on it quick and return calls immediately.
Track the market
Do rent surveys & talk to other apartment owners of similar buildings in the area where you own property (send me an email or drop a comment if you want to know how to do rent survey report & spreadsheet). This is also a great way of finding properties for sale. Make sure to give everyone you talk to your information and let them know that if they ever think about selling to give you a call.
HAVE GOOD SYSTEMS IN PLACE
We automate as many of the processes as possible by having good checklists of activities we do repetitively. Instruction sets are created on each item to make sure that we do it correctly and consistently. It’s hard to figure out what is and is not working if you don’t do things consistently so you can track them. It makes it so much easier to improve on what we are doing. In addition, it allows me to easily hire people and get them up to speed quickly, or, if I lose someone, I know how to do that task and I am not held hostage or overly dependent on any one person.
Here is a quick example of sample turnover procedures.
Once someone gives us notice to vacate (sample of one of our move out inspection flow charts)
For example we have our systems for
Final walk through (see sample flow chart of walk-through) letters go out to tenant with instructions on ours and their responsibilities.
Once it is vacant we will: walk through checklists for repairs, vendor coordination, property showing, applications etc.)
A few things we do to make it more efficient: Use an electronic Realtor (sentry) lock box. This device allows my assistant to generate up to 10 random codes daily from the office. When someone calls my google voice number, I get a text with the voice message which I forward to her which goes in our database. She then calls them back to get the rest of their contact info including an email. We then send the prospect an email with instructions on how to get to the property, how to enter, and THEIR OWN code which we inform them to not give out to anyone because it is tracked (see sample form letter below which we EMAIL to prospects). We are then able to log on to see who looked at the property so we can follow up to see if they are ready to fill out an application and why or why not. Also now that we have their email address, if they decide not to rent with us we now can update them in the future about upcoming vacancies 6 ,12,18,24 months from now when they may be thinking of moving again. This is crucial for renting out units fast.
Viewing instructions for our units
If they want to fill out an application, we use my smart move/transunion credit/criminal check which they do online and either pay for or they give us the cashiers check and we then pay for (I like this way better because they are more committed after giving us the credit check fee) which we get a copy of along with the prospect. With this service, I do not have to collect social security codes and worry about certain compliance issues. In addition, it also speeds up the process. We then get an approve or disapprove based on our criteria and can then make a decision.
Once an application is accepted we send them an approval letter/email/phone call and let them know they will shortly receive a lease package via email for electronic signature using a service called docusign which is legally binding.
My assistant puts together the resident package which includes some of these items
All of these are put into docusign for email/electronic email distribution. An email get’s sent out which is signed by both parties (legally binding) and no paper has to be printed. The fully executed copy goes in their file which is on our computer server for any reference in the future.
Hopefully this can give you some ideas on better ways to operate your apartments which will reduce your risk. As always feel free to give me a call or drop me an email to discuss further.
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Curtis Gabhart and Gabhart Investments, Inc – 2018 All Rights Reserved The material contained in articles that appear on gabhartinvestments.com is not intended to provide legal, tax or other professional advice or to substitute for the proper professional advice and/or commercial real estate due diligence. We urge you to consult a licensed real estate broker, attorney, tax professional or other appropriate professionals before taking any action in regard to matters discussed in any article or posting. The posting of an article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.
If you are thinking of selling an apartment building I think it is important to use someone who specializes in that product type. Just like if you have a 5 million dollar home in Rancho Santa Fe, you wouldn’t list it with an agent who focuses on first time home buyers in San Diego.
Multifamily investments take a much different approach to marketing the listing for sale than a residential property. In the report below I mention some of what I feel are good ways on how to hire the right real estate agent.
If you don’t want to end up with this agent then you need to…
Here is a quick recap of some things I look for when doing a quick inspection of an apartment building or even a single family home and common issues I come across.
I like to do a quick review to the outside condition of the property in order to gain insight as to whether it warrants further consideration for purchase or investment.
Now, before getting into the details, let me summarize the most important factors regarding the physical condition of a property.
