One of the mistakes that I see people making is knowing what the average rents are in your market. Some of you may be thinking to yourself, "Charlie, that's ridiculous, of course." Listen, I'm telling you right now. I'm blown away by the fact that investors , new investors will take the offering memorandum and just take the broker’s word as to what the market is for the rents in the area. Let's just think about this for two reasons why you need to know what the average rents are going to be.
The first reason is when you receive the offer memorandum, you will know right away if the rents are in line with the market. In other words, what they're saying and when they’re showing you the rent roll, you're going to know. And that’s because you know the market.
You can say, “hey, these guys are way low, or these numbers don't make any sense.” How many times have you read an offer memorandum where the broker tells you, "Oh, the rents are below market.” Everyone tells you that! Do you know for a fact that they are?
You've got to understand what the average rents are in your market and have it built into a database so you know that properties in this area of my market are going for $550 for a studio, $650 for 1-bedroom or $775 for 2-bedroom. That's the type of information that you absolutely need to know from them.
And secondly, you need to know if there's any value play in the opportunity.
Just think about it. Let me just give you this last part an example about rehab. When a broker tells you in the offering memorandum that rents could be increased with a light rehab of $2,000, it will get you a hundred dollars more per month in rent. How do you know if that is true? Too many of you just take the broker at his word. And if you don't have the data, you've got to take him at his word because you've got nothing else to stand on.
So, you've got to start collecting this information every time you evaluate a property. You've got to start building your own spreadsheet on cap rates, average rents, occupancy, quality of the asset -what the quality of the asset is generating for that type of rent. So, don't let these guys tell you what it is. You've got to know that market cold.
If you're not building it yourself you've got to be going out to third party reports and bringing them in.
Don't trust the broker.
Don't trust the offer memorandum.
Don't trust anything they give you.
You've got to know that market cold. It's so crucial because, when you own that property, you don't want any surprises. And the last surprise you want is to find out that we were way off in our rent assumptions.
How do you go back to tell grandma that you screwed up on the value of the property, and what the exit strategy was and what the value play was, just because you didn't have all the information.
This is what sets us. All those big apartment owners -I'm talking about the really big ones out there. They have departments that just analyze data. They need to know the data and you do too! We're running a business. All business is about the numbers. You've got to understand the numbers. And that's really where all business people need to be.