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Multifamily Acquisitions – The Age Quotient

October 22, 2011 Leave a comment Go to comments
The age quotient for a multifamily asset has two components: the actual age and the functional age.  One is no less important than the other.  In fact it is often more important to know the functional age of the property.

In competitive markets age can sometimes become meaningless.  When occupancy is tight, assuming usable amenities, the  age factor can be diminished to zero relevance.  A hovel in a major market with limited availability of rental units may rent for $2 a square foot (and much higher) as compared to .55 cents a square foot to rent  practically new build units  in a smaller, less populated or tertiary market.

The Actual Age

When reviewing potential multifamily acquisition candidates we always want to know the year built, or year of construction.  This is our baseline data point that says much in a single number.  Just by saying “year built 1976″ we can make certain assumptions.  One, there is lead paint on property.  Two, if garden apartments, most likely all units will have only one bathroom. 

Year built can also point to architecture.  Year built also guides us towards the direct competition for an asset by quantifying the total number of units built within a certain time band.  Example: 1980-1989.  Depending on the locale and date, market data will tell us the total number of properties (and subsequently the number of units) within this age cohort in the market area for property X.   

The Functional Age

Some properties get better with age, they really do.  When this occurs we refer to it as “gentrification”.  The dividing point for what is “gentrified” is the amount of money put in the deal.  Older property with completely updated amentities says that that people put money in- lots of it, to modernized older assets.  Modernization can take the form of structural improvements (translated: big bucks) or cosmetic improvements. 

Liam Neeson is a great actor.  He tells a story about being on location in Europe.  They were using an old bridge in a scene.  He made a remark to a local about the old bridge.  The local corrected him.  “No sir, your movie is using the “New Bridge”.  It’s not even fifty years old.  The old bridge is over there- that one’s four hundred years old.  Americans often find this concept unreal, being in a country with such a short heritage. 

To a healthy older person age is just a number.  This applies to building as well.  The age of a structure, while important, is less important than the functional age of the structure.

Always look at the actual age for clues to obsolescence and functional age for markers to forward-looking usability. Take both numbers into account when reviewing potential acquisition candidates. 

About This Blog
Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency.  This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel.  Our focus is sharing strategies and tactics that can be implemented and measured. For more information, please visit: http://www.MultifamilyInsight.com

by John Wilhoit Jr.

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Categories: multifamily, Uncategorized
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