JF1307: Apartment Due Diligence: How To Evaluate The Mechanics Of A Deal #SkillSetSunday with Nathan Tabor
Nathan has been on the show once before, and is back to tell us how he evaluates mechanics of the apartment buildings that he fixes and flips. From roof, hvac, and plumbing, to parking and windows. Nathan knows what to look for and what you can do when mechanics are less than ideal. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Nathan’s previous episode:
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Nathan Tabor Real Estate Background:
- Has purchased, renovated and sold over $52m dollars worth of real estate
- Enjoys helping others find their niche, understand the processes and achieve their goals.
- Has founded and operated more than two dozen businesses since 1999, grossing over $150 million in sales
- Based in Winston Salem, NC
- Say hi to him at apartments.nathantabor.com
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
I’m excited about today, because today is Skillset Sunday, and we’re going to be helping you hone a skill as an apartment investor who is doing due diligence on apartments… The skill of knowing how to look at the mechanical aspects of the apartment community and what is the ideal setup, and what are some of the things to consider for the setup if you’re presented with a less than ideal situation, from water heaters, to aluminum versus copper wiring… We’re getting to get into those details.
With us today to talk through that is Nathan Tabor. How are you doing, Nathan?
Nathan Tabor: Good, Joe. I hope you’re doing well.
Joe Fairless: I sure am, and I’m excited to have our conversation. Best Ever listeners, a little bit of background… So I interviewed Nathan on a previous episode, and you can just search his name, my name and it will come up. After interviewing him, I then bought his book, which is “How to find, finance, fix and flip apartments from duplexes to 100+ unit complexes.” I read that in approximately 72 hours, I enjoyed it so much, and afterwards I thought it would be good to have him on the call as a follow-up to talk through some due diligence stuff on apartments, because his background and what he does is he fixes and flips apartment buildings in a short period of time, so due diligence is clearly a bit aspect of that.
With that being said, Nathan, let’s go ahead and dive right into it. The approach that we’re gonna be taking today is talking about what the ideal setup is for our property, and then some situations if we’re not presented the ideal. So first, what is the ideal setup as you walk into an apartment community, from a mechanical standpoint? What would you love to see?
Nathan Tabor: Well, in the perfect it would be building it from the ground up, so you can build it exactly the way you want it, Joe. But walking in – and this depends on class A, B, C or D, how much you’re paying for it, occupancy, deferred maintenance… But I would rather have a pitched roof over a flat roof, I would rather have copper over aluminum, I would rather have newer HVAC units versus radiant heat in the ceiling, or baseboard heat; I would rather have a good, solid parking lot that’s been recently done, I would love to have double pane windows for efficiency on the electrical bills for the tenants… And those are on the mechanical side. Windows might not be a mechanical per se, but those on the mechanical. Hot water heaters – newer; I would love to have all the units individually metered from the water side as well.
Joe Fairless: Okay. And then what are some common situations or common circumstances you’ve found yourself in that weren’t one of these, and how do you think through it?
Nathan Tabor: So I bought one complex with aluminum wiring, and my personal is I don’t buy aluminum wiring anymore. I know people who do, and that’s good for them… But I bought it not knowing about aluminum wiring, other than the normal “Why we use copper versus aluminum” tide. But I had to pigtail all the units – the pigtail is this little 6 to 8-inch copper device wiring; I had to do all the outlets, all the light switches, all the overhead lights, because I couldn’t find an insurance carrier who would even bind the property without having that done.
Joe Fairless: How much did you invest to do that?
Nathan Tabor: 56 units cost me $93,000.
Joe Fairless: Yowsers.
Nathan Tabor: So it was a pretty significant, unplanned-for expense. And the problem with aluminum is housing is one thing, but you get into the apartments – it overheats, it doesn’t conduct as well, especially if it’s 40 years old, you’ve got some nicks in the wiring over the years… It’s just not the best thing to go into, whether you’re flipping or keeping the property long-term.
Joe Fairless: You mentioned HVAC units versus radiant heat in ceiling or baseboard heat. Why that?
Nathan Tabor: The cost for the tenant. One of the biggest is HVAC units are traditionally more efficient and more cost-effective for the tenant, but then on the owner side, the flipping side… At one point, I owned 399 units in 7 complexes, and I currently have about 168 units… Baseboard heating gets beat up, people stand on it, they kick them off them, they bend them… Well, guess who’s responsible to pay for those? The landlord.
For resale value, HVAC units always are gonna bring more money. So I would almost rather not have central heating and air than to have the radiant or baseboard heat. I’d rather go in and put in new units into all the units than to have to deal with a radiant heat especially. You start getting into the ceiling, and that’s been put in for 40 years. Insurance companies these days that I dealt with, they really wanna know “Is that an efficient/effective way to heat that unit that doesn’t have a fire risk to it?”
