San Diego Rent Control

San Diego Rent Control

Quick Summary

  • Californian’s will get to decide in the November ballots the fate of the Affordable Housing Act (AHA), which would allow for cities to adopt rent control.  The AHA seeks to revoke the Costa-Hawkins Rental Housing Act, which prohibits rent control on buildings built after February 1995.
  • Many San Diegan’s believe this would provide an answer to our housing crisis, however, many professionals and economists disagree.
  • Experts believe rent control would be detrimental to the San Diego economy and would discourage new housing development, further exacerbating the housing crisis.
  • Experts also argue that rent control would eliminate many incentives to own rental properties. This could cause harm to both owners and tenants.
  • Rent control has already been adopted in several cities around the United States, and the results have proved to be harmful to the overall economy by shrinking supply of affordable housing and driving up rental market prices.

Continue reading below to learn more about rent control and the effect it would have on the San Diego economy.

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San Diego Rent Control

San Diego is facing a profound housing crisis. Rents keep climbing and supply keeps falling desperately behind demand. According to the San Diego Union Tribune, in March of 2018, the average rent in San Diego County hit an astonishing record of $1,887.

San Diego now ranks as the ninth most expensive market in the United States. Many San Diegan’s are finding it increasingly hard to afford rent and are turning to the government for answers. Their solution? Adopt the Affordable Housing Act and repeal the Costa-Hawkins Rental Housing Act which would allow cities like San Diego to decide on their own rent control measures. The initiative received more than 650,000 signatures and will be placed on the November ballots, giving Californian’s the option to decide on this issue.

Many economists and experts agree that rent control offers no benefits for all parties involved and would be disastrous for our local economy. How would rent control affect San Diego? Let’s take a closer look at the various players in this debate.

*This is part 1 of our series on Rent Control. Be sure to stay tuned for detailed scenarios and further information to come soon.*

What is Costa-Hawkins?

Costa-Hawkins is a California state law that was adopted to counter vacancy control ordinances and spur new construction of single-family homes.

It limits how cities set rent control in two ways

  1. It prohibits cities from putting a rent cap on single-family homes or apartment buildings built after February 1995.
  2. It gives landlords the right to raise rent prices to market value when a tenant moves out, otherwise known as a vacancy control.

Costa-Hawkins does NOT outlaw rent control. Cities like Los Angeles and San Francisco have been able to adopt some forms of rent control but within the state law.

Source: Union Tribune 

What Is the Affordable Housing Act?

The affordable housing act has three main objectives

  1. It aims to restore California’s cities and counties to develop and implement local policies that ensure renters can find and afford decent housing in their areas.
  2. Improve the quality of life for millions of California renters and reduce the number of people who face critical housing challenges and homelessness.
  3. Repeal the Costa-Hawkins Rental Housing Act

Supporters of this bill hope that if passed, rents will go down and that many San Diegan’s will be able to find affordable housing. They believe that increased rents are a result of landlords fueled by monetary greed.  This act would allow cities to prevent landlords from increasing rents once a tenant leaves.

Source: Affordable Housing Act Website 

While it is no question that rents are sky-rocketing and that a solution needs to be reached – rent control is not the answer. In fact, I would argue rent control would just exacerbate the problem.

 

Why Rent Control Won’t Work

Those against the Affordable Housing Act include apartment developers and landlords (among others). Repealing Costa-Hawkins would lead to shortages in both the quantity and quality of housing. Profits are what incentivize landlords to maintain a building in good shape. If rents are capped at a certain limit, what is the incentive for landlords to maintain the building?  Buildings would become neglected and long-term improvements wouldn’t be invested in. This can create unsafe living conditions for tenants.

Rent control would limit property owner’s potential cash flow to dangerous levels. When you think about things like increased expenses and rising interest rates, this could put owners at risk. If the owner can’t make their mortgage payment because rents have been caped, they risk losing their property. This could create a domino effect amongst many property owners. Tenants might also have to look for a new place to live.

There are already many risks associated with owning a multi-family building, so if you factor in rent control, what is the incentive to buy a place? Owners might opt to convert their building into condos if they do not see enough cash flow to turn a profit. This would take away even more rentals from the San Diego market.

