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Apartment Investing

SteveO

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Feel free to ask any questions that you may have with regards to investing in apartments. Keep in mind that there are some limitations with regards to local income and expenses in your particular market that I may not be familiar with.
 
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What do you think are the most important things to focus on when looking to buy an apartment, renovate it and sell it again for profit?
 
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tua79610

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Will be watching this thread as I have been looking for a multi-family unit for a while now. How did you find most of your deals?
 
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SteveO

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I fondly remember the subordinate that used to work for me. I was attempting to coach him in his development as a technician. He told me that if I was going to make his job "not fun" that he would quit. I asked him why and he told me he did not need the money.

I changed my approach and started asking him questions. He told me about the apartments that he owned.

For the next few weeks I started reading books and asking him more questions. I repeatedly asked him how to get started. His only response was "just go do it" or "just go buy something".

Well, I learned how to evaluate a property and estimate income and expenses. Then I got listings of every single property in town. I drove past most of them to get ideas and narrowed it down to certain areas. Then I started tossing out offers. Most of them were refused because I was looking for a seller carryback of 10-15%.

I did not have a lot of money to use. Fortunately, I had a house and was able to take a third mortgage (that is right, I got a "third loan on my house").

I found a seller of a 4-plex in Carlsbad, Ca that had an ocean view. The seller was tired of operating this property and gave me the seller carryback. I negotiated the asking price down from 230K to 180K.

There was one vacant unit when the transaction closed. I remember standing inside of this unit, looking around, and thinking "what in the F*ck did I get myself into. It looked like so much work.

I got the unit ready and rented it. Never had another vacancy with this property for the remaining 2 years that I owned it.
 

SteveO

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What do you think are the most important things to focus on when looking to buy an apartment, renovate it and sell it again for profit?
This is one strategy and one that I have used many times. The most important thing to look for is the ability to make a return. Sometimes you can find decent running properties with little deferred maintenance for a reasonable price.

The most important part for anyone is the ability to understand the income and expenses associated with the property. If there are repairs that are needed, that needs to be factored in to the cost. You can often get these repairs included into the financing.
 

SteveO

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Will be watching this thread as I have been looking for a multi-family unit for a while now. How did you find most of your deals?
There were many different ways. Primarily by keeping in close contact with the agents. It takes a long time to build these relations through transactions. Agents like to know that you are a real buyer before they will waste their time with you.
 
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Dr Noisewater

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Steveo

Lets assume you have your eye on an apartment building and your estimate of the income and expenses for that property is looking promising. What would you consider to be a good return on your investment? Putting it another way, does a 10% cash on cash return make you happy or are you looking for something like 15-20%?

I have been reading along at Biggerpockets and some of the guys leveraging single family homes are seeing 20% cash on cash but only in the neighborhood of 10% cash on cash if purchased outright. I always heard that apartments were the way to go if you have the finances in place and in terms of a long term investment strategy.
 

SteveO

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Putting it another way, does a 10% cash on cash return make you happy or are you looking for something like 15-20%

This is a tough one to answer. I don't even always give more than a glance at the cash-on-cash. I want to see what my anticipated 5 year return is going to be. There, I want to see 300% or more.

My primary goal is to force appreciation through upgrades and/or increased income. Both of which will lead to a larger net operating income (NOI). The larger NOI will lead to a higher sales price.

Houses and apartments don't always track on the same valuation curve. They did on this last big downturn because of the huge oversupply that was in the market. Apartment valuations basically track from rental demand. There are plenty of other factors as well but house values are not tied to this.
 

smartman

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sorry for a layman's question, but to clarify- your business plan for apts is to sell in 5 years after purchase? Sorry if I misread something.
 
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IceCreamKid

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sorry for a layman's question, but to clarify- your business plan for apts is to sell in 5 years after purchase? Sorry if I misread something.

Steve, with your permission may I give a breakdown of a simple reposition deal? I think it will help many understand the basic foundation of the process. I will delete this post if it conflicts with your investment strategy...not trying to steal your thunder here, my friend!
  • Assume you get a chance to purchase a 40 unit building for $1M that you buy at a 12 cap. The owner is old and not interested in pushing rents at all so the units are renting at $500/month which is $50 below market rent. The property is 100% full and operating with expenses at 52% of PRI
  • Let's see what happens to our investment if we get rents to market levels and manage our leases to get a 3% increase per year over the next 5 years. Let's also assume that we can manage expenses to be no more than 45% of PRI
  • $50 per unit per month increases NOI by $24k/year
  • 3% annual increases will drive market rents up 16% or an additional $88 per unit by year 5, or another $42,240/year. Rents would average $638 starting year 6
  • Dropping expenses from 52% to 45% and holding them steady adds an additional $21,400 to NOI
  • These three steps add over $87k to NOI which is enjoyed over the life of the project.
  • Assuming the cap rate remains stable this would create appreciation of $725k at sale
  • If you purchased in the path of growth and created a more stable project the cap rate could go down, at a 10 cap this increased NOI would generate $870k of appreciation
 

SteveO

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sorry for a layman's question, but to clarify- your business plan for apts is to sell in 5 years after purchase? Sorry if I misread something.
I pencil them out for 5 years. If they are ahead of schedule, I may sell earlier.

