How To Assess Your Apartment Building

Five Steps to Increase the Value of Your Apartment Building
(Part 1 Assessment)

Primary Axis assessment:
In order to make this information more useful we begin with the primary factors affecting owner’s ability to implement these techniques. Breaking the information into Axis I, II and III, start by honestly assessing the strength of your asset in terms of overall position in the market using the 3 primary Axis below.

Axis I questions:
Can tenants live in my property without owning a car? BART access? Parking?
Are there interesting places to walk to for coffee, dining, shopping etc?
Does it take more than 2 weeks to fill a vacancy?
Is there easy access to a thriving city center, corporate campus or major university?
Is the nearest city in an expansion or contraction mode? How much diversity is there in the local job market?
Does a commercial lender consider my location A, B, or C?
Do I have excessive turnover?

You have heard it so many times but it is true, the primary factor affecting the value of your building is the location. Well located apartment buildings near public transportation will be the last to suffer in a downturn and the first to recover.
Many of the owners we speak to about their buildings simply do not face the simple fact that their property is poorly located. The sooner you face this and work on a strategy to improve turnover or trade into a better location the better.

We recently worked with a client who was able to trade two poorly located mid sized buildings into one larger well located building.
The risk of an undesirable location can be mitigated to some degree by high cash flow or significantly reduced purchase price.
Securing a good location should be the first priority in apartment building ownership, therefore trading into a better location should always be evaluated.

Axis II questions:
Are my rents at market? Have I reviewed all leases recently including laundry?
Is my cap rate in line with comparable buildings in my location?
How many units and square feet is my building compared to neighboring properties?
Have I creatively explored every option to add income?
What is my return on equity on my apartment
building?
What is my debt coverage ratio and would a lender give me a loan today?

In today’s market we look at NOI and cap rates rather than gross rents when evaluating apartment buildings. However the gross rents of a building say a lot about its potential.
If the first principle is to be in the best location, the second is to have the highest possible gross income. You have heard the saying
in the automotive world “there is no replacement for displacement”. This is true for apartment buildings as well. The bigger the cash ‘motor’ the more opportunities there are to improve performance and overcome other defects.

It is much easier to turn a big apartment building with high gross income into a profitable business than it is to do the same with a smaller building with low rents. If you own a building that is not throwing off significant gross income, it may be time to evaluate making a change.

Axis III questions:
Does my property have a soft story?
Are my total expenses greater than 45% of SGI?
What is my expense ratio and what are my costs per Sq. Ft. and per unit? Are they in line with comparable buildings?
What are my turnover costs each time a unit vacates? What materials or fixtures am I replacing frequently?
What are the projected capital expenditures
over the next 5 years?
Does my on site manager charge me for small repairs?
Does my management company question
excessive tenant repair requests?

With buildings built prior to 1920 it can be extremely difficult to keep up with and control expenses. If your property is very old there are things you can do to mitigate risk and plan for the inevitable repairs and capital expenditures you will encounter. Unlike gross income and location, building quality can be overcome, unfortunately at great expense.
Other than roof and foundation, plumbing tends to be the biggest expense and unknown factor with respect to older buildings. Copper plumbing although prevalent in Europe for many years, was only introduced in the U.S. in the late 20’s. Chances are that if your building was built in the 20’s it has galvanized pipes. There are numerous expenses and problems associated with galvanized plumbing, however we have found some cost saving creative solutions.
Having a long term strategy can help with decisions such as when to use tile or linoleum. Having a budget per unit can provide a framework for managing repairs. Evaluate the most common repairs and shop on-line and at salvage yards for used or bulk items in order to reduce expenses.

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