In 2016, the Union Tribune asked 14 experts whether they believed rent control would benefit the San Diego economy, all 14 experts answered, “No”. They cited everything from shrinking the supply, decreasing affordability long-term, to driving tenants out to repurpose buildings.

History has shown us that rent control doesn’t work. Look at New York City in the 1970s and 80s. Landlords simply stopped maintaining the buildings, amenities were no longer looked after, living conditions became dangerous, and eventually, entire streets blocks were left vacant. New York’s neighborhoods fell into an economic recession and investment was at an all-time low. 

The Impact on Development

What about developers and investors? Would the same incentives remain for them to continue to build new construction if they knew property values would be artificially capped?

A recent CoStar report discussed the impact that rent control could have on development.

“Many developers are concerned about the economic impact there will be on new development if it is subject to rent control… it would change the “whole economics” of how developers view potential development opportunities… It’s hard enough and costly enough for a developer to make a decision to build housing, and now they are put on notice that the housing may be subject to rent regulation… they may very well be unwilling to make those tough decisions of being invested in building a development”.

If developers are unwilling to build new units, which San Diego desperately needs, that is a losing scenario for all parties involved. This would place us further behind meeting the demand for housing. Alan Gin at the University of San Diego argues,

“the problem is the lack of construction of both single-family and multi-family residential units. Controlling rents would reduce the incentive to build more multi-family units”.

If developers see fewer incentives to build housing, they may turn to other development avenues like commercial, retail, office, etc…

Rent control not only discourages development, but it would contribute to less affordable housing developments being built. Austin Neudecker of Rev points out that rent control would increase the prices for those who cannot find a controlled unit. New York City and San Francisco are prime examples where soaring rental prices and rampant abuse of rent-controlled housing exists.

Another big concern with rent control is tenants deciding to stay for extended periods of time in their current unit or subleasing it out. This makes it harder for people who need affordable housing to get into units.

A 2017 Standford Study and this LAO report also concluded that rent control does more harm than good. I recommend giving these a read, they provide some valuable insight into what happened in San Francisco and their attempts at rent control.

Final Thoughts

Think about this for a moment. If produce is too expensive, should we limit how much the farmer makes? What about if Apple Computers are too expensive? Do we start paying people who make them less?

The same concept applies to landlords when being asked to accept rent control. Just because rents are going up, it doesn’t mean the responsibility falls on owners and developers.

More permanent solutions lie within increasing zoning, reducing the time it takes to build, and expanding our public transit system and building communities around those transit centers.

These are just jumping off points but could be great starts to solving what is arguably one of San Diego’s biggest dilemmas. I will be updating this post as more developments arise, so please stay posted.

More Information

San Diego Union Tribune “What’s the Deal With Rent Control” 

EconoMeter Critics Panel Report

Rent Control is No Answer to California Housing Crisis 

Written by Blake Imperl in collaboration with Curtis Gabhart

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.

 

Hot Topics in Commercial/Multi-Family Real Estate – CCIM & IREM Luncheon

Hot Topics in Commercial/Multi-Family Real Estate – CCIM & IREM Luncheon

CCIM & Irem Annual Joint Luncheon

Hot Topics in Commercial/Multi-Family Real Estate
CCIM San Diego Hot Topics In Commercial Real Estate

I am pleased to announce I will be presenting on the expert panel at the upcoming CCIM & IREM Joint Luncheon.

Topics will include

  • Rent Control (Multi-Family and Commercial)
  • Women in Brokerage (career opportunities)
  • Legislative Update
  • Q&A with Expert Panel

Location/Time

Thursday, July 12, 2018
11:30AM – 1:30PM

Bahia Resort Hotel
998 West Mission Bay Drive
San Diego, CA 92109

Sign Up Here

For more information, please contact Ellen Ernst at eernst@ccimsandiego.com.

