LOOK FOR THIS MAJOR RED FLAG IN INVESTOR'S UNDERWRITING

[Jason Malabute]

One of the biggest red flags is if the investor thinks they can raise the rent of all the units in year 1 (especially if the property is a mid-size or large-size property). This is impossible. The property manager cannot raise rents from day 1. The property manager needs time to adjust to the property, tenants and implement the business plan.

I was talking to an experienced asset manager. Based on her experience, it takes property managers six months on average to start raising rents and implementing the business plan.

There will be things that come up in the first six months of the acquisition that will prolong the implement the business plan. For example, for some reason, rent delicacies increase when you first take over a property (especially for C properties). Also, tenants have lease contracts. You cannot increase those rents until the lease contract is up (unless the tenant has a month-to-month rent agreement). Therefore, it is better to side with conservatism when underwriting deals.

In conclusion, when underwriting deals, you should assume that you will not raise current rents to market rents until six months later. If it happens to be that you and your property manager can raise rents sooner than six months after the ac

[Nathan McIntire]

@Jason Malabute Agreed. Another red flag might be when an operator promises high returns year one on a deal that needs large amount of capex per door. 

When I run the numbers on a deal I like to stay pretty conservative with my underwriting. Because my goal is to underpromise and overdeliver to the limited partners that will be investing in the deal with me.