Some of the important visible considerations are:
Reviewing the foundation and cement
Checking the siding
Reviewing the sprinkler systems
Analyzing the quality of the landscaping
Looking at the windows
Looking at the roof
Inspecting at the front door
Looking at the gas meters
Looking at the train gutters
Reviewing the quality of the paint
Looking at the overall neighborhood
When buying a property, whether it’s an apartment building or single-family house that you may plan on flipping, some of the concepts are going to be very similar, if not identical. With many investment properties, you will find an inside inspection is subject to an accepted offer. This means you will need to make some assumptions about the property before you submit your offer. This can prove difficult, especially when you’re not able to view the inside.
I’ll look from the ground up – I’ll start by looking at the ground and taking an overall look at the condition of the property to see what level of care has been maintained. As a general rule, if it’s a piece of shit on the outside, it’s probably a piece of shit on the inside. There have been a few exceptions where I’ve been pleasantly surprised when I got inside a property, but that’s exactly what they are – exceptions. I’d use this analogy as a general rule of thumb – if you see a car that looks junky on the outside, it probably just as junky on the inside.
Foundation – I’ll look at the foundation,all the cement on the ground near the foundation, and all landscaping near the foundation. I’m looking for things like sprinklers spraying on the building. I’ll then check if there is stucco peeling off the building,which can sometimes indicate moisture intrusion into the building. I’ll also check if the ground is sloping towards or away from the building; it should be sloping away from the building.If it’s sloping towards the building, it may indicate that a possibility of having a foundation or other problem that relates to water. If there’s cement, I’ll look for big cracks in the cement, which sometimes can indicate unstable soil or cracks in the foundation.
This could indicate further foundation issues
Landscaping – what is it going to cost me to improve the landscaping, what do I need to do to it, are there sprinkler systems, and are they automatic or non-automatic?
Building – what kind of siding is there? Is it stucco, brick, vinyl, wood? I pay close attention to the condition that it is in. If it’s wood, I will check for visible water or termite damage.
Eaves – Does the wood going into the eaves have damage? If there’s a lot of damage in the eaves, it very well could go into the attic rafters, which could be a lot more expensive. If it’s on the siding, what kind of siding is it? If it’s an old building, a lot of times replacing siding can get very expensive for two reasons:
the eaves is the part of the roof that meets or overhangs the walls of the building
First is the fact that you may not be able to find that particular kind of siding anymore without having it specially milled.
Second is anytime you pull something off an old building, you’re very likely to find unforeseen surprises. Because you can’t be certain of the magnitude of these surprises, it is safe to assume everything is going to cost you a little more than you think. Whatever you think the price is, assume it probably cost more than you originally estimated.
Windows- Are they new or old? If it’s an old building, are they wood sash or aluminum windows? Is that something that’s going to need to be replaced? Typically, the double-wood-hung windows that you see in houses or old apartment buildings are not in very good condition. With aluminum windows, I essentially just look at them and decide if I’m going to replace them or not. What you need to be aware of is in many areas where you replace these windows, there may be architecture review committees that require you to replace them with historical windows. This could prove to be very costly, especially if they are wood sash.
wood sash window
Building Corners – Does everything appear straight? If there’s siding, are the lines of the siding vertical or are they all straight? On the corners of the building, what does the wood look like? Is there stucco coming off?
Roof – Does the roof have something called a drip edge? This is a little metal edge that goes into the lip of the shingle roof. Are there rain gutters? If there are no rain gutters, water may not have been running away from the building. Because of this, I will spend more time thoroughly inspecting the foundation.