Hold vs Sell Decision – Real Estate Investing Class

Hold vs Sell Decision – Real Estate Investing Class

Hold vs Sell Decision

Commercial Real Estate Investing Class

One of the most important decisions for real estate investors is to hold an investment or sell it. This class will demonstrate a methodology to evaluate the hold vs. sell decision. Investment pro-forma’s will be used to measure the impact of keeping an investment or selling it.

Topics will include:

  • Estimating Investment Base
  • Forecasting cash flows
  • Comparing alternative investment strategies
  • Estimate investment performance with Net Present Value and IRR.

Registration is at $50.Seats are limited to 50! RSVP in advance to reserve your spot!

________________________________________

The presentation will be put on by Curtis Gabhart, CCIM and Mark Goldman, CCIM of SDSU. 

Curtis Gabhart has been a successful Real Estate professional for more than a decade. He has a Certified Commercial Investment Member (CCIM) designation from the CCIM Institute. He is a Director at Keller Williams Commercial Brokerage and President of Gabhart Investments, Inc, a privately held real estate investment firm that manages a syndication of private investors, specializing in acquiring and renovating single and multi-family properties. He also serves on the Commercial Advisory Board at the University of San Diego Burnham-Moores Center for Real Estate and he teaches commercial real estate courses for the California Association of REALTORS® and San Diego Association of REALTORS®. He has been recognized by members of Congress, California State Senators, the City of San Diego, and had a day named after him in the County of San Diego for his community service and dedication to the community. He was awarded as the Dealmaker of the Year for 2015 in Retail and Multi-Family category.

Mark Goldman has been a loan officer in San Diego since 1991. He has a degree in real estate finance from the University of Connecticut. Mark has a Certified Commercial Investment Member [CCIM] designation from the CCIM Institute. He has authored several books on real estate financial analysis and given seminars on real estate financial analysis and financial planning topics. Mark also teaches real estate finance at SDSU. His areas of expertise include analyzing financing alternatives and searching for specialized loan programs. Mark has been a “Certified Community Home Buyers’ Program” instructor. He can help to maximize your home purchasing power or achieve your refinancing goals.

Commercial Real Estate Due Diligence Class Recap

Commercial Real Estate Due Diligence Class Recap

Commercial Real Estate Due Diligence

After having a great discussion during my last class on Commercial Real Estate Due Diligence, I wanted to take this opportunity to share with you some of the key takeaways. This article is intended mainly for apartments/multi-family, however many of the same principles will apply across different areas of commercial real estate. I’ll start with a brief overview, then dive into each topic a bit more, and finally leave you with my powerpoint presentation that gives an overview of the topics I covered in my class. It is my hope you will add many of these ideas to your property analysis toolkit.

What is Due Diligence?

Due Diligence is a necessary part of any real estate transaction.

  • It is the process of examining a property, related documents, and procedures conducted by or for the potential lender or purchaser to reduce risk.
  • Applying a consistent standard of inspection and investigation to determine whether actual conditions reflect the information represented.
  • The process by which you confirm that all of the facts of a deal are as they have been represented to you by the seller.

 

Conducting proper due diligence can be the difference between turning a profit or suffering a financial loss in a real estate transaction.

If you’re new to commercial real estate transactions, I recommend that you consider bringing in someone with more knowledge. It’s OK to admit you need help. Getting help from an experienced commercial real estate broker can add a lot more money to your pocket and make the process much easier for all parties involved.

 

Start With Initial Due Diligence

Once you’ve found your target property, begin by requesting all of the information in the seller’s possession (expense reports, property records, profit and loss statements, etc…). Often you will find on smaller to mid-sized apartment buildings that owners do not keep detailed records. This means you will need to do a little more investigating to get the accurate expense numbers.

Talk to the current tenants about things that are wrong with the building. Ask how long have they been there, if they are happy with things, what’s the neighborhood like, etc.… Current tenants can be a tremendous resource for learning about a property. If there is a current property management company in place, ask the tenants how responsive they are to their needs. A lot of times it’s easier to keep the same management company in place for the first few months of acquisition if they are doing a good job. Talk with the maintenance people about matters not tended to or problems that will have to be fixed in the future. They are often going to be more honest than a seller would about the actual condition of the property.

