Dialing in my proforma

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Dialing in my proforma

Ian Kisbert
Member since 2020 · 27 posts · 5 votes

I am a new investor trying to dial in my proforma so I can start analyzing deals better and I have a few questions about where to add certain items.  I am looking for 2-4 units with a value add component to the deal.  Any help is very much appreciated.

1.  Where do I add security deposits, (under income, expenses, or turnover costs)?  Does this get factored into vacancy at all, or possibly somewhere else if there is a value add component to the deal and current tenants will be vacating and get replaced by higher rents?

2.  Utilities - if a property is showing that the landlord is paying for all utilities, how much can be passed back in RUBS, and how quickly can this happen?  Would it be safe to assume about 80% of water, sewer and trash can be passed back as RUBS income right after you close on the deal, or does it take time to implement.  Also, can gas/electricity always be paid for by the tenant, or are separate meters necessary to do this?

3.  Renovation costs - If the deal is requiring renovations to be done, would that be added to year 0 capex, then year 1 starts as soon as the renovations are done?  If this is the case, would you add higher assumptions for vacancy in the very beginning of year 1 in case it takes a while to fill the units that were just vacated due to the renovation?  

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  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    5y

    The IRS' guidance on security deposits: Don't include a security deposit in your income if you may be required to return it to the tenant at the end of the lease. If you keep part or all of the security deposit because the tenant breaks the lease by vacating the property early, include the amount you keep in your income in that year. If you keep part or all of the security deposit because the tenant damaged the property and you must make repairs, include the amount you keep in that year if your practice is to deduct the cost of repairs as expenses. To the extent the security deposit reimburses those expenses, don't include the amount in income if your practice isn't to deduct the cost of repairs as expenses. If a security deposit amount is to be used as the tenant's final month's rent, it is advance rent that you include as income when you receive it, rather than when you apply it to the last month's rent.

    RUBS is tougher than many of the books make it out to be. I would look at what local comps are doing and figure based on that. If you're the only guy in town billing back utilities it's a bit tougher. What are comps doing?

    Regarding vacant unit underwriting, they're obviously vacant while being renovated. Hopefully your renovated units are in demand and don't take too long to lease up once they're ready. How long are vacant renovated units sitting on the market in your area? Years are...years. They start when you close and count upward from there. It's your portfolio so you could do it monthly if you really wanted to. Ultimately it comes down to whether the business plan is sound.

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  • Ian Kisbert
    OP
    Member since 2020 · 27 posts · 5 votes
    5y

    @Taylor L. thanks for the response.  I would think using the security deposit to go towards move out damages is the way I would proceed, so with that said, how would you add this to a proforma?  Would this be a capex line in which you just add "turnover costs" and take a certain percentage of the security deposit on hand and put it towards that assumed cost?

    After doing some digging on RUBS, it does seem like most properties in my market are billing back RUBS.  With that in mind, can you start billing this back day 1 of operating, or are there steps that need to be implemented that take time, or any legal implications of giving certain notice to tenants since it is a new charge?

    Doing a little digging on down time too, it seems that my market is relatively hot right now so downtime is rather short.  I think depending how much work is needed, and how much time that work takes will determine if I need to outline a monthly detail, or if I can start a year one very soon after renovations are complete. 

    Thanks again!

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  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    5y
    Originally posted by @Ian Kisbert:

    @Taylor L. thanks for the response.  I would think using the security deposit to go towards move out damages is the way I would proceed, so with that said, how would you add this to a proforma?  Would this be a capex line in which you just add "turnover costs" and take a certain percentage of the security deposit on hand and put it towards that assumed cost?

    After doing some digging on RUBS, it does seem like most properties in my market are billing back RUBS.  With that in mind, can you start billing this back day 1 of operating, or are there steps that need to be implemented that take time, or any legal implications of giving certain notice to tenants since it is a new charge?

    Doing a little digging on down time too, it seems that my market is relatively hot right now so downtime is rather short.  I think depending how much work is needed, and how much time that work takes will determine if I need to outline a monthly detail, or if I can start a year one very soon after renovations are complete. 

    Thanks again!

    I have a line for turnovers in my underwriting. Look up what your state laws say about what you need to do with security deposits. Some states require you to hang on to them in a separate bank account.

     For RUBS I would default to whatever the lease and state laws say. If the lease says 'xyz utilities are paid by the owner' don't go through the rigmarole of trying to change that. Make the change when it's time to renew leases. And as state & local laws allow, of course.

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