I look at the shingles of the roof; if there are many noticeable curved edges, it is likely on its last leg. Then, if I think I may need to replace the roof, I will look at how many layers of roofing there are. Typically, you don’t want to go past two or three layers of roofing. What that means is that if you replace a roof that has two or three layers, you need to put in your budget funds to tear off that existing roof before replacing it. You also will need reserves for unexpected issues when you pull of the old roof because you may need to repair the plywood underneath. Depending on how much work you do around the roof, you may have to re-sheet it.
re-sheeting a roof
Fence –Do I need to replace or paint it?Is the fence wood? Is it leaning, does it look like it’s on my property line, does it look I could add private yards for apartment units? Many times, you will find large open areas in the back of apartments that are shared. What we can do is put up a fence around the units and now each unit has their own backyard – a very inexpensive fix that not only can help you get higher rent but can reduce costs because you may not have as much landscaping to maintain
Paint (for older buildings) – If it’s pre-1978 and you have peeling paint, you’re probably going to want to get a lead-based paint test conducted. That’s going to tell you whether you’re going to need to do any kind of abatement or work on the property. If work is needed, you may need to use lead-based paint best practices, which can prove very costly. I usually recommend getting a test. Paint used in older buildings in San Diego is less likely to have lead in it compared to the east coast, where the weather is harsh and requires more durable paint. Most of the properties I have tested did not contain lead, but it is still important to get it tested.
If it is tested and comes back negative you do not need to follow lead based paint best practices. If you have a pre-1978 property and decide not get it tested, you still must work on it like it contains lead based paint – which is a good reason to get it tested in the first place.
Front Doors – Aesthetically, are they looking good? Are there any gaps? If I look at top of door, I will look for a little pie-shaped gap at the top. If this is present, it indicates there may be some settling in the property.
Meters– Is it gas or electric? Are there gas meters for all units? If the property runs on gas and there is one water heater, there should be gas meters for each unit and also for the building.If it’s a multi-unit building, I count how many individual meters there are. There should be as many individual meters as there are units, plus one additional one, which would be for the common area. If you’re missing a meter, you may have something called a bootleg property, which means one of the units may have been put in unpermitted(just something to look at). These are important things to note because in San Diego the tax assessor will charge for all the units, and state on the public website that it is X units, but that does not necessarily mean they are legal units.
Electrical –As far as electric meters go, I’m looking at what kind of panel it is. If it’s old, it could be something called knob and tube, which could indicate that I’m going to have to put a lot of money into upgrading the electrical. This will likely increase the interior costs as well. I then look at the circuit panel – is it updated? Then, I’m looking at how many amps each unit has. Ideally, you want 100 amps, but for many apartments, you’ll have between 30-50. Newer apartments should have 100.
Knob & Tube Wiring
I’m also looking at the type of panel; Murray Lampert typically have problems, so I want to check what kind of panel there is. Are there circuits in the units? Is there any room to add additional circuits if you want to add appliances or anything else inside the property? Is the inside of the panel painted? If so, it could indicate that the previous people who worked on the property weren’t doing things the proper way. This would lead me to believe other things were not done the proper way.
This is quite the mess!
I’m looking for bunches of electrical or cable lines running all over the place. We’ve bought properties where it looks like spaghetti running all over the building, and we’ve ended up having to rip it all off and start from scratch simply because it’s easier to do instead of trying to sort it all out.
Staircases –When I walk on the stairs, I make sure to walk very heavy.I’m looking to see if it seems squishy. Is termite damage visible, are the railings stable? In compliance with code, railing spacing should be about three and a half inches. For me, if I can make a fist or place my hand through the pickets of the railing, it is most likely not up to code and I’ll have to replace it depending on my insurance company and how bad it is. I look at the stairs to see if the tread rise and depth are consistent. It should be around 7” of rise and 11” of depth. If they are not to code they may need to be replaced.
Inconsistent stair depth
After An Inspection– Once the inspector gets into the property and finds things that I may not have found, do I decide not to buy the property? No, not at all. It just helps me to figure out what it’s going to cost to fix or if I even want to fix it, and what exactly I’m getting myself into. That’s what is critical about the inspection. You can make a well-informed decision on the property rather than going in blindly and being surprised later.
It is naïve to think you can figure out how to hit a certain number or certain profit, or how to stay within a tight budget, without being informed of all the problems. This is valuable while I’m negotiating in the beginning. If I’m coming in lower than the initial offer, I can right away talk to them about some of these problems, which, most likely, the owners already know about but haven’t disclosed yet or many times they had no idea there were these problems which make it easier to negotiate.
