I own multifamily properties throughout the U.S, and made a rule early on to walk each and every property before I buy it. I am a syndicator, so I invest with investors and manage the deal after we close. I don’t only walk the property because it’s an essential part of my due diligence, but also because I invest my own money in every deal. When you’ve got “skin in the game”, your perspective and attention to detail when walking a property is enhanced. I did not make an exception for this even during COVID. In this article, I will walk you through my process, and talk about how I used to walk properties before COVID, and how that has changed during COVID.
What Makes a Good Potential Deal
While I live in Rhode Island, I don’t buy properties here. Instead, I like to purchase properties that are located in landlord-friendly states, including Texas, Georgia, Florida, and the Carolinas. I do this for the same reasons as when I lived in southern California; landlord-friendly states are advantageous to landlords when problems arise.
Landlord-friendly states tend to favor landlords in the eviction process, whereas tenant-friendly states do not. There are other factors in addition to evictions, including policies governing security deposits, small claims court dollar limits, landlord-tenant statutes, and more. Each state has their own laws and policies governing landlord and tenant issues, so it helps to determine whether the state you’re planning to invest in is landlord-friendly or not.
Of course, the deal doesn’t hinge on a state being landlord friendly. I’m looking for job growth in the market, rent growth, and population growth. Other important metrics include the number of new units coming on the market over the next several years, the overall vacancy rate, the average rent rate, and the average price per unit. That’s what makes a strong market.
When considering a property purchase, there are many steps involved before a final offer is submitted and accepted. After finding a viable deal, I submit an LOI, or Letter of Intent, expressing my interest in purchasing the property as well as submitting a preliminary bid. If the seller is interested, we’re invited to submit a “best and final offer,” which is an accurate representation of the amount we’re willing to pay. It’s all part of the acquisition process.
Walking the Property
There is about one week between the time I submit an LOI and the time we’re asked to submit a best and final offer. During this time, I walk the property with my team. My process of walking a property always includes five specific aspects that will help me determine whether to move forward with the deal. This requires a team effort including my property manager, the current property manager, the maintenance team, and the broker. We visit units, and if possible, we talk to tenants to get their impressions of the property. Here are the five things that I’m looking for:
Item #1: Assessing the Tenants
Prior to COVID, one of the first things that I’d look for were how many cars were in the parking lot during working hours. If the lot was filled with cars during the daytime, and many people were just hanging out, it might have meant that many tenants weren’t employed, because if they were, they wouldn’t be home in the middle of the day. That could have been a red flag. However, with many people now working from home, these observations may no longer be relevant, yet we still need to assess the tenants. The type and condition of the cars in the lot is relevant, however, because older vehicles or vehicles in poor condition reflect on the quality of the tenants. If a person takes care of their car and keeps it in good condition, they generally take care of their apartment as well, and are more likely to be a good, paying tenant.
If I get to speak with tenants, I usually try to assess if they’re the type of people that I want to rent to. I’m looking to see if they’re the type of demographic that can support not only the current rent, but a potential rent increase as well. We’re also looking at the age range of the tenants. I also try to assess the demographic to see if it matches my business plan. Are tenants mostly older, retired renters, or are they millennials? The reason for this is I’m trying to determine what type of new amenities and unit renovation scope would appeal to the current tenant mix.
Item #2: Determining Curb Appeal
When walking the property, I try to put myself in the shoes of a prospective tenant. I’m looking to see if the property appeals to me. Is it appealing and in good shape, or does it appear old and in disrepair? A property with good curb appeal is certainly easier to rent than one that looks dated, and it will also determine how much money will be needed to bring it up to an appealing asset.
Does the property appear to have “good bones?” Does the landscaping look like care was taken to plan and maintain it? When walking the property, I’m looking ahead to see how much money it will take to enhance the overall curb appeal. This is critical, as the overall cost may influence the amount of our best and final offer.
I’m looking to assess the condition of the roof, as well as the parking lot. Does the parking lot need new asphalt and repaving, or does it simply need new striping? Will power washing take care of the dirt on the building, or will repainting be required? When a property has a bad curb appeal, it can be fixed, but there is a cost associated with doing the repairs. Assessing the curb appeal hasn’t changed much during COVID compared to pre-COVID era.