So if I were looking today, when I look, if it does not have HVAC, I build into my numbers to go in and put in a drop ceiling and put in HVAC and do away with the radiant heat and the baseboard heat. If I can’t make my numbers work, then I don’t do the deal.
Joe Fairless: Approximately what does that cost per unit?
Nathan Tabor: I’m in North Carolina, we don’t have a union, so we’re a work at will state, or whatever they call that… So we’re about $2,800 to $3,800 a unit to put in for a 2-bedroom — about a 800, 900, 1,000 square feet unit. So a pretty significant cost. You’re doing a 50-unit complex – $150,000.
Joe Fairless: Oh yeah, absolutely.
Nathan Tabor: But you will get every dime of that back in resale, or in holding; your tenants like it better. You’re gonna get better tenants if you have HVAC statistically than if you don’t have air conditioning and you just have baseboard heat or radiant heat.
Joe Fairless: You said earlier pitched roof versus a flat roof. Why pitched roof versus flat?
Nathan Tabor: Maintenance, mostly. pitched roofs if you’re building – they’re cheaper to initially install, but a flat roof is less expensive to install, but flat roofs you have the drainage you have to make sure, so you’ve gotta climb up there often, make sure that the drains are unstopped… Depending on where you are in the South, flat roofs just make your electrical bills more, because in the summer it’s hotter, and in the winter you don’t get the sun.
pitched roof has more appealing appearance to it, as well. Flat roofs are very institutional, like medical facilities and that. I don’t know that I’ve ever seen a class A apartment building be built with a flat roof, unless it’s in a city. So when you start looking at maintenance-wise, a pitched roof is easier to maintain. Now, pitched roofs cost more — if you’ve gotta go in and replace the roof from the get-go, a flat roof is gonna cost you less than a pitched roof, but that’s about where the pro of a flat roof…
Now, I will say I did several complexes with flat roofs. One of the biggest benefits that I know of for a flat roof is if you’re in an area where people still HVAC units, and I’ve had that happen quite a bit. [unintelligible [00:10:18].25] and instead of setting them back outside, you set them on top of the roof… And I’ve never had an HVAC unit stolen from a top of a flat roof. That’s about the only benefit of a flat roof that I can really think of.
Now, Joe, with a pitched roof you’ve gotta be really careful of where the guttering is coming down, right? Same way with your house. If that water is just running into the gutter system but then running straight down and running into the foundation, it won’t be long before you have foundation problems and cracked brick and that, so make sure that’s running off and out, away from the building.
Joe Fairless: I know with the flat roofs, at least from my experience, it also costs more to ensure, because insurance companies know that they’re not gonna last as long as pitched roofs.
Nathan Tabor: They’re not gonna last, and there’s also a greater leak risk with a flat roof, because the water stands, and if you gutter gets stopped up on a pitched roof, it just rolls over the top. If your drain gets stopped up in a flat roof, where is the water going? Into a unit… So there is a great insurance — and lifespan… On most flat roofs, a lifespan – they say ten years; I’ve seen some flat roofs that made it 15-20 years, but see, they don’t use asbestos in the rubber anymore, so you have money up-front, but you don’t get the lifespan of a 25 or 30-year shingle as you do on a pitched roof.
Joe Fairless: What are some other due diligence — well, actually, you said hot water heaters… That compared to having boilers – can you elaborate on that?
Nathan Tabor: Yeah, so in the South we don’t have a lot of boilers here. I think that’s been more of probably a North — we had one complex with a boiler… Those are expensive to repair, they’re expensive to replace. Hot water heaters – the number one issue that I see in a hot water heater is when you visually are looking at the hot water heater it looks okay, but how old is that hot water heater? When was it installed? Was it permanent when it was installed? Does it have a drip pan? I don’t know of any municipality that allows you to put in a new hot water heater and not have a drip pan. Well, if that unit is 12, 15, 18, 20 years old, most likely the bottom of that hot water heater is rusted out or is rusting out.
I don’t know about your grandma’s house, but [unintelligible [00:12:52].26] They don’t make hot water heaters like that anymore.
Joe Fairless: My grandma is 102 years old and she’s lived in the same house since the 1940’s, so hers is probably looking pretty shabby, too.
Nathan Tabor: But it’s still running, right?
Joe Fairless: It’s still running, yes.
Nathan Tabor: And congratulations on having a grandmother that’s 102. She must be living a good life.
Joe Fairless: She is.
Nathan Tabor: I mean, a good life as in what she does with her time and her life. But the average hot water heater today – about 15 years and you’re getting ready to have to replace that hot water heater. So if you’re buying a complex that’s 40 years old and every hot water heater in that complex is 20-25 years old, if you’re planning on keeping it or flipping it, get ready to deal with having either to replace or give a credit for those hot water heaters. And to replace a hot water heater – labor, permit and hot water heater, it’s around $1,200 in my area, for a 40-gallon hot water heater.