Keep in mind, none of this is 100%. These are just good rules of thumb when looking at a property. They have served me well to establish if an investment property warrants further investigating and analysis, and if so, what kind of offer to submit. This obviously isn’t everything. I depend on inspection in most cases. I will be posting an interior walk through an article in the weeks that follow. I’m interested to hear your story and what else you may look at when walking a property. Please share your take in the comments below.
**Disclaimer** – make sure you are walking the property with the consent of the current owner. Please keep in mind we are in the San Diego market and practices in your area may be different. I highly reccommend you get a building inspector to look at the property unless you are highly confident in your ability.
Curtis Gabhart, CCIM President Gabhart Investments, Inc.
Edited By Blake Imperl, our newest intern at Gabhart Investments. Check out his Linkedin page by clicking here.
Gabhart Investments, INC. (GII) is a privately held real-estate investment firm based in San Diego, California. We operate in a rapid paced project driven environment. The employees at Gabhart Investments, INC. (GII) are close-knit, highly qualified professionals, possessing the necessary competence to meet our clients’ goals. GII promotes ethical balance for continuous training, leadership, and teamwork. Since 2000, GII has acquired and converted multi-family properties into condominiums throughout San Diego County. The new real-estate market has presented us with many opportunities to take advantage of. Along with our equity partners, Gabhart began to grow its portfolio in, arguably, the strongest housing market in the country. Thus, we consistently generate superb risk-adjusted rates of return for our investors. In 2005, Gabhart’s private investment portfolio had transactions in excess of 40 million dollars. We intend to accelerate our business model by maintaining our focus within the purchasing and rehabilitation of bank owned real-estate property. Our additional services include consulting, brokerage, venture funding, development, construction management as well as property and asset management.
Winner of the San Diego Business Journal Top Real Estate Deals of 2014
“My team represented the owner and closed the deal from multiple offers, at the full asking price of $4.7 million. That selling point was one of the highest recorded price-per-unit sales in Golden Hill.”
I was honored and humbled when I recently won the prestigious San Diego Business Journals Deal Maker of the Year Award for best Multi-Family with the sale of El Dorado Manor in Golden Hill and also won for the top Retail Deal of the Year for the sale of the San Ysidro Swap Meet.
I wanted to take few moments to share with you the details of the apartment transaction in hopes that it will provide you with some ideas for transactions you may be involved in.The deal presented was the successful sale of a 22 unit multi-family property located just east of downtown San Diego in the Golden Hill neighborhood. My team represented the owner and closed the deal from multiple offers, at the full asking price of $4.7 million. That selling point was one of the highest recorded price-per-unit sales in Golden Hill.
This story began in 2005 when I originally teamed up with the Seller for a project to put a subdivision tract map on the property.The Seller’s original plan was to either develop the property himself or sell it as a package to a condo conversion specialist. That plan was dealt a challenge when the City of San Diego was served with a lawsuit by a private group whose aim was to stop Condo Conversion projects.
Front shot of the 22 unit golden hill apartment building for sale
With over 180 projects across the city paralyzed by pending litigation, I swiftly assembled the team necessary to start a non-profit foundation providing legal leadership to all the affected property owners.The Foundation’s actions soon gathered many of the Owners together and successfully removed them from the lawsuit.However, the larger issue was a lack of defined and realistic civic regulation covering this type of real estate transaction.
logo that was created as part of the marketing campaign
I employed the resources of the foundation to continue its mission beyond this first success. The involvement of all parties – City, Owners, Realtors, and Citizens – was the key to the creation of new condominium conversion regulations for the City of San Diego.My continued involvement in the lawsuit conversations and its successful resolution meant that condominium conversion would continue to be one of many sources of affordable home ownership for San Diegans.
Unfortunately, the delays encountered in addressing the lawsuit prevented the owner of the Golden Hill property from selling at the most opportune time, at the peak of the market for this property type.Not to be dissuaded, I continued to meet regularly over the years with the Owner, analyzing market trends and data. Incorporated into this strategy was attention to the existing tentative condominium map so that it did not lose value through expiration.