 

Financial Due Diligence

commercial real estate sales comparable

  • Review the profit and loss statements (P&L). Make sure you pay extra attention to any areas where significant gains or losses occurred and try to spot any discrepancies.
  • Underwrite the property. Never take a seller and brokers provided pro forma at face value. Their numbers are usually a smaller look at the property and might not reflect how the financial performance of the property in a few years time.
  • Look at rent and sales comparable in the area.
  • Since your evaluation of the property will depend upon income today and tomorrow, the accuracy of the historical data, as well as the validity of projections, will significantly alter your potential financial return.
  • Look into the rent roll and leases including the terms, deposits, and payment history.
    • Be aware of handwritten changes to the leases
    • Get written confirmation or an Estoppel Certificate from the tenants if you can’t read the document or if the statements are unclear.
      tenant estoppel certificate

      Tenant Estoppel Certificate

      • An Estoppel Certificate is a statement signed by the landlord and tenant that states that particular facts are correct, that there are no defaults, and that rent is paid on a specific
    • Look for rent concessions
    • Are the security deposits mentioned in the lease the same as those outlined in the rent roll? (This is usually a problem area)
    • Cross check the rent roll against the income statement.
  • Get a lease abstract. This is a summary of the essential financial, business and legal information that exists in a commercial real estate lease. It should bring to the reader’s attention any important lease provisions, financial obligations or other issues of importance.
  • Always add your property management fees back into your expenses. Quite often, the current owner could be managing it and won’t factor that cost into their expenses, which could make the NOI appear higher than it would be if you bought it.
  • Reconstruct the financials on your own… add things back like long-term capital improvements (HVAC, electrical, roof, cabinets)… then show how that would affect your financials as you spread those costs out over time.
  • Recommend taking CCIM classes for understanding the financials and underwriting a property.

If you’re an expert in the location you’re interested in; you may still feel comfortable buying a property without the expense reports because you’re familiar with what expenses should look like. This is another reason why having an experienced broker could help because sometimes you will find properties that could be good deals but may lack proper financial reports.

Make sure you’re comfortable with the deal above all else.

financial due diligence checklist

Here is my quick financial due diligence checklist

Physical Due Diligence

commercial real estate physical due diligence

  • Walk every unit. It sounds like common sense but make sure you take a look at everything.
  • Don’t trust the seller/broker to tell you the unit is in perfect condition.
  • As you walk the units, I recommend using a “walkthrough sheet.” I have included a sample in my PowerPoint, which you can find at the end of this blog post. If you would like the full checklist, please let me know if the comments below.
    • As you walk the units, assess the overall condition of them. Take inventory of things that need to be addressed, breaking it into what must be fixed and then a “wish list” of items you’d like to get to eventually.
    • Look for any warning signs or safety concerns.
    • Are there any tenant concerns? Things like hoarding, multiple pets, an excessive number of occupants, unapproved alterations, illegal activity, …
  • Building inspectors are never a bad thing to have. Often you’ll get your money back in the deal.

physical due diligence commercial real estate

Legal Due Diligence

Here are some necessary things you’ll need.

  • Title inspection and survey
  • Environmental inspection (typically paid for by the buyer)
  • Inspection for building code violations. This is critical for understanding any potential hazards or areas that need immediate addressing.
  • Checking to make sure that the property is in zoning code compliance

Disclosures

When using AIR Commercial Real Estate Forms

  • Seller Mandatory Disclosure Statement (SMDS)
  • Property Information Sheet (PIS)
  • Tenant Estoppels (TEC)
  • Commercial Property Owner’s Guide to Earthquake Safety (pre-1960 buildings)

AIR is a leading, member-owned real estate network. From contracts to networking and education, they’ve been helping commercial real estate professionals for years. Developed by top commercial real estate experts, AIR CRE Contracts are recognized as the industry standard, and the most efficient way to close a deal. I highly recommend you look into becoming a member as they offer over 50+ contracts that you can use and edit to your own needs. Learn more by clicking here. 

