It’s obvious that when you are buying a property, you would attempt to investigate as much as you can about that property.  In the investor world, this causes problems though because investors are often trying to move fast, and they don’t consider the different issues that arise between the varying types of real estate.  We see this a lot when investors go from buying single family homes to small apartment communities.  Apartments are a different real estate class and involve different issues.  An apartment owner must be aware of things such as submetering, RUBS and vendor contracts.  These things may not be relevant when buying a single-family home, but they will absolutely affect your bottom-line when buying an apartment community if they are not properly considered.

For example, an apartment owner must know how the property provides utilities and what the rental agreements specifies for what the residents are liable.  In a single-family home, residents are generally liable for setting up and paying for all utility accounts.  This is not the case in apartment communities, where there are common areas in addition to the rental units.  The Arizona Residential Landlord and Tenant Act has an entire section addressing utility charges.  A.R.S. § 33-1314.01 provides that a “landlord may charge separately for gas, water, wastewater, solid waste removal or electricity by installing a submetering system or by allocation the charges separately through a ratio utility billing system” (“RUBS”).  For a RUBS, it even gives examples of acceptable ratio methods, such as charging by square footage or unit type.  The statute further provides that upon 90-days’ notice a landlord can transfer from a RUBS to a submetering system, if it is provided for in the lease.  This makes due diligence incredibly important.  I have seen clients buy properties thinking they had one method, only to find that utilities were actually included in the rent.

Another example deals with washing machines.  An investor new to buying small apartment communities may assume that when they buy an apartment community, they are buying the washing machines and dryers on site.  They don’t realize that a vendor owns those machines and they are liable to share profits with that vendor.  Many small apartment communities have coin-operated washing machines.  We recently reviewed a laundry service contract that a community had with a coin-operated laundry vendor.  The contract had an initial 10-year term with automatic (and endless) 10-year renewal terms.  The contract required a 90-day notice to terminate the contract before it renewed again for another 10-year term.  If this type of contract was just renewed, the new owner could be stuck.

Investing in different asset classes is a great way to diversify.  However, it’s important to remember to research your asset classes and their varying issues before jumping in.  Measure twice and cut (invest) once.

By Mark B. Zinman,  Zona Law Group