Acquiring a Property? 5 Things to Look For:
Congratulations and welcome to multifamily (if you’re new here of course)! If this isn’t your first rodeo when it comes to acquiring assets then welcome back.
In this article I want to break down 5 big things to look for when you’re adding a new multifamily asset to your portfolio that you potentially hadn’t been looking at super closely before.
1. Consumption Audit
Occasionally when I’m onboarded onto a property that is looking to implement water conservation right after acquisition we discover that the “high” consumption being reported on the water bill from the city is actually a product of an underground leak onsite and isn’t going to be solved with an onsite water conservation program. During due diligence the old ownership group just communicated that bills have historically been high, nothing new, blah blah blah.
First of all, no.
I would encourage you to complete a consumption audit during your due diligence phase to determine whether or not high consumption could be a product of in unit leaks, underground leaks, or a broken line somewhere. If consumption has been high for the past few months, the best way to narrow down what its’ root cause is, is to do a 12 month consumption comparison. What did January’s consumption at X occupancy look like last year compared to this January. If you notice a dramatic increase from last years consumption to this years consumption- chances are you can retroactively look and see when the initial spike occurred.
I’d also encourage you to calculate the CPD, Consumption Per Day, and CPDOU, Consumption Per Day Per Occupied Unit on your property.
In the event that you dig deeper into this data and notice an unusual spike in consumption during a short period of time that never went back down- chances are you’ve got a leak somewhere. Leaks are costly and should be taken care of ASAP.
2. Common Area Deductions
This may come across as a no brainer- but I actually want you to really consider what you’re looking at when you’ve got this data in front of you. If you’re acquiring a property that’s at a 25% common area deduction for water on a property with no irrigation system sharing the meter- I would encourage you to figure out why. Why are the residents conditioned to only pay 75% of the total water bill when the maximum they can pay (in Texas) is 95%? Is it because the total water bill is just too high? Had the property inherited a billing program that didn’t manipulate the pass thru % to ensure the property was recovering the max amount of utility exposure they could? Are your leases signed on site to reflect a specific common area deduction? Depending on what the answer is- you’ll be able to better gauge what your utility recovery will be when you step foot on the property.
3. Irrigation Meters
Per the Public Utility Commission Rule Handbook in the state of Texas, irrigation systems play by a completely different set of billing rules. In the event that your irrigation system is not individually submetered- you’re not allowed to bill back the maximum 95% of the total water bill from the city. Instead, you have to maintain a much larger common ask area deduction regardless of how much water is actually being used by the irrigation system. If possible, I would encourage you to ask your property seller to submeter your irrigation system before you officially acquire the property. This way there are no surprises when you begin to strategize your approach to billing back water on site- you can push through your whole water bill minus the standard 5% common area deduction.
4. Is the property in arrears in utility billing
Understanding what service periods for utility bills are being billed through to the residents during what time period is crucial to understanding how you can maximize your utility recovery as you onboard new assets. You need to be aware that acquiring a property in January 2019 doesn’t mean that there are still potential unpaid balances owed to utility providers that predate January 2019. From my experience, I normally see properties being anywhere from 30 to 60 days in billing arrears. Make sure that all unpaid balances from a previous owner are taken care of- even the gap between the last service period residents were billed for up until when you acquired the property.
5. GPM and GPF
If you can pin point what exactly is installed inside of each unit as far as water fixtures go- you can prepare to be build a much more efficient property. For example, if you know you’ve got 2.5 GPM (gallons per minute) showerheads installed and 2.0 GPM aerators installed in your kitchens and bathrooms- then you can plan on replacing those pieces with Green Standard Rated equipment (pieces with lower GPM’s and GPF’s-gallons per flush) and quite literally predict what your consumption savings will be as you turn the entire property.
The little things make a huge difference when it comes to adding new multifamily assets to your portfolio. I hope this short list provided a bit of insight on how some of the easy to glance over things during due diligence actually create great payoff if we give them a little more of our attention!