When using CAR (California Association of Realtors) Residential Income Purchase Agreements

  • Know Material Facts
    • Seller property questionnaire (CAR Form SPQ) or Exempt Seller Disclosure (C.A.R. Form ESD) if TDS-Exempt
  • Commercial Property Owner’s Guide to Earthquake Safety (Pre-1960 Buildings)
  • Tenant Lease Agreements
  • Tenant Estoppels (TEC) if agreed in the contract
  • Survey, plans and engineering documents, if any, prepared on seller’s behalf or in seller’s possession.
  • Permits and structural medication documents – if in seller’s possession

Statutory Disclosures

When using CAR Residential Income Purchase Agreement (cont’d)

  • Lead-based paint pamphlet and form
    • Applies only to residential property built before 1978
  • Natural and Environmental Hazards
    • Seller is required to disclose if the property is located in a special flood hazard area; potential flooding (inundation) area; very high fire hazard zone; state fire responsibility area; earthquake fault zone; seismic hazard zone; and (iii) disclose any other zone as required by law and provide any additional information needed for those zones. These are satisfied with an NHD Report.
  • Withholding Taxes
    • Seller shall deliver to the buyer or qualified substitute, an affidavit sufficient to comply with federal (FIRPTA) and California withholding law (C.A.R. Form AS or QS)
  • Condominium/Planned Development Disclosures
    • Seller has seven days (standard) after acceptance to disclose to the buyer whether the property is a condo minimum or if its located in a planned development or other common interest subdivision.

Click here to download the CAR Sales-Disclosure-Chart

The California Association of Realtors (CAR), is real estate trade association to develop and promote programs/services that enhance a member’s ability to conduct business with integrity and competency. They have many tools designed to help you thrive in your real estate career. From their zipForm transaction tools to their education courses and more, they are a great resource. Learn more by clicking here

legal due diligence checklist real estate

Final Thoughts

Thank you for taking the time to read this article. I hope you found it helpful. As always, please leave any thoughts or comments below. We hope you will join us for our next class on “Don’t Take Cap Rates At Face Value” on Thursday, May 31st.

Stay up to date with all of our upcoming real estate classes by clicking here. We offer one class a month that covers relevant and important commercial real estate topics.  

 

Curtis Gabhart and Gabhart Investments, Inc – 2018 All Rights Reserved
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of Gabhart Investments, Inc. 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.

 

The New Tax Laws Effects on Commercial Real Estate Live Presentation

The New Tax Laws Effects on Commercial Real Estate Live Presentation

You’re Invited to Learn About the New Tax Laws That Are Affecting Commercial Real Estate

Please join us for an informative live presentation with Dan Adams, Senior Vice President & Commercial Lending Manager at Wells Fargo. Dan will be taking us through the changes, how they affect commercial real estate, and also conducting a Q&A to answer any questions you may have. Come prepared and ready to learn how you can maximize your business, personal, and investment strategy.

Date: March 29th, 2018

Location: KW Commercial Del Mar/Carmel Valley

Time: 12:00-1:00PM

Seats are limited to 30! Sign up today to secure your spot!

Registration is free and we encourage donations to Autism Tree Project Foundation (ATPF)

autism tree project foundation logoThe Autism Tree Project Foundation helps spread community awareness for autism. Their goal is to give children on the autism spectrum a voice and additionally aims to build community compassion towards the parents and families of these special children. ATPF helps thousands of families with autism create a roadmap for their child with autism and navigate a very complex system of care required for children with Autism Spectrum Disorder.

All monies donated to ATPF go straight to helping real families in our community through one of their 20 critical programs. These programs are on-going and provided to families at no charge, making the Autism Tree Project Foundation very unique. They are a grassroots foundation and have only 1 full-time employee on staff. They do not charge any of their families for ATPF programs.

Sign-Up Here

Earlier this month we asked you for your top questions on the new tax law. Dan was generous enough to answer some. Here’s the top 5:

1. There are new rules for Sub S corp and LLC’s. Do they apply to real estate in single asset entities?

Yes, the new pass-through rules apply to single asset (real estate) entities.   This means that the 20% deduction of pass-through net income applies to the rental real estate owned by a business, an individual, or a living trust.

