Thread: Apartment Buildings

To all those who are working with apartments, can you describe in detail how you put together your first deal? How many partners did you have? How much did you put down? How many units?

Thanks! ...Can't wait to see the numbers behind it all!

My first deal had no partners. It is not necessarily the way I would recommend that someone get started. But...

Purchased a 4 plex with 80% LTV and a 10% seller carryback. I had to come up with 10% and a bit of fix-up money which was all borrowed from credit lines. I refinanced after a year and paid all the loans back.

Sold after 2 years and 1031 exchanged about 100K.

The second deal is more along the lines of which I would recommend. Using data that suggested Riverside CA was heading towards and upswing in occupancy and rent growth, I partnered with 8 other people on a 46 unit apartment building. We set it up as a Tenants-In-Common partnership. The lender gave us 80%LTV and the seller carried 5% on a note. The note did not have any payments for 2 years. All the interest just accrued.

I put about 100K into the deal which gave me about 30% ownership.

Sold this after about 2 years and came out with almost 300K.

Originally Posted by SteveO

The second deal is more along the lines of which I would recommend. Using data that suggested Riverside CA was heading towards and upswing in occupancy and rent growth, I partnered with 8 other people on a 46 unit apartment building. We set it up as a Tenants-In-Common partnership. The lender gave us 80%LTV and the seller carried 5% on a note. The note did not have any payments for 2 years. All the interest just accrued.

Steve,

Can you explain how a Tenants-in-Common partnership works? Is there a holding company (an LLC or LP) that "owns" the property and the investors are all part of the company?

Or something else?


Thanks!

When you did the 10% owner carryback, does that mean that the owner literally comes to closing with 10% for the down- or is it just on paper that he carries 10%? ...There were no payments and the interest accrued for 2 years? How did you pay this off? ...Also, how did you make $300k in such a short period of time?

Tenants-In-Common is simply a way of taking title. Each partner takes title on the property for their share of ownership. If you have a 10% share, you have 10% on the title. You can hold it as an individual, trust, LLC, whatever...

When you did the 10% owner carryback, does that mean that the owner literally comes to closing with 10% for the down- or is it just on paper that he carries 10%?

An agreement is usually put together specifying the terms. The seller may need to come in with money if there is not enough left over but this is an unlikely scenario. It would probably only work for a seller if there is enough equity for them to just put it on paper. If the seller is planning on reinvesting through a 1031 exchange, they won't usually carry paper. Sellers that are planning on retiring or getting out of the business are the best candidates. Sellers that are getting out, want out bad, and struggling are usually the most motivated.

There were no payments and the interest accrued for 2 years? How did you pay this off?

When we sold. The note was actually for 5 years but the deferred interest part was for two. We could have refinanced as well to pay it off but it was much too sweet.

Also, how did you make $300k in such a short period of time?

Par for the course... Fairly typical... What I have been doing on most deals for the past few years.


If you could see the math.... Check out Vollucci's book.

I just started Vollucci's book, so maybe there won't be so many questions in the near future. If I forget to tell you in person when we all meet up- I really do appreciate your time.

...When you made $100k off the 4 plex, was it because you raised rents and improved the building? I suppose I am still a little confused over how commercial real estate appreciates. ...Who managed the 4 plex? Did you have to sign a letter of intent? What was the asking price? Purchase price? How did you come to determine the value of the property? Did you/do you use the 1% rule?

...Why would you recommend buying an apartment building the second way you did it? What was right about it the second time around?

CAn anyone tell me is there much difference in the 1993 Publication of 'How to buy and sell appartment buildings' and the 2004 publication?

I am touring a multi-family (4 units, owner owns 8, both are for sale) tomorrow at 11am I don't know how interested I am in this property, but I figured if nothing else it gives me experience with the numbers. Here is how I am going about analyzing the numbers. Am I on track here?
Asking price: $169,000
Occupancy: 100%
Gross Rents:2 units at $500; 2 units at $550= $2100
Expenses: (Water and trash paid by owner) Says it is a little less than $200/month for all 4 units ($2400/yr); Taxes and insurance: $200/month($2400/yr); repair- say $200/month($2400/yr); vacancy (owner says units aren't vacant for more than a week at a time, yeah right!) 10% $210/month ($2520/yr)
NOI: $1290/month or $15,480/yr.
Cap: 9.2%

I was thinking that if I got a loan for 80% ($899.50/month) and had the owner carry 20% for 2 years with no payments and had interest accrue (SteveO idea), then I would be $390/month.

Does this seem right and am I missing anything here?

What about the area? is it growing? new employment? a new mall near by? is it on a main street or hidden in a cute cul-de-sac? is this a SFHs area or is it full of apartments for rent (more competitors)? How many parking spaces? who would be your renter (profile)?

Without looking too much into the numbers, the idea of the 80% loan, 20% carry on is great. What rate are you using for that loan? Also, management costs should be added to the numbers (use 10% for your calculations) and this will bring your NOI down. Even though your PM company will manage the property you should always add it to the expenses.

The area has steady growth. There is talk of the military base expanding here. Commerce is up and coming. ...I live in a small town.

The interest rate I was figuring was 7%. I hadn't figured in property mgr. fees, as I don't know if the size of the building can support it. Although, I am trying to move from an "S" mentality to a "B" mentality and the "doing it all myself" mentality needs to end!
Any other thoughts? ...How would you recommend I look into growth/commerce data?

