48 Unit Apartment Building for $430K - no fix up needed

[Windsurfer]

I have been a residential RE investor for about 7 years now and am looking to move up to the apartment building lifestyle. I'm just learning about apartments, but I found this deal on CL and would really like to hear some feedback on it.
On the surface this sounds great. With 20% down, the owner will provide financing and he has put $100K into the building in the last year. The pictures make it look like it needs little to no fix up. He said what it really needs is good management. But it is in a small town bordering 3 northern Midwest states and in the middle of nowhere. The town sounds like a small ag town and the population as of 2011 was 1,410 according to Google.
I've been in touch with the owner and he thinks even with a 20% vacancy rate the apartments will cash flow like crazy. He is going to send me some numbers, but I would love to hear from other apartment investors out there how to analyze this and does it have any possibilities?
Thanks.

 

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[H. Palmer]

Short answer: check the numbers and the math will tell you where to go.

Then again. It seems your main vulnerability is that you're new to apartment investing. (Disclaimer: I only have some experience with single apartments). This means you might miss a few cost items that are unknown to a person investing in single family housing.

I would be alert for typical apartment house costs, such as collective lighting and heating, garbage takeaway, cleaning, maintenance of lawns, trees and bushes and stuff like that.

Also, does the apartment have a HOA (Home Owners Association) or is it all rental? Do the renters have regular meetings and if so, do they have minutes of the meetings? What is being agreed?

In any case collect as much material as you can from the seller, like bank statements, the leases, contracts with the cable company, yearly taxes, etcetera.

Even if you do your due diligence, it's still a scary thing if you don't have experience with it. But I guess it's doable.

 

[snowbank]

I've been in touch with the owner and he thinks even with a 20% vacancy rate the apartments will cash flow like crazy

He's not going to tell you if it sucks, he's trying to sell it to you

 

[nextgen]

A 48 unit apartment building in a town that has 14oo people unless they are having a population boom I wouldn't buy it. And just as snowbank said he's going to tell you the best case scenario.

 

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[Steve37]

Too early to tell without any specific details. Two issues that jump out immediately is how are you going to provide good management? The property is too small to hire full time staff and in a town that size there are likely no property mgt companies. The other issue is if you run 100% occupancy that means you provide shelter to over 3% of the town. That doesn't scream diversification of risk to me.

This kind of question is better answered on biggerpockets.com

 

[CommonCents]

in a small town I'd want to know first hand about the employment situation. Is there a major employer? Are they planning on closing or moving out of town? Are the tenants well diversified as far as employment. He might know something you don't. Something to check on.

 

[Phenom]

Disclaimer: although I don't have experience in large apartments, I do have 15+ years of experience in rental properties. I've owned multiplexes (2-5 apartments) condos and single properties. From your numbers, if at 20% vacancy and you're profitable, the numbers do look good. However, please do your homework.

From what you wrote, the owner seems very motivated to sell (i.e.: profitable but wants to sell, willing to finance, etc.). So my first question is why? He mentioned that all you need is good management - does that mean, he wasn't good? or are the tenants so bad that sometime it's just not manageable.

I'm not familiar with the area you’re investing into but where I'm from (Montreal, Canada) the great apartments are rarely on the market, they are usually passed on from one generation to next (i.e. from father to son) - so very long-term. And when they are on sale, they are usually snapped up before they are even advertised. So you will find a diamond but most advertised apartments are usually money-pit.

The good apartments all have the following 3 criteria’s: location, location and location. It’s a cliché but it’s so true. Location is crucial because it will determine the type of tenants you will get. And in rental revenue, good tenants is rule number 1. Is the apartment in a good neighborhood? Do the properties surrounding your apartments are well maintained? What’s is like at night?
In terms of the economic (numbers), it sounds like you have a good handle. Once you do your due diligence, ask yourself this question: can the current tenants continue to afford to pay $400 per month consistently? Add utilities cost if it's not included. I know it's not an easy question but getting to know the current tenants will shed some light. Here's what I suggest, look at the overall profile of the tenants: tenure (how long have they been there), how many tenants are single, family, retired, etc. For example, if you find out that most of your tenants are young and single, chances are they are there temporary and turnover may be high. If most of your tenant are retired (my preference) and have been there for years, then you would expect longer tenure, little problems and more "stable" revenue.