2. Are there any changes in expensing acquisition costs that were capitalized in the old tax rules?

No, those rules remain exactly the same. 

3. Are there changes in the Alt Min Tax rules for passive investors?

Yes, there are significant changes to the Alternative Minimum Tax (AMT).     Generally speaking, the AMT has basically been eliminated.   It would be extremely rare for an active or passive investor to be subject to the AMT anymore.  I have read some comments that the IRS now expects the AMT to impact fewer than 1,000 individual taxpayers going forward.

4. Any changes in 1031 or installment sale rules?

Yes, we can now only exchange real property (not tangible personal property like improvements).  That creates a difficulty for buildings which had a cost segregation study done, in that the short-life assets would be taxed as boot (taxable gain) in the exchange.  Ideally, the replacement property would need to have a cost segregation study done immediately so that the additional depreciation from that could be used to offset the taxable gain from the exchange boot. 

5. How are the taxes on each property affected as far as tax write-offs?  It seems if they only allow a certain amount of taxes to be written off, it is going to affect the property prices?

The $10,000 state and local tax limit applies to state income taxes and property taxes paid on your primary, secondary, or investment properties only.  There is no limit on business properties or rental properties that are owned by a corporation/LLC.  There is a chance that owning a home is less lucrative now because of the tax limitations.  This could artificially increase demand to rent a home instead of own it. 

Click here to check out our tax article about the Tax Cuts and Jobs Act 

Interview with Globest

globest daniel adams tax law

In a recent article with Globest, Dan discussed some of the recent changes.

Below are a few highlights of the article, to view the full interview, click here

  • Dan believes the new tax laws are positive for the industry by creating certainty.
  • The tax policies ability to spur GDP growth is an indicator of the increase in the demand for office, industrial, warehouse, and other commercial property.
  • The new tax law made numerous changes that will favorably affect commercial real estate as an asset class, including indirect changes such as reductions in tax rates.
  • The law provides for a 20% reduction of business income for most pass-through entities.
  • 1031 Exchanges are now only available with real estate.
  • The increase in estate-tax exclusion to $11 million per person should be viewed as favorable since those are the assets that most often appreciate and are inherited by heirs.
  • The demand for single and multi-family properties will go up as the tax advantage of owning a home has been significantly reduced.
  • US-Based Manufacturing will increase, which could drive demand in that sector.
  • Although it’s been said California was hit harder than other states, much has been exaggerated. The $500,000 capital-gain exclusion for sale of principal residence still exists.
  • The new tax law isn’t a “one size fits all” situation. Brokers should consult their tax professional and figure out how to structure their business, their income, and their investments in a way that maximizes the advantages of the new tax law.

daniel adams wells fargo san diegoDaniel Adams – Senior Vice President, Business Banking Area Manager, Wells Fargo Bank – Dan leads a team that provides commercial real estate loans, treasury management, and credit lines to businesses in Southern California and Nevada. They provide loan structuring, underwriting and risk analysis for operating businesses and commercial real estate investors, and also offer working capital optimization technologies to help businesses operate more efficiently. Dan’s team originated over $300 million in loans in each of the past four years, including Small Business Administration, Healthcare Finance, Equipment Leasing/Purchases, and conventional lending products. Dan is a veteran U.S. Marine artillery officer with multiple deployments to the Middle East and Southwest Asia and also an adjunct Graduate Finance Professor at several local universities.

Wells Fargo’s Business Banking Group serves the needs of small- to mid-size privately held businesses throughout the country. They provide a proactive approach to a team of local Relationship Managers and others to provide customized service and rapid response to help our customers succeed financially.

Questions about the event? Contact us here

Multi-Family Quick Tips When Doing An Exterior Inspection

Multi-Family Quick Tips When Doing An Exterior Inspection

By: Curtis Gabhart, CCIM

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.

Starting Out 

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 foundationI’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

  1. First is the fact that you may not be able to find that particular kind of siding anymore without having it specially milled.
  2. 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.

peeling lead-based paint

Click here for information on lead-based paint best practices

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.

Meter Boxes

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 inspectionYou 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.

Final Remarks

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 InvestmentsGabhart 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.

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