In 2012 and 2013 the meetings included a new, thorough financial analysis. The Owner and I focused on three viable scenarios for the property:
Owner to proceed with the Condominium Conversion himself
Owner and Agent (Myself) to enter into a joint venture to complete the Condominium Conversion
Owner to sell the property as it existed (multi-family apartments).
Additionally, my research addressed these issues:
Tax basis and tax consequences for the Owner
The potential tax liabilities of the Owner doing the Conversion directly
The value of the property in a 1031 exchange ascondominiums or as apartments
After 10 + years of ownership, trading out this property in the Owner’s portfolio would require a very attractive replacement and the confidence that I would be able to locate it.Our carefully considered conclusion was to list the property as an apartment building with the still-viable tentative condominium map included in the transaction.
With the Owner’s blessing, I selected an ambitious price point, which was the highest per unit price of any listing in Golden Hill.This created a fresh challenge – overcoming resistance to the number by clearly illustrating the supporting values.
Through my research of current and historic rents in the desirable neighborhood, I revealed support for aggressive pricing, indicating viable prospects for the property.A detailed list and photographs of comparable buildings in the area was compiled to show buyers what was being offered to apartment seekers at that price point.Additionally, I invested in large-scale, photo-realistic renderings of the property, illustrating its potential for renovation as a condominium project able to compete with pricier options in nearby Downtown San Diego. Packaged into a video format, the information was easily communicated to potential Buyers and their Realtors. This action enlarged the pool of potential buyers, with more agents and clients able to understand in visual terms the scope of possibilities and value being presented.
a rendering that was made for the marketing of the apartment building
The historic high price point per unit was supported and accepted, evidenced by the reception of multiple offers on the property.My persistence throughout a 10-year relationship and innovation created value and resulted in a successful transaction at full asking price for the Seller. My understanding of all facets of the transaction was invaluable in assisting the Buyer’s agent in compilation of the multitude of documents into a comprehensible format for the Buyer.
A final level of complexity had to be negotiated. The transaction needed to be completed within a specific one-week window of opportunity.The ability to do this in coordination with the Buyer’s Broker allowed the Buyer to fulfill the requirements of their 1031 exchange at the same time the Seller did the same for their 1031 transaction. Additionally the sale was carefully timed so that the Seller avoided a significant pre-payment penalty.
Here is a list to use that should help you with your due diligence when buying apartment buildings. Below are some of the things to request from the seller of a multifamily property.
I decided to post this list because of a comment I received on a previous posting. I did named data collection and income & expense analysis of apartment buildings (click here to read that post).
Here is an excerpt from his comment
Remember that the SELLER always LIES so NEVER ever rely on the seller to give you accurate numbers. Do your own research that way you only have your self to pat on the back!!!
Below is a list of items I use (in San Diego) that you will want to request from the apartment buildings seller and/or broker listing the property.
Due Diligence Request List
1. Annual profit and loss statements (P&Ls) past 3 years; one year of monthly P&Ls
2. Rent roll and leases including term, deposit, and payment history, Section-8 housing documents, if any
3. Tax returns (last 2 years)
4. Receipts of utility bills (water, gas, trash, sewer, electric, etc for last 12 months) or recap report from provider showing usage and cost
5. Any service or advertising contracts: (Trash, extermination, maintenance, management, commission agreements, union agreements, vending, billboard, pay telephone, etc. and any instrument or contract to be assumed by Purchaser)
6. Copies of all appraisals, engineering reports, termite reports, environmental reports
7. Insurance claims history for last 5 years (can be obtained from insurance agent)
8. List and receipts of any major repairs done in the last 5 years (paint, fence, remodel, roof, water heater, etc)
9. Insurance policy including all riders, risk assessments, and disclosure affidavit for carrier
10. Architectural and engineering plans and specifications (if available)
11. Payroll register: List of employees including name, position, wage rate, and entitled benefits
12. Business license
13. Litigation History: details of any past or pending litigation (if none, then an affidavit from the owner)
14. Environmental Inspection and Survey, if readily available: Key Issues: Asbestos, Lead Paint, underground tanks, wetlands
15. Warranties: existing warranties from roofers, contractors, etc. (passed to the new owner if possible).