Apartment Investing

[zaiteku]

Thank you for this thread SteveO. Great stuff!

 

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[Rickson9]

Hi SteveO, great thread. Thanks for sharing.

As a Canadian, as a result of the last housing downturn I own a number of property in the US. They're condos and detached homes.

When I purchased the properties the numbers were great. Now the prices have literally doubled since 2010 and my return has been halved (due to rents staying relatively the same and the equity doubling). Would you recommend taking out a mortgage against the equity to purchase more or to just stand pat? The properties were all purchased with cash so there are no outstanding mortgages on them.

If you recommend tapping the equity, what % would you consider prudent?

On the one hand I feel that I'm leaving a lot of non-performing equity on the table. On the other hand, I'm thinking that it's not really a problem, just let it cash flow and shut up.

Or another option entirely?

Thoughts?

 

[SteveO]

Well. I don't like to tell people how or when to leverage. It really depends on your risk tolerance.

I know what I would do though.

The cash on equity can be calculated: Annual Cashflow/ Equity

It is a bit tougher today to purchase cashflow as you are seeing. I don't know what location you are in but in mine, I expect to get something that is in the 6-10% range of Cash-on-Cash (CoC). That is not all that I target though. There are always undermanaged or poorly performing properties that can be turned around. By doing this you can add value. I want the cashflow and the added value.

The market provided you with the added value. You are already getting the cashflow. It seems that if you could figure out a formula to continue to get both that you would continue to add to your gains.

I get that formula through increased income from less vacancy and increased rents.

 

[jpa0827]

Hi SteveO, I'm really enjoying your thread. Great insights!

You said you do not hire management anymore. Do you actively handle all management yourself or did you mean that you now hire someone in house that works for your management company?

 

[SteveO]

Do you actively handle all management yourself or did you mean that you now hire someone in house that works for your management company?

I have a management company with a crew of one manager, one leasing agent, two maintenance, myself and a part-time bookkeeper.

I do have a couple properties in another state with professional management. Those are under contract to sell and once they are gone, I don't plan to invest outside of my area.

 

[CarrieW]

I don't do rei yet, when we do I am also going to stick to the local (or known) areas...

I have lived in a few states so I know the local re scene in a few locations that I would be comfortable investing in and outsourcing management.

to start thought and mostly I will be working near where our home base is located, only because I can go see things myself right away rather then having to travel...

@SteveO I can only imagine how many of your posts I am going to have to study before I dive in

I am going to start with tax liens and work my way up

 

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[oddball]

I have a management company with a crew of one manager, one leasing agent, two maintenance, myself and a part-time bookkeeper.

I do have a couple properties in another state with professional management. Those are under contract to sell and once they are gone, I don't plan to invest outside of my area.

That's what an investor I know is doing, only buying local stuff because that's how he can make his management work.

I may have found a 49 unit complex, out of state owner that doesn't want to deal with it (he does sfh and wanted to try going larger), he is too far away and wants to get out of it. Expenses don't seem too crazy but rents are under market value.


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[T14]

@SteveO you mentioned in a response to one of my questions that bank financing hasn't been much of a challenge for you. Was this the way you started investing in buy and holds? Have you used private money? Would you mind sharing what terms you borrowed the money at if you have?

@zend***phin gave a terrific example of how he would go about making some big money in his "golden nuggets" thread. He recommends raising private money from investors and using those funds to finance buy and holds.

Obviously a reputable track record is needed to go this route, but I was interested to hear your thoughts on borrowing PM and using the funds to buy large complexes.

Thanks

 

[SteveO]

This is how you want to find them. The most critical parts of this whole evaluation process are:

How much income will this bring in?

What will the expenses be?

These are critical. Do your homework and account for all. The sellers will often misrepresent these numbers.

 

[SteveO]

Would you mind sharing what terms you borrowed the money at if you have?

This is a topic for an entire chapter of a book. Perhaps even an entire book.

The flow of money and what everyone's returns will be is what makes the investment world go around.

There is a capital "stack" that goes into every deal. That stack could be as simple as your own cash or it could be multi layered. Mezzanine financing, hard money, your own "skin", conventional financing, investor funds, equity partners, etc....

I use many of these options.

 

[mtnman]

What's the worst that can happen on a small 4 plex if you have repair skills excluding HVAC? (just assuming you need either bankroll or sweat equity if shit hits the fan... I hear people talk about water heaters exploding - exaggerate much?? , roofs leaking, etc...)

If you started over, and were buying your first triplex or quadplex, what would be the most important buying factors for you, and what would you be more lax on?

 

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[SteveO]

If you started over, and were buying your first triplex or quadplex, what would be the most important buying factors for you, and what would you be more lax on?

Location, location, location. I hit a home run with my first investment. It was a fourplex in Carlsbad, CA that had an ocean view. Had a vacancy when I bought it but not another for the entire 2 years that I owned it.

I bought a good looking property once in a bad area. After two murders on the property in the first year, two assaults on my manager (which led to a lawsuit against me that I had to settle), and morning rounds of checking for squatters in the empty apartments, I had to get out. Did not make any money but learned a lifetime of lessons.

Make sure that you understand your income and expenses. Factor in the rent loss from people that don't pay and vacancy. If the area has move-in specials, this needs to be counted also. I have seen times where the vacancy factor was at 10 percent but the other rent losses took the total income loss to over 20%.

The best time it buy is when the income loss is at its highest. I have made the most money buying properties with a zero cap rate and turning them around. This process takes market knowledge and no fear on your part.

 

[SteveO]

What's the worst that can happen on a small 4 plex if you have repair skills excluding HVAC? (just assuming you need either bankroll or sweat equity if shit hits the fan... I hear people talk about water heaters exploding - exaggerate much?? , roofs leaking, etc...)

If you are going to buy a property, understand how much life you expect from all the major capital items. How long before you need to replace the roof, parking, appliances, a/c's, paint, etc. Either get a credit from the seller or put some money into an account for capital repairs. Then you apply $250/unit/year into the account for future capital expenses.

I am at the point where I don't feel that there is much short of a fire that cannot be handled internally. We do our own roof repairs. Water heaters are easy. I have had a couple of them bust loose and cause a lot of damage but this is rare. They don't cost much to purchase and are easy to install.

The problem that I least look forward to are plumbing problems under the slab. I have had to do some repairs that required jack-hammering up the slab and have also had to reroute water pipes. I have not yet had to tear up a major portion of a floor to replace drain lines. This seems like it could be the biggest issue if it ever came up. I have had a couple of times where I thought I might need to but managed to control the situation with drain tools.

 

[Lakeview]

The best time it buy is when the income loss is at its highest. I have made the most money buying properties with a zero cap rate and turning them around. This process takes market knowledge and no fear on your part.

Great advice Steve! In my pursuit of a first good buy, first thing I look at is a good cap. I will look at things differently now.

Just finished Berges book and ordered Vollucci's book. I like the strategy of value play and your success in implementation inspires me.

 

[SteveO]

In my pursuit of a first good buy, first thing I look at is a good cap.

I have used investors for the past few years. This has been the most difficult part of selling to them. Most people want to see a good cap rate. A good cap rate at purchase means less forced appreciation. This is where all the money is at. But be careful... Not all properties can be turned around for a profit.

 

[MJ DeMarco]

What's the worst that can happen on a small 4 plex if you have repair skills excluding HVAC? (just assuming you need either bankroll or sweat equity if shit hits the fan... I hear people talk about water heaters exploding - exaggerate much?? , roofs leaking, etc...)
If you started over, and were buying your first triplex or quadplex, what would be the most important buying factors for you, and what would you be more lax on?

Matt J? Really? No way! Last time I heard from you I think Clinton was President.

 

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[mtnman]

If you are going to buy a property, understand how much life you expect from all the major capital items. How long before you need to replace the roof, parking, appliances, a/c's, paint, etc. Either get a credit from the seller or put some money into an account for capital repairs. Then you apply $250/unit/year into the account for future capital expenses.

I am at the point where I don't feel that there is much short of a fire that cannot be handled internally. We do our own roof repairs. Water heaters are easy. I have had a couple of them bust loose and cause a lot of damage but this is rare. They don't cost much to purchase and are easy to install.

The problem that I least look forward to are plumbing problems under the slab. I have had to do some repairs that required jack-hammering up the slab and have also had to reroute water pipes. I have not yet had to tear up a major portion of a floor to replace drain lines. This seems like it could be the biggest issue if it ever came up. I have had a couple of times where I thought I might need to but managed to control the situation with drain tools.

Thanks Steve! Makes sense thus far. All of those issues seem manageable to me, especially on a small footprint.

Location, location, location. I hit a home run with my first investment. It was a fourplex in Carlsbad, CA that had an ocean view. Had a vacancy when I bought it but not another for the entire 2 years that I owned it.

I bought a good looking property once in a bad area. After two murders on the property in the first year, two assaults on my manager (which led to a lawsuit against me that I had to settle), and morning rounds of checking for squatters in the empty apartments, I had to get out. Did not make any money but learned a lifetime of lessons.

Make sure that you understand your income and expenses. Factor in the rent loss from people that don't pay and vacancy. If the area has move-in specials, this needs to be counted also. I have seen times where the vacancy factor was at 10 percent but the other rent losses took the total income loss to over 20%.

The best time it buy is when the income loss is at its highest. I have made the most money buying properties with a zero cap rate and turning them around. This process takes market knowledge and no fear on your part.

I still need to do some learning in this area, but I do know certain groups are touting growth in the Orlando area in the coming years. They built a couple new high rises downtown, new soccer stadium on the way, and a couple other things that might offer opportunity to adequately support a few small units in the surrounding area at the very least. (I'm speculating here on hearsay... need to do more learning on how to evaluate this with confidence.)

LOL - I'm chuckling here a bit after reading your low income property experiences in the rest of this thread or another. I went to look at this yesterday, just to see what you get for pennies. Holy crack house!!! (literally, supposed to be vacant... cars out front, loitering, etc...)

http://hotpads.com/real-estate/1731...se,medium,large,garden,&dupeGrouping=building

 

[IceCreamKid]

Steve, I've come to the conclusion that I need $300k cash to get started in commercial real estate, specifically apartments. Is this a fair conclusion or am I missing something?

What are your thoughts on leverage in the new economy? Many view real estate from a different angle after the last crash.

What blind spots do newbies typically not see?

 

[mtnman]

Matt J? Really? No way! Last time I heard from you I think Clinton was President.

Hey MJ! Hows it hangin' brother? I'd poke the bear with our current president, but I know how much you love your politics.

 

[SteveO]

Steve, I've come to the conclusion that I need $300k cash to get started in commercial real estate, specifically apartments. Is this a fair conclusion or am I missing something?

You must leverage my friend. What size/price deals are you looking at?

 

[randomnumber314]

LOL - I'm chuckling here a bit after reading your low income property experiences in the rest of this thread or another. I went to look at this yesterday, just to see what you get for pennies. Holy crack house!!! (literally, supposed to be vacant... cars out front, loitering, etc...)

http://hotpads.com/real-estate/1731...se,medium,large,garden,&dupeGrouping=building

FWIW I know of a guy who bought all the houses on a street (one at a time, approached landlord owners) and then went through and remodeled each house. Took the average property values up, rent income up too. They did it because they grew up there or something and didn't like the drug haven it had become. So...if you're able to play the long-game you could flip an entire neighborhood.

 

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[pickeringmt]

@SteveO Thanks a million for doing this thread man. Very interesting stuff.

These are just the basics. Pick up some books and read them. They will help.

Can you throw out a few good titles? I'd love to do a little more due diligence on this process.

 

[SteveO]

Can you throw out a few good titles?

I have not had a need to read any books on the topic. There is not much that I am going to learn from them. Any titles that I have are MANY years old and probably not relevant in today's market. Steve Berges had a book that I felt had some strong fundamentals. "The Complete Guide to Buying and Selling Apartment Buildings". The examples will be outdated but the fundamentals will be there.

I also liked "The Real Estate Game" by Poorvu. It is a tough read but very interesting. It is about real estate transactions and the creativity behind them.

 

[SteveO]

Steve, I've come to the conclusion that I need $300k cash to get started in commercial real estate, specifically apartments. Is this a fair conclusion or am I missing something?

These are your own barriers. There are a lot of creative ways to do deals. First you should consider where to start and gain experience. I always feel that a four-plex is the best way to do this. You can usually get more aggressive financing with these smaller properties. Plus, you can use this as a springboard to jump.

I went from four-plex to a partnership that gave me about 33% of a 45 unit project. This took less than two years. After another two years we sold the property and I traded into 70% of a 52 unit project.

 

[AubreyJ]

Whenever you are looking for an apartment, what do you look for as far as location goes? Are you looking for apartments that are in nice areas of town or more middle/lower class areas?

I am currently looking to buy a four-plex and am having trouble finding any leads in the area of town that I live in- but in the surrounding cities, where the income isn't as high, there are a lot more options for buildings that are in my price range.

 

[SteveO]

Whenever you are looking for an apartment, what do you look for as far as location goes?

Most nice areas have pockets of apartments or areas that are not as nice. I prefer to find something that has more "nice" than "not so nice" around it. Especially if there are improvements that I can make that will increase the rents.

Any increase in rents will jack up the value significantly.

Sometimes the value is just not understood. You may get a smaller initial cashflow from a more expensive property. But the overall returns could be better. There tends to be less turnover in desirable areas as well.

I am not saying not to invest in the less expensive parts of town. I have done this successfully many times. I just prefer the nicer locations.

 

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[SteveO]

what do you look for as far as location goes?

I forgot part. I also like to see the buildings be close to shopping and work centers. Washer/dryers, private yards, and single story add to the appeal for renters.

 

[AubreyJ]

I forgot part. I also like to see the buildings be close to shopping and work centers. Washer/dryers, private yards, and single story add to the appeal for renters.

Thank you for the response! This was helpful!

 

[Chazmania]

Great thread @SteveO! For some reason at a young age I too fell in love with real estate and I think I always will embrace it. It took me a while to develop the skills to manage it well because you certainly wear many hats in this business.

I've come to the conclusion that if the numbers don't hit me over the head as a sure thing, I don't even bother with it. It doesn't take complicated math. It's simple. Max income, minimize expenses - and then leave room for error. If it still makes sense then you probably have something there, but you need to know your market.

As far as cap rates go, I wanted to throw my 2 cents in: Among other multis and singles, one example I own is a sfh in a "rough" area and the tenant is on housing assistance, but it throws off 20% CoC. The gov't pays over 90% and it hits my mailbox like clockwork. She actually pays her part early too. It's not a total war zone or anything but it's not exactly suburbia lol. It's definitely profitable and that's all I care about.

I just locked up another deal like it and am going to give the deposit tomorrow. Lower income areas can be great for cashflow, but that's about it. Don't expect appreciation, and that's why you need to buy below market for sure. Usually the rents are similar to nicer areas but the cost of the house is much less. It also takes a certain street-sense to pull it off I guess, but the profit is really there.

Another sfh we have is right here in the town we live in, which is middle class and blue collar mostly. That house throws off over 15% as well, but we bought that one below market as a short sale and it fortunately worked out well. Great tenant and always pays early, keeps the place clean etc.

Point is: if someone looks for good cash on cash, it's out there. If I can do it in NJ, I think anybody can. The prop taxes here are the worst in the whole country.

I look forward to bumping up to bigger buildings like you're doing though because that's where the scale and magnitude start to really meet up.

Have you found it difficult dealing with commercial lending guidelines? On one hand it seems like it could be easier because they look more at the building than the individual, but I've never dealt with one.

 

[IceCreamKid]

You must leverage my friend. What size/price deals are you looking at?

I've been looking at 4-6 unit buildings ranging from $1.3M-$1.7M. Located in the Bay Area. I'm looking into the possibility of investing out of state, but have reservations about investing outside of my market. I feel that it's really important to have intimate knowledge of the area that you're investing in.