How Your Property Manager Can Help You Evaluate A Deal
When you think of a property manager, you think of someone who keeps your property running smoothly. That includes everything from keeping vacancy rates low, making sure tenants are happy (and pay you on time!), ensuring that repairs are made quickly, along with a myriad of other things.
What many property owners and syndicators don’t think of is having their property manager help evaluate a deal they’re considering. Yes – your property manager can HELP you assess a deal. That’s right. I’ve found that the right property manager can provide valuable input and insight into a prospective deal, and I use them to help evaluate any deal that I’m contemplating. You need an experienced property manager who understands multifamily properties and one who can provide key deliverables to assist you in your evaluation. Here are some areas where a good property manager can help you when evaluating a new potential deal:
Deliverable #1: Operating Budget
A good property manager has the ability to create an operating budget for the property that will provide a good indication as to the potential profitability of the deal. The operating budget will include line items like payroll, repairs and maintenance, tenant turnover, utility costs and many others. It provides vital information that could impact the overall return on the investment, and is crucial in order to see where you’re able to potentially reduce expenses.
The property manager should have an extensive knowledge of the amount it will take to operate the property. His or her knowledge and experience should include how much it costs to turn over an apartment, including payroll, cleaning, painting, and basic repairs of each unit as tenants move out. When you think about it – how can you REALLY know how much to pay for a property if you don’t have a high confidence in how much it will cost you to operate it?
Deliverable #2: CapEx Budget
Another area where the property manager can help is with the CapEx (Capital Expenditure) budget. This would include major capital improvements like HVAC systems, roofs, and other major expenditures like furniture and appliances. Having this budget in advance is extremely helpful when evaluating a deal.
Having a property manger on premises walking the property is invaluable, as he or she can directly observe the condition of the roof, for example, and alert the buyer that a new roof would probably be needed. This is significant, as a large multifamily complex roof can run as high as $1 million. In addition to reporting on the condition of certain property assets, the property manager can also help determine the timing of potential replacement.
I never purchase a property before having my property management company walk it and send me a detailed analysis of Operating and CapEx budgets. Without verifying those factors, you are guesstimating the cost, which can be very risky.
Deliverable #3: Comps Analysis
Knowing the competition in a new market that you’re considering for a property purchase is invaluable when analyzing the deal. Having an experienced property manager provide you with a competitive analysis is the best way to gain key information about potential competitors. This is important because it will help provide a guide for potential changes at the property.
I have the property manager look at comparable properties, in an area that is 1-3 miles from the property in question. The analysis should also be done at properties that are of similar vintage, usually 5 years younger or older. They should research the available amenities, the size of the units that are available, type of appliances included, and whether or not there are any energy-saving features available.
The grounds are another area to analyze. Do they have professional landscaping? Is there a pool, and if so, what condition is it in? Is there a clubhouse or exercise room? Answers to these questions and more will help to determine where the proposed property will fall in terms of desirability.
It’s also helpful if the property manager can provide you with a projection of potential rent increases based on his or her analysis of the competition. If the property manager is able to tell you, “we can raise rents by $200 based on my analysis,” for example, that information could significantly impact the overall return on investment, as a rent increase would boost the property’s net operating income.
Deliverable #4: Professional Reports
Having a property manager who has access to professional reports like YardiMatrix and CoStar, can be extremely helpful when analyzing potential deals. Having access to these and other professional multifamily property research companies is key, as they provide market and property data that is hard to find and expensive to acquire.
For example YardiMatrix provides data on multifamily properties that includes detailed unit mix, rents, occupancy and comparables, short- and long-range forecasts of rent and occupancy in the market level, and many other reports. For those who prefer value add deals as I do, YardiMatrix identifies value add prospects based on defined criteria set by the client.
CoStar is another commercial real estate information company that provides research on multifamily properties. In addition to reports on various multifamily properties, CoStar also provides market research, analytics, and even forecasts for potential growth over a five-year period.
Deliverable #5: Area Assessment
When looking at a multifamily property in a new market, having someone who really knows the area is crucial to gaining the proper insight for analyzing a deal’s potential. The property manager has that knowledge, and can provide an assessment of the area that will help determine whether or not to move forward on the deal.
You can do your own research on the property’s proximity to stores or restaurants, crime and tenant profile, however, a property manager can tell you if the area/neighborhood is in a path of progress, or whether the area is inferior to surrounding neighborhoods and a change is slow or not coming at all.
When a property manager tells you, “This is not where you want to be,” it’s time to walk away from the deal and look at something else.
Deliverable #6: Access to Off Market Deals
Established property managers have access to a network of professionals in the market you’re looking at, including real estate brokers, property owners, attorneys, accountants and of course other property managers in the surrounding areas. Those are all potential sources for access to off market deals. They are usually the first to know if an owner wishes to sell off-market.
To clarify, off market deals are multifamily properties that are not marketed using traditional methods or shared with multiple people. Often, they are available from brokers, because they’re holding the deal close to his or her pocket. The broker often has a relationship to the owner and gets the listing, while at other times the owner reaches out to investors or syndicators about the listing.
I prefer off market deals for two main reasons: they are often available at a better price and the deal can progress at a faster pace. By pursuing an off market deal, I am able to avoid a bidding war with other syndicators and investors. With regard to the faster pace of an off market deal, I don’t have to spend time marketing the property or meeting with multiple brokers.
Having a property manager who has access to off market deals also means I won’t have to spend time contacting property owners, networking with brokers, attorneys or other professionals in the market. The property manager handles the entire process for me.
Evaluating any real estate deal takes knowledge, experience, and a lot of time. Properly vetting a multifamily property is critical in order to acquire a property that meets the investment criteria that you and your investors require. Having a property manager who can help in this process will provide invaluable input and free up a lot of your time. Just be sure that they can deliver critical reports that can help you in your evaluation process. That includes delivering an operating and a CapEx budget, a thorough analysis of comparable properties in the area, access to professional reports, and access to off market deals. Having a professional of this caliber on your team is well worth their cost.
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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 focuses on the "APS" of real estate: Asset, Process, and Strategy. Each episode discusses how investors can scale their real estate portfolio and/or businesses.
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.