When it comes to magic tricks and investing in income property the first rule of thumb is to not fool yourself. The same rule applies when selecting multifamily acquisition candidates. There are no short-cuts.
Completing the acquisition of a quality multifamily asset can be an arduous task. There are numerous moving pieces and many “metrics” to measure starting with determining rental revenue.
By revenue I mean rental income. In other blog post we have discussed “other income” and “incremental income”. Determining the value of a multifamily acquisition candidate rest squarely on rental income. This is our focus in this blog post.
There are many different names for rental income. Here are some common names: Income, Gross Rents, Gross Potential Rents, Revenue, Rental Revenue. For purposes of this blog they mean the same thing. Here are three places to begin the process of getting to that real number.
The Rent Roll
Rent Roll. How do you see clear with the consistent “smoke” of glossy reports, fancy brochures and the deluge of information? Start with the rent roll.
An income/expense statement is a starting point for determining value. Use the rent roll as an guide to determining revenue generation. One of the first things to review is whether rental income from the income statement matches the rent roll. If not, why not.
Certainly, most deviations between the rent roll and profit/loss statement can be accounted for. But when the numbers begin to widen (large monthly differentials between Income statement and rent roll) further explanation is required to address the disparity.
Bottom line is if the two never match, how do you know which document to believe; the income statement or the rent roll? Further due diligence would include a review of 100% of leases files, random conversations with tenants, supervised calls to tenants, etc. These actions all designed to validate, validate and validate revenue numbers.
The Bank Statements
Bank Statements. Let us say the numbers seem to be a bit… bouncy. They’re just not adding up. The fastest way to see clear is review bank statements. Statement deposits should correlate quickly with receipts. If not, why not. If yes, you can move on to a review of expenses (that’s another blog).
Sometimes you will hear much murmuring with this request for bank statements. Be reasonable, make it a doable thing, but convey it’s necessity to tie off your due diligence. When buying a long-term asset- it’s your money. This is no time to be shy about acquiring facts and figures.
The Unit Inspections
Unit Inspections. For “real time” validation of current income there’s nothing that can replace an inspection of one hundred percent of the units on property. That’s right… going inside every last unit on property.
Are the units occupied? Do people really live here? This is often accomplished after validation of numbers, but if it’s a property with potential but suspect revenue numbers, best to do this earlier in the decision-making process.
Unit inspections are usually saved until later in the due diligence process. Unit inspections are time consuming, but so is chasing a deal where sellers are having a hard time delivering credible paperwork. This allows you to cut your losses (of time and energy) quickly when necessary.
Most often, a random inspection of X units starts this process (5-15% of units). Keep records so there is no need to duplicate later when the 100% inspection is scheduled.
There is always more to do to increase one’s comfort level with the numbers. These are some starting points to get the buyer beyond the pretty pictures and reports that were generated three, maybe even six months prior to the property being placed on the market.
Mr. Wilhoit is the author of two books: How To Read A Rent Roll: A Guide to Understanding Rental Income and Multifamily Insight Vol 1 – How to Acquire Wealth Through Buying the Right Multifamily Assets in the Right Markets.
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About This Blog
Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. We discuss best practices in multifamily management and methods related to how to buy apartment complexes. Our focus is sharing strategies and tactics that can be implemented and measured. For more information, visit: www.MultifamilyInsight.com
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