Understanding the Books and Records of a Multi-Family

The Books and Records of a multifamily can be not only hard to understand but incomplete as well!

When I am asked to review books and records, it is always important to understand two items.

First, knowing what to look for as real expenses. Most owners and property managers simply lump both operating and capital expenses together.  Here is the good news-this is an easy way to evaluate the “major” work done to the building.  Here is the bad news-this makes it harder to ascertain the real operating numbers on a building.  Remember that capital expenses are considered nonrecurring expenses.

A good rule of thumb is to see if these expenses are completed on a routine basis.   Pest control may not be done every month, maybe every three months but a termite treatment would be considered a capital expense.  Carpet may or may not be considered a capital expense as this may need to be replaced whenever a tenant moves out but tile flooring is a capital expense. Maintaining the landscape is an operating expense but installing new landscape is a capital expense.  When I look at books and records and I see a plumbing expense over $500 I will question what it was for. Often I can find new hot water heaters in the books and records.

Once we have removed the capital expenses from the operating numbers, this makes it easier to do an honest evaluation on the property.  WAIT I said that there are two factors that I look for on Books and Records.

Secondly, it is important to make sure that all expenses are accounted for.  One of the biggest issues that I see with books and records on the MLS is that uneducated agents (again why you need use an experienced commercial Broker) is that they will not add a vacancy rate or management fees on the MLS.  This will give you a higher cap rate but not accurate figures.  When I question them, here is what I often hear, “Oh, the owners manage the building themselves!”, or “The building is full.”  When I respond, I will ask, “Does this mean that the owner will manage for my clients forever for nothing?”‘ or “Does this mean that the owner will guarantee 100% occupancy forever?”.  The answer is of course not.  Then my answer to the agent is get your numbers right.   Even a self managed building should show these numbers.

Often the taxes and insurance are not shown on the books and records.  This may be due to the fact that the owner has the building self managed and pay these expenses out of the their account vs. the property manager’s account.

What about additional income? Laundry, storage and pet fees etc?  Some property managers keep the late fees as part of their income.  So this as additional income may not be used.

Once you have the actual numbers and they have been verified, it becomes pretty easy to figure out if the property makes sense.

In the Phoenix market, where rents are easily increased, I usually run two spreadsheets.  One with the VERIFIED actuals and one with the projected income based on the actual expenses.

I had a client this past week not understand that without this being done completely, I would not provide the analysis on the building.  This type of analysis usually takes me 3-4 hours to completely do depending on the information that has been provided.  Often it is a back and forth between myself and the other agent in order to get the correct answers.  The above mentioned client was frustrated with me instead of welcoming the information being done correctly.

Often times we can obtain a building that other investors overlook due to the inability or lack of knowledge to understand the books and records.  This is a great benefit for my clients.

Next week we are going to discuss inspections and I will give an overall view of what kinds and when they are needed.

Remember that I answer my phone and WELCOME you comments at the bottom of this Blog!

Have a great day!

Linda 602-688-9279

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Rent Rolls are SO critical to understand

Let’s speak about Rent Rolls in income producing properties!

Rent Rolls on an income producing property can either generate an offer (whether you are a Buyer or a Seller).  Giving the most up to date and accurate information is critical not only for a Buyer or Seller but the lender and also to attain an overall view of where the property stands. This means not only performance but also in the market place.

Rent Rolls and what should be on every rent roll:

  1. Date
  2. Tenant name
  3. Effective Date of Lease
  4. Expiration or Month to Month
  5. Security Deposit (both nonrefundable and refundable and these need to be stated)
  6. Market Rent
  7. Amount of Rent
  8. Rental Sales Tax column and who pays it
  9. Additional fees (Pet, Parking and Storage as an example)
  10. Total Monthly fees Due from Tenant
  11. Date last paid
  12. Any balances due from Tenant
  13. Another column should be for notes

It should  be noted that all of these items should be able to ascertained from the leases (and/or addendums).

Protecting your Rent Rolls:

The rent roll for an income property is absolutely critical whether you want to sell, buy or even keep your property.

If you plan to sell this should be prepared and available to the Real Estate Broker and all potential Buyers.  When I list a property, this is why I want copies of ALL leases.  One of the first things that I like to do is take the leases and create a rent roll, then compare my rent roll to the Property Manager’s Rent Roll.  There are often differences but are usually easily handled will good communication with the Property Manager.  For example, maybe I was not given an addendum.

If you are a Buyer, you certainly want to see a rent roll.  It is a great way to evaluate the Property and even the job that the current Property Manager is doing.  If the current owner cannot provide you with a rent roll, the best idea is to start with the leases.  Then you have the ability to ask good questions instead of simply asking for a rent roll that may or may not be accurate.  Remember that a Lease is a legal contract and if you are buying the building, you are also buying the leases as they will convey as written to you.

If you are planning on keeping the building, you should evaluate your rent roll for accuracy at lease once a year.  What is you want to re-finance the property?  The Lender will ask for a complete rent roll almost immediately.  Do not overlook this very important piece of your investment.

One of the most common errors I see on rent rolls are concessions.  FIRST, if you are going to give a move in special, no not give it in the first month.  Do it at least in the 4th or 6th month.  Here is an idea that I like to use.  Do not give a rent concession, but a grocery store or gas gift card.  You can expense this but not HURT the rent roll. On a fourplex a $25.00 per month per unit has either decreased or increased the value by approximately $25,000.

One last thought on your rent roll-this is a very valuable tool and a great way to evaluate your rents against the market and also a ten thousand mile overview of your Property Manager.

Questions, call me 602-688-9279.  Next week I will be discussing the essence of books and records.

Have a great week and remember that I answer my phone!

Linda Gerchick, CCIM

Broker’s Advantage

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Property Preparation for Sale

BEFORE I list an investment property for sale, there are several items that I really like to prepare.  Sometimes it may take a month or so to complete some of the items that are needed.

First and foremost, I want to see the rent roll and books and records.  Rent rolls are so important to the overall sale ability of the property.  I personally do a drive by to view the area and the property. It is also important that I get to get into the units. Wouldn’t be awful if we get a great contract and good buyer and when we get to inspections there are inspection or maintenance issues that will kill the deal wither on appraisal or inspection? I never want a Seller to spend money where it is not needed but sometimes it is really important.

Next week I am going to blog in depth about the rent toll and books and records.  This will be one of the more important blogs that I will do this quarter.

I also want copies of ALL pages of the leases.  Even if the tenant is month to month.  This is not disclosed to the public but it is important that we have these on file.  We also, go through the leases to make sure that they match the rent roll.

If there is a laundry room lease I will need this as well.

It is important that if the property is owned in an entity or trust that I receive these documents as well.  Not only do I need to verify that the person signing contracts is the correct person but the Title Company will need this as well.

The Insurance Loss run is needed and I will help the Seller prepare a schedule of personal property and capital expense list.

The Seller’s Disclosure Statements will need to be prepared and signed.

Once these items are done or being done, I then schedule professional photos or videos depending on the property.

As you can see there are a number of items that are done prior to and at the time of listing.

In future blogs, I will be discussing marketing and the extensive marketing that I invest in my Seller’s properties.

If you need to speak to me; please call my cell at 602-688-9279.  Remember that I built my reputation on the FACT that I either answer my phone or return my calls promptly!

Linda

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