Item #3: Looking for Unlocked Value
Our approach to purchasing multifamily properties is to buy assets that are in relatively good condition with the intent of doing value-add improvements and increasing rents, and therefore profits. So, when walking the property, I’m always looking to see where additional value can be added to justify a rent increase. Input from my property manager as well as the current property manager and the maintenance team is valuable in this area.
I look to see if the property offers covered parking or car ports, or if there are reserved parking spaces close to the buildings. Does the property offer valet trash service? These are things that we can charge an additional monthly fee for, as well as increased rents. Is there room for a dog park or dog wash station? While we can’t necessarily charge a fee for these, they are amenities that many properties don’t offer, and if the property allows pets, they’re an added bonus for tenants.
Does the property have Amazon lockers or a receiving and shipping room? Those are amenities that tenants are often willing to pay a premium for. Is there space to add a yoga room or exercise studio? Again, I’m looking to add amenities that will either generate fees, additional rental income, or both.
During COVID, some amenities are more important than others, such as dog parks, since more people have adopted pets during the pandemic. Hence, improving a worn looking dog park or building a second one would take precedent over other amenities. Another amenity that is important during COVID is Amazon lockers, as more and more people shop online rather than go to an actual store.
Item #4: Comparing Renovated and Non-Renovated Units
Because of our value-add approach, viewing both renovated and non-renovated units is extremely important. I want to see how much and what type of work has been done on the renovated unit to justify the current rent. Did the current owners replace the cabinet doors in the kitchen, or did they replace the entire cabinet? What type of flooring has been added? Did they install granite countertops or quartz? Were new appliances installed, and were the bathrooms updated as well?
Comparing a non-renovated unit with a renovated one gives me a more accurate view of the rent potential. The difference between the current rent and the projected rent after a unit has been renovated is called the “premium.” On average, it can cost anywhere from $3,500 to $7,500 to renovate a unit, especially if structural changes are involved. The increase in rent can run from $200 - $250 per month, multiplied by the number of units on the property.
During COVID, I focus on inquiring how quickly current ownership has leased the renovated units comparing to pre-COVID, and whether they had to offer concessions or other perks to attract tenants to rent the renovated units since COVID hit. It’s extremely important to understand how hard it will be to lease renovated units in todays environment.
Item #5: Looking at Deferred Maintenance
During my tour, I also look at one-time expenses that might occur due to deferred maintenance. This could apply to sidings, HVAC, or the roof, pool furniture or parking lot resurfacing, and many other items. If the exterior requires repair and repainting, it could add significant costs to the maintenance budget. Adding up these expenses can impact our best and final offer as well, so it’s important to assess what needs to be done prior to submitting a final offer.
Evaluating the deferred maintenance hasn’t really changed before and during COVID.
The more you know about the property you’re planning to purchase, the more you can determine the appropriate bid to offer on the asset.
Prior to submitting a best and final offer, I walk the property to look at key items. They include assessing the type of tenants that are currently renting, as well as the type of prospective tenants that would want to rent at that property. I look at the property’s curb appeal and determine whether or not it would be welcoming to prospective tenants. If it doesn’t have curb appeal, I try to determine how much money it would take to bring the property up to an appropriate level.
I also look for value add amenities that would help to increase fees, monthly rents or both. This could include adding a dog park, a yoga room, installing covered parking and many other items. I compare non-renovated units with renovated ones to determine if the rental premium is justified, or if there is room to increase it. Finally, I look at what deferred maintenance items will be required to implement once the property is sold, as this will impact my best and final offer. Walking the property does take time and requires due diligence, but it will help to determine the appropriate price when presenting a final offer.
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About the Author
Ellie is the founder of Blue Lake Capital, a real estate company specialized in multifamily investing throughout the United States. At Blue Lake Capital, Ellie helps investors grow their wealth and achieve double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
Ellie is the host of REady2Scale , a podcast that highlights honest, insightful, and thought-provoking discussions on the multiple approaches for successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.