Due diligence in the valuation of a prospective apartment project purchase includes a financial breakdown of leases and rent payments.

Far from merely a flat spreadsheet of the monthly rents collected, there are a number of important financial revelations that come from careful analysis of timing of expiration of leases, comparison of rents within the project for similar units, and comparison of project rents to the local market competition.

These three major considerations do not stand alone, as all three influence the others. Whether to purchase the apartment project, and a schedule of actions to take after the purchase, are determined by these three analysis items.

Comparison of Internal Rents

Just because there are multiple identical 2 bedroom units in a project being considered for purchase doesn’t mean that they’re all generating the same rent.

Not only is this determined by when leases were originated, but can reflect the negotiation between tenants and management. Knowing which units should be at higher rents is important to valuation and income analysis.

Local Market Due Diligence

Markets are fluid, and no apartment project purchase should be made without thorough local market rent due diligence. Not only should there be a comparison of rents for comparable units, but the buyer should do a careful analysis of population movement and local commercial activity and job stability.

This analysis could show that a project-wide adjustment of rents is on the horizon, upward or downward.

Lease Expiration Analysis

Charting a time line of lease expiration dates, including the rents for each unit, yields a lot of information important to the decision to purchase, but also a schedule of the actions to take after purchase.

If a spreadsheet is set up to show current rents along a time line, as well as proposed rents at lease expiration dates, a projection of first year ownership revenues can be created. Especially when there is opportunity to increase rents, this process can show increases in return on investment from rent adjustments that can change the valuation of the project as a whole.

Likewise, if there is a softening of rents in the market area, there may need to be extra marketing costs for incentives, and possibly even lower rents as leases expire. This could rule out the project for purchase, or change the purchase price to reflect a lower value due to lower future rents or cash flow.

I’ll share more with you soon…

Warm Regards,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President

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