Oh, here’s another one that’s come about. I’m in Winston-Salem, North Carolina area; the housing authority has passed now that any time you have a 30-gallon hot water heater, you have to replace it, even if they find out about it. So there’s nothing wrong with the unit, there’s nothing wrong with the hot water heater, you still have to replace it. That’s crazy, isn’t it.
Joe Fairless: That is. So you have to proactively do that? You said “only if they find out about it”, so is that if there’s an issue and someone tells on you, or what?
Nathan Tabor: You’re supposed to proactively do it, but obviously, most people aren’t. So if they find out about it… I had a complex that had 40 units, 40 30-gallon hot water units, and we got cited by the city to replace all the units because a 30-gallon hot water heater was not enough water for a modern-day family. And over time, we had to replace them all. What do you do if the municipality is telling you to do something?
Joe Fairless: Yeah, that would be a battle you don’t wanna fight.
Nathan Tabor: Well, you hire an attorney, but you’re gonna spend the money one way or another, so why not just go ahead and upgrade the hot water heaters? That’s not in my book, but I need to put that in there, now that I remember that story. So check with your municipality township, make sure what size hot water heaters do you have to have.
Gas hot water heaters? What’s the current code for venting those out? Because the way they installed those 40 years ago, if you upgrade the gas hot water heaters today, they have to be vented directly out, not up… At least in North Carolina. We know how expensive that is, if you can’t go up in the same pipes, and now you’ve gotta go left or right; it can be quite an expense. I’m not trying to scare anybody away from doing this, I just want to help them make sure they have the right information to do it the right way.
Joe Fairless: Earlier you said you want all units individually metered. Will you elaborate on that?
Nathan Tabor: If you only have one water meter, you’re getting the bill for it. I have a 60-unit complex and it just has one water meter, so I get one bill. Well, who’s outside washing their cars all the time? Who’s letting their faucets run? If they’re not paying for it, why does it matter how much is being used?
There’s some new systems out there – we haven’t tried it yet – that they hook on top of the hot water heater and they bill tenants individually… I’ve not had any experience with those, but it makes it a lot easier if you have individually water meters for each unit to where they call and get their own account set up, versus having one main account.
Hey, here’s a total random thought.
Joe Fairless: Bring it!
Nathan Tabor: Do you know who owns the fire hydrants on the complex you’re getting ready to buy?
Joe Fairless: I can tell you what – on my very first one, I did not look into that, and then you know what happened, since I didn’t look into it… Fast-forward two years and there’s a big ol’ gigantic puddle next to the fire hydrant. So I said to my management company, “Hey, tell those fire department guys to come over and fix that thing!” Uh-uh, not how it works. [laughs]
Nathan Tabor: Because it was a private road, so who had to pay for it?
Joe Fairless: I had to pay for it, $6,000.
Nathan Tabor: Yup. So I bought a complex, it had four hydrants; thankfully, I didn’t have to pay anything for it, but I was looking at a $24,000 expense if anything went wrong. That’s one of those that who would ever think about it? Now, hopefully, whoever is listening to your show, they now will think about it… But $6,000 – had you planned on that?
Joe Fairless: No.
Nathan Tabor: Still, it’s a lot of money, but… Any way you cut it. So who owns the mailboxes, the aluminum little boxes? Do you know how much — and I’m sure you do… I was mortified; I looked at a 40-unit aluminum box, four feet by four feet. Do you know how much that thing was?
Joe Fairless: How much?
Nathan Tabor: It was $1,800. You know the ones that I’m talking about, where they’ve got the big door on the back and the little doors on the front?
Joe Fairless: Of course, yeah.
Nathan Tabor: Google how much — now, that was seven years ago, but I just thought hey, it’s stamped on the side of it “Property of the USPS”, they maintain it. Guess what they don’t do? They don’t maintain them.
Joe Fairless: Yup.
Nathan Tabor: So those are some of the curveballs that really break people down, because it’s not that you miss one of them, you miss three or four things and then it’s times 7 or 8 or 40 or 50, and all of a sudden the $200,000 you were hoping to make, you’re looking at $100,000 in expenses that you didn’t plan for, that were right out there in the open, but you missed it.
Joe Fairless: What about any plumbing considerations?
Nathan Tabor: So the number one thing on top of my list that I do first when I start due diligence is to go to the housing authority or whoever is writing city complaints and get the last two years’ worth of city complaints. The reason why – I got burned on this.