Here's what I would do: Knock on doors and ask at least 10 current tenants how long they lived there and what they don't like about the place. Listen to their complaints - are the complaints fixable and consistent with what the current owner says. And if all this pass, don't forget the building inspection. Hope this helps. All the best.

 

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[Windsurfer]

Thanks for all the input. I've been doing more digging and found the county where this town is located is the 87th most populated county out of 87 counties in my state (Minnesota)! It has also lost somewhere between 3-10% of it's population since 2010 depending on what website I searched for in terms of demographics. It looks like the rents are about $400/unit on average but it just seems like it's going to be incredibly difficult to fill it.

I live about 200 miles from the place, so I have not gone out to look at it, let alone knock on doors and talk to tenants. I don't plan on doing that drive until I have done more research and seen that this is a halfway decent investment. If anything comes of it I will post my experience.

Thanks.

 

[Michael Raphael]

Phenom said it best. You need to research the location where this place is. See if a corporation that used to labor half the population is leaving. If it is, you can bet so are the employees. Research the tenants as well you have the right to this. Go door to door and do a survey. Find out age, occupation, salary, and their 5 year goal (if they plan to leave or stay in that place). You need people that will continue to pay.

Second speak to the city's mayor. Find out what they are trying to do in terms of future development, increasing job, import of corporate HQ's and what not or if it is the opposite. If you have a positive outcome than by all means, continue researching, if you draw no red straws than invest. But why is this man really looking to sell if it is so profitable. My family does RE they work in NYC and they own apartments. I will tell you this now, a good apartment such as what you are being told would be sold behind doors not in the open on CL.

Do your homework and dont make any assumptions. When you assume, you make an "a$$" out of "u" and "me" its a saying for a reason.

If you have any questions I can PM I have a R&D team that works for my company, although they do more tech research I don't see why they aren't qualified to research this business for you.

 

[Arturo-Jay]

In any case collect as much material as you can from the seller, like bank statements, the leases, contracts with the cable company, yearly taxes, etcetera.

Just thought I'd reply to this specifically.

The last offer I made on a duplex, I was able to talk with the slimeball owner in person. I asked him how he could prove the "Cash rental payments" were being made...specifically bank statements!
He goes, "I'm not showing you MY bank statement"....well bozo, you do have a business account, so techinically it's not your personal information.

Anytime you get resistance from a seller like that, he is full of SH*T up to his eyes, and you ought to walk away from any deal like that, unless you know for a fact you can turn a profit.

 

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[ptiz]

While I have yet to purchase any rental properties of my own, I have been a property manager for several large apartment complexes and single-family homes.

Whenever my bosses were interested in purchasing a property, they would send me out to inspect the property, perform a rent survey of the area, and gather whatever other "intelligence" I could. I have gotten to be pretty good at walking through a property and seeing problems. A lot of things that may not be apparent to most people, I can now easily spot. So while it may look good in pictures, it could be a nightmare in reality. The seller is putting his best foot forward, so to speak, and showing you what he wants you to see. It may be an incredible property, or it might be the shiny used car that breaks down a couple days after you buy it. Long story short, an inspection by a property manager who knows what he/she is doing is worth its weight in gold.

As far as the numbers go, it doesn't seem that you'd have to rent too many units to break even. At $400 per month, even with 100% financing, it seems you would only have to rent 7 or 8 units to cover your mortgage. Double that to cover your other expenses, like taxes and maintenance, and I think you'd do fine. In one of my threads, I discussed the ebook that I wrote about property management and how I increased rent, occupancy, and decreased costs. I sold the website and the rights to the book and the new guy let the site go down, but I'm happy to send you a copy if you'd like.

If you are concerned about vacancies, I would recommend dropping the price below market, screen heavily to find the BEST possible tenants, and gradually increase the price over time. 48 units at $350 per month is better than 38 (20% vacancy) at $400 per month.

Hope this helps.

 

[hatterasguy]

Two things:

1. Never beleive the owners numbers, they always lie. You have to know the numbers for your market to see threw their BS.

2. I wouldn't invest in a town that small, the tenant pool is to small, especially for a site that large!

 

[tafy]

You live 200 miles away? Take a weekend break down there and take a look! Put it down as opportunity cost, treat the wife/gf.

Edit: Just realised this is old thread... any updates?

 

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