We are here to learn. There are no questions that are too simple.
 

buwatcha

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I would love to own more apartments (I own a 12 unit bldg now) but in my experience it is very hard to find anything at a reasonable price.

Where are investors finding 12 caps? Even in my small town larger buildings (20+ units) are setting asking prices at 7-8 cap. They don't even respond to offers at a 12 cap.

I've started considering mobile home parks but not sure.

You can get 12+ caps buying 4 unit houses in crappy areas. But, I don't want to own 50 houses and deal with seriously problematic tenants.
 
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Revoked

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Steve,

Do you self manage or hire it out? Is there a reasonable way to estimate the time commitment on a per unit basis? Obviously a few rotten tenants can make your life a nightmare.

What areas do you target if any (ie; college, low income, etc.)?

Thanks!
 

SteveO

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Do you self manage or hire it out? Is there a reasonable way to estimate the time commitment on a per unit basis? Obviously a few rotten tenants can make your life a nightmare.

What areas do you target if any (ie; college, low income, etc.)?

I have hired it out in the past. Will not do that again. Good management is very difficult to find. They are never as interested in the property as you are. You can just add a typical management fee into your proforma for your time. This varies on the size of the complex. For 20 units, you would likely add 7%. Around 3.5% for 100 units.

Rotten tenants need to be removed. Just like cleaning out the fridge. :D

I target decent areas where renters want to be. I do not care for student locations or low income although I would look at either to evaluate. If possible, I like single stories with backyards and washer/dryer hookups. Does not have to have these but they are resident stabilizers.
 

Windsurfer

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Steve,

Have you bought any buildings out of state? If so, how much more difficult is it?

Thanks for doing this.
 
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SteveO

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Have you bought any buildings out of state? If so, how much more difficult is it?
I have bought properties out of state. In fact, I still own apartments in Corpus Christi and Houston. Vollucci sets up his entire premise on buying right place/right time. It would work if you want to hire out management. Not for me anymore. I will stay local so there is more control.
 

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Steve,

Thanks! A few more if you don't mind:

What steps do you take to shield your investments? LLC for each property? One holding company?

Have you leveraged equity in your properties to do other deals? Is this worthwhile? Seems like a good way to increase speed?

Thanks again!
 

SteveO

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In all the years that I have been investing in apartments, I have never seen a real 10 cap. I doubt that I have ever seen an 8. Income and expenses are rarely reported in an honest fashion. A proforma is usually handed out to potential buyers. The income and expense numbers are usually estimates done by the agents or seller that grossly misstate the actuals. Actual numbers are frequently doctored also.

It is best if you have your own numbers for expenses and income. There is too much to this for me to go into right now.
 
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Windsurfer

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In all the years that I have been investing in apartments, I have never seen a real 10 cap. I doubt that I have ever seen an 8. Income and expenses are rarely reported in an honest fashion. A proforma is usually handed out to potential buyers. The income and expense numbers are usually estimates done by the agents or seller that grossly misstate the actuals. Actual numbers are frequently doctored also.

It is best if you have your own numbers for expenses and income. There is too much to this for me to go into right now.

So this tells me it is best to buy apartment buildings, improve them, raise the rents, and then get out? Lather, rinse, repeat.
 

SteveO

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So this tells me it is best to buy apartment buildings, improve them, raise the rents, and then get out? Lather, rinse, repeat.
Yes and no. It depends. My goal now is to get a building between 100 and 200 units, pay it off and exit the business. But I need to repeat the process to get to that point.
 
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SteveO

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Sounds like flipping but over a longer period of time.

HaHa. So does buying a house and holding it for a couple of years. It is a business the needs to be worked and brought back to a tuned machine.
 

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First of all, Thank you for running this topic Steve O!

There's a well branded and seemingly successful series of apartment buildings near the one that I live in.
They're right near the college campus , there's four buildings around the area and two have been built within the last two years so he must be doing well?

500-1000 units each
£120 per week rental per unit which is the upper end of the market for accommodation.
40 week contracts
+ constant supply of new tenants (students) low risk of non payment (parents as guarantors) & built in this low interest cheap money environment he's onto a winner ?

We are here to learn. There are no questions that are too simple.

With this said sorry but what's a Cap rate ?

Also, was thinking of approaching the guy for mentoring , his office is 5 minutes away .
I Was wondering what value a successful apartment investor would require in exchange for some