I bought a complex on a foundation – 20 units downstairs, 20 up top. The day I closed, that night I had a plumbing company out there and got a $2,200 bill because the bottom units had backed up and sewage was coming up in the bathtubs and in the toilets. The pipe underneath the building was crushed, so we had to move all the bottom tenants out, go in with a jackhammer and jackhammer the concrete out, dig down two and a half, three feet, and replace the main sewer pipe that was on the bottom of the complex.
I was like, “There’s gotta be a way to figure out the plumbing side”, so I started pulling housing complaints and started looking for backed up toilet, raw sewage in the bathtub… Anything that let me know that there was a problem with the main sewer line.
Joe Fairless: Yeah.
Nathan Tabor: You can hire somebody to bring a camera out, but they want $300 to $1,000 to bring a camera out and run it down the pipe, and I was like “Well, I can get the information for free and in 30 minutes know.” It takes a little bit of time on that, and then once you know that… It was $87,000 to replace that pipe underneath that complex. It was $87,000 I lost. It didn’t come out of anybody else’s pockets, it came out of mine because I didn’t know how to catch that problem.
Joe Fairless: So now the first thing you do is get the last two years of complaints?
Nathan Tabor: Yup, complaints. I sit on every toilet, I rock the toilet to see if the floor underneath it is rotten, I open up every sink… If you are opening up a sink, and every sink you open up – in the bathroom, in the kitchen – has freshly-painted wood underneath the P-trap, do you know most likely what they have? Severe water leakage problems in that area. Because they’ve known you’re coming to do your due diligence, they’ve cut a new piece of plywood, painted it white and stuck it underneath there. Well, that’s a plumbing issue, but that’s also a mold and mildew issue. What’s underneath that piece of board?
So plumbing, electrical, talking about that… Do you have a fuse box? Do you have the old screw-in fuses? The first thing I do when I go in to buy a complex, from the electrical side, is see what the breaker box is like, because it’s a couple grand (2k, 3k, 4k) to rewire a unit. And people laugh at me – I buy one of those little $5 testers, Joe, that plugs in, and I walk around to every socket and plug it in.
Joe Fairless: When you look at the fuse box, what are you looking for, what ideally do you see and what ideally don’t you see?
Nathan Tabor: You want to see the modern-day little black 3,5-inch fuse with a toggle switch on it, left to right. You wanna take the outside off – and if you can’t do this, have somebody with you, take it off, and then you can see, is there aluminum wiring or copper wiring? I’ve actually opened them up before and seen half-copper and half-aluminum on one unit. I don’t know how that happened. Somebody must have just rewired it themselves, or they had a water leak and they updated it with — obviously had to pull that out.
You really want to see if you can toggle those little switches, to see if those breakers are good or not. If you have the old screw-in fuses, not that they are bad, but that’s old technology in the electrical world. So if you have screw-in fuses, at some point those are gonna need to be updated. So if you’re flipping it, I would ask for a credit on that.
If you’re holding it, you need to put money in reserve to upgrade that at some point. GFI plugs, little things like that. Does each bathroom and each kitchen have a GFI plug? Most insurance companies I deal with today require that there be a GFI plug in the bathrooms, in the kitchen, or they won’t write the insurance policy on the complex. But most 1960, early 1970’s complexes were built without GFI plugs. Again, not a big expense; a GFI plug is $8-$12, but how many do you have to replace, and how much is the electrician gonna charge you to put them in?
Joe Fairless: This has been a college course of due diligence for apartment communities and I’m very grateful that you came back on the show and talked to us about the ideal scenario, and if it’s not ideal, things to consider.
Nathan, how can the Best Ever listeners get in touch with you?
Nathan Tabor: They can visit Apartments.NathanTabor.com. It’s got my contact information there, and they can also get a copy of my book, or talk with you about how to get a copy of my book, what are the best ways to do that.
Hey, just so you know this, I really appreciate you having me back on, I enjoy our conversations, and I hope your listeners take this in the spirit of — look, you can make hundreds of thousands, you can make whatever you want to in doing apartments, but out of personal experience, if you don’t do it the right way and you don’t do your due diligence right, you can just as quickly lose hundreds of thousands of dollars or millions of dollars, because you missed something.
Joe Fairless: So true, and I’m glad that we approached it from that angle, because typically it’s not approached that way. So for the ideal scenario, as you’ve mentioned, having a pitched roof, having copper… By the way, I have aluminum wiring in my house, believe it or not. Yeah, it’s something we ended up being okay with during our due diligence of my primary residence. We’ve done some things to mitigate that risk…
But pitched roof, copper wiring, HVAC versus radiant heat or baseboard heat, good parking lot, double pane windows, hot water heaters that are individual, and having the individual water metered.
Thank you for being on the show, thanks for talking through this. I hope you have a best ever weekend, and we’ll talk to you soon.
Nathan Tabor: Thanks.