Well, looking into more data about growth/commerce may not make too much sense in your case, as it seems you know a lot about it already (hey, living in a small town has to have its advantage, no?). In any case I normally recommend to check with the chamber of commerce, as they track this and know what businesses are moving in/out of town.

I would also recommend a little higher rate, unless you have an established relationship with banks/mortgage brokers. I rather overestimate the cost than overestimate the profits. Many banks will not like that you don't have any of your money in the deal, check with your bank/brokers.
Yes, I used to tend to skip some costs, trying to force the numbers to look good, but I've learned that the numbers are there to tell me whether there is a deal, not to convince myself there is one. It is great that you recognize where your weaknesses are (S vs B mentality) as now that you know it you can do something to fix/improve it. SteveO told me that he uses an average of cost per unit to work his numbers, so he puts a lot of time finding/estimating this cost/unit, usually asking RE brokers and PMs that specialize in the area. I think you mentioned somewhere that you have a RE license, or I am mistaken? If you do then this should open you many doors to access good information (ask your broker).

By the way, have I mentioned that I think you are doing great?

Aww, Andviv- I really appreciate the acknowledgement. Sometimes (fairly often) I feel like that little dog on Looney Tunes that ran around the big dog Spike. You remember the one? The one that talked all the time and asked a million questions.
Everyone's been so great with info, just saying "thank you" seems to fall embarrasingly short.

To answer your questions, I don't have a RE license in NM, only one in CA. You are probably right about underestimating interest rate. ...I suppose I was thinking it would be about right since the property is a 4 plex and woudl be considered residential and res. rates are around 6%. As far as cost per unit, I would like to know more about how to figure this. What numbers would I take into account to figure this number?

Also, would I be better off buying all 8 units ($336k) and going with a commercial loan or buing them as separate res. units?

Usually you can higher LTVs (and possible lower int. rate) if you separate each apartment, as banks look at it from a residential viewpoint rather than commercial.

Rgds.
ProInvestor

Originally Posted by ProInvestor

Usually you can higher LTVs (and possible lower int. rate) if you separate each apartment, as banks look at it from a residential viewpoint rather than commercial.

Rgds.
ProInvestor

Can you go into further detail?

...I just got back from my neighbor's house, (she's a bank president) and was very discouraging about investing in multifamilies, and having a property mgr. She felt that I'd lose a lot of money and have nothing but issues. What do you guys think? I hear so much about getting a "professional mgmt team" in place, but how would I weigh how "professional" they really are? ...I am also trying to weight their advice. Now granted, they have both been in many facets of RE for decades, but they are both hard core "S" personalities. I want to set things up with a "B" mentality to begin with. Thoughts?

I have only done an analysis of a few multifamily properties with a property manager. Not all property managers are the same. One property had an unusual amount of door repairs. When I inquired about the excess they responded that any maintenance issue was charged to door repair. It still looked like a lot to me. I passed on the property. The current property I am looking at charged higher up front monthly fees but doesn't itemize every repair so I can't see exactly what has or has not been done. It would be interesting to hear how the more experienced guys here have chosen their PM's for their properties. Good luck.

Greg

Russ just said it.

Do not listen to those that have not succeed doing it.

[Hijack]
A couple of months back a coworker asked me about my most recent deal. At the time I was putting together a big deal (we were talking millions here) for rich investors. I had the opportunity to invest myself and let others join me in the deal, as long as one of the rich investors put $500K in the deal. When I told my coworker that we were targeting returns of well above 30% per year he sounded excited and wanted to verify with one of his friends that had apt bldgs before. Three days later he came back to me telling me that he had talked to his friend and he had setup lunch for the three of us. I asked him why would I want to have lunch with his friend and he told me that, in this former-successful-investor, apartment buildings were overpriced, so he had sold and was not interested in buying anymore. I told my coworker I did not want to have lunch with them. He asked me why, if it was a great opportunity to hear from somebody that had done it. My answer: Cause I don't need more reasons why not to do it. I've decided to talk to positive people that are actually doing things and not running away scared from the market. Instead of talking to chicken little I talk to SteveO or Russ. Instead of talking to people that believe the sky is falling, I talk to bflbob or Biophase. I decided to talk to doers... and successful ones, thank you very much. If you can chose who you can talk to and what information you let in your mind, why choose the wrong one?
[/hijack]

I agree with ProInvestor. I'd go for both as separate properties and try to get residential loans for each.
About the cost per unit, I'd have to refer to SteveO, who is the one that actually uses something like this. I think he estimates that based on information gathered from property managers and brokers in the area.

Originally Posted by yveskleinsky

...I just got back from my neighbor's house, (she's a bank president) and was very discouraging about investing in multifamilies, and having a property mgr. She felt that I'd lose a lot of money and have nothing but issues.

I have several 4 plexes and love them. I think it's crazy when people discourage other because there will be "issues".

Other expenses to consider: Age of building, heating, water tanks, plumbing, electric, etc. (reflect maintenance costs), common area utilities/ cleaning, yard/snow removal, advertising, accounting, pest removal. Will the purchase price become the new assessed value and change your property taxes. Confirm water, trash costs. Get an exact insurance.