April 22, 2022
Once you’ve assembled your team, scouted your deal, sent the LOI, negotiated the contract, closed your deal, and got your real estate investor portal running to start raising equity, it’s time to get your hands dirty and dive into the execution of your CapEx Plan. In this article, we will talk about the first step in this process: the Multifamily CapEx Budget.
One of the first things your real estate syndication team will do is gather all relevant documents on your CapEx Plan. This will include but is not limited to:
The CapEx Budget may have many drafts and can change over time. Still, the preliminary budget is typically used as a guideline to determine how to get started with your overall CapEx Plan.
The City Required Repairs, Lender Required Repairs, and Due Diligence Report mentioned above will all have a large effect on how you actually end up spending your funds. As I will discuss in future posts, they each will hold equal weight in your decision-making.
The CapEx Budget is a tool used to determine how to allocate funds to value-add opportunities, lender-required repairs, city-required repairs, and deferred maintenance. Here are some questions you can ask while putting together your budget.
– Which projects have the biggest impact on the community, the tenants, or potential tenants touring the property?
– Which projects will have the biggest impact on your net income?
– How will each project affect the overall value of the property?
– Which projects are important to complete first, later, or right before you prepare to sell the property?
One of the first items on my list to address after taking over property is “tenant hazards,” which will typically fall under the category of City Required Repairs or Lender Required Repairs, or both.
Theoretically, tenant hazards should always be taken care of first, as they will set the foundation of the relationship between your tenants and their new owners/management. In addition, it will help prevent any accidents or lawsuits from occurring during the ownership of the property.
It is important to share your budget goals with partners and investors. Still, it is probably best to keep that info from property management and contractors. Their business models are set up to profit from changes or improvements to the property.
Although this is normal, if the goal is to find the best product at the best price and not max out the budget on each project, then revealing your budget to these parties may not always be in your best interest.
After all, if I can save money on deferred maintenance projects, I can allocate funds to the larger value-add opportunities in the future.
Property management companies are typically incentivized to improve your bottom line. Still, in some cases, when they provide their own contractors from within their network, they may charge a management fee or may receive referral fees from their contractors.
In addition, the property management company is not typically a partner or investor in the property, and therefore may not be as committed to the success of the CapEx plan as you or your partners are.
In my experience, property management is more efficient at managing ongoing projects and smaller projects since they are consistently on-site at the property. Examples include pest control and landscaping.
Suppose a project cost climbs to $5,000 or more. In this case, I typically want to get additional estimates from outside the property management’s network. This also allows me to confirm that my scope of work is correct and make sure I’m comparing apples to apples on all of my estimates.
So, of course, you can share your budget with your management company. However, do your research and ask “if” they are compensated or “how” they are compensated for managing each of your projects. In addition, don’t be afraid to ask the following question as often as possible.
“Am I getting the best product, at the best price, from your best available contractor?”
You could try one strategy to keep property management focused on their day-to-day activities. For example, make-readies, new leases, tenant satisfaction, work orders, and the maintenance team, and assign the larger CapEx projects to the experts. This could help reduce distractions and keep property management from being stretched too thin. I will dive further into “other CapEx management options” in future posts.
Contractors or General Contractors are highly incentivized to make a profit. How could you blame them? They are trying to run a successful business just as we are. Contractors have ongoing expenses and overhead. They have to pay employees and salespeople. So no matter how much you trust a contractor, it’s really in their best interest to max out your budget on each project.
In my experience, sharing your budget with a contractor lets them know exactly how much they can charge you. As a result, it gives them the upper hand. What you do want to share is your vision for the project and what value you’re looking to create with the results. The more the contractor understands your end game, the better they can provide the right scope of work.
The first step of each individual CapEx project is to determine the scope of work. I recommend doing this before involving the contractors. However, you may need an expert to help you determine what that scope of work should be. I will dive further into the “scope of work” in future posts.
So, of course, you can share your budget with the contractor. Just make sure you’re making the final decision and not them. Some contractors will commit to serving you in the long run and may not try to max out your budget. However, get at least one more estimate from an additional contractor to keep them honest.
No matter how you decide to use your CapEx Budget, remember to consistently communicate your long-term vision to your property management company or any contractors on your team.
In my next post, we will discuss City Required Repairs.