Buying, selling and operating apartments in Portland

Determining a Price to Pay – Part 1 | 17 April 2010

Work with your broker and understand when he recommends a price how he got there. There are several factors to consider when analyzing a property for purchase:

Financials – Have your broker analyze a property and tell you the financial return (whether Capitalization Rate or Cash-on-Cash return) based on real operating numbers. Determine what major capital expenditures have taken place recently or are anticipated before you make your offer.

Comparables – When looking at comparable financial returns, use only recently sold properties. You’ll want to pull information from complexes that are the same location, age and unit count and mix.

Physical Condition – Before making an offer, assess the physical condition of the property. After an accepted offer, perform a more thorough physical inspection to determine the status of the apartment. Be sensitive to any issue involving moisture invasion. Have your inspector summarize what he thinks will need repair/replacement within the next three years. In addition, have him give you an estimated life on sidings, roofs, parking lot surfaces and other major items. Capital expenses (i.e. depreciable improvements) are not considered operating expenses because:

a) They do not occur regularly each year
b) They should be paid out of a reserve fund that is an operating expense

Summarizing a list of repairs for the seller lends much more credence to a request for a price adjustment or list of repairs.

Intangibles – Your broker needs to lay out a plan on what can be improved:
a) Are there services (e.g. water bill-backs) that can be added for revenue?
b) Can you raise rents compared to surrounding complexes?
c) Are there any efficiencies in operation you can implement to increase your NOI?
d) Are conservation measures possible?
e) Can the tenant mix be improved?
f) Can you reduce maintenance thru upgrades?