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.

 

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!

 

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...

 

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.

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.

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


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

 

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

 

TNT,
I went to half.com today and found the prices to be similar for the 2 versions. I went with the newer version. I would compare prices with other online sites like amazon though. 2 of the books I purchased today were not cheaper on half.com and a third was almost $20 cheaper. Just some food for thought. BTW thanks for the book recommendations SteveO.

 

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.

 

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?

 

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

 

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.:cheers:

Greg

 

Hey, let me guess: She's an E, has never successfully invested in multifamily housing, and would rather steer her friends away from it than admit that it might be a great way to invest in RE.

That being said, there are LOTs of opportunities in REI to screw up. Banks notice the screw ups more than the successes, since the successes stay off the radar and pay the mortgages.

-Russ H.

 

:iamwithstupid:
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.

 

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.

 

I have several 4 plexes and love them. I think it's crazy when people discourage other because there will be "issues". We have to remind ourselves to stay away from the noise of the E's.

Other expenses to consider: Age of building, roof, heating, water tanks, plumbing, electric, etc. (reflect maintenance costs), common area utilities/ cleaning, yard maintenance, 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 price. How competetive are rents? They sound as though they are priced right if you have such high occupancy or perhaps even a little lower than market.

 

I live in a small town, have 45 apartments and I've never hired a management company- there's only one that I know of here and they have a very bad reputation. At this time, I did not want pay 10% plus one month's rent (when they got a unit rented) to the company and get poor service! Plus, being new, I wanted to dive in, get my feet wet and learn all aspects of owning and managing my properties. It helps that all of my properties are within a 5 mile radius of each other and from where I live.

I did hire one individual to manage properties for me. I set my guidlines for them and involved myself in what I wanted to and he basically took care of the rest. It worked out for about a year, but towards the end, the manager was burned out. He got tired of dealing with tenants and was at times intimidated by some of them. We parted ways and I got back into it. I tried one other person recently and it did not work out at all. I know in order to get out of my E/S comfort zone, I need to get a manager and I am trying to work on this...

You must take people's advice with a grain of salt. Does your banker own 4 plexes? Probably not, so don't get discouraged when people give you advice that they have no experience in. Glad you're back to sailing.

 

Our deal started out with 36 units for about 700K with two investors and ended up being 156 units for 4.175M with 9 investors. We were originally going to finance the apartments with a HUD loan but the occupancy was not stable long enough so we switched to private lending. While we were looking into it, the sellers dropped the price (5.1M) to basically their cost IF we could close in a month. The terms of our bridge loan were not great but we needed a lender who could move fast. We are working on refinancing the building with a HUD loan in the next 4-6 months as it now meets the criteria.

We plan on holding the property for about 7-10 years as the return and cost segregation projection are maximized within that time period.

We approached a lot of people about this deal and eventhough they chose not to invest with us on this deal, they have expressed interest in future deals. We have an opportunity to purchase a couple of the apartment buildings surrounding ours but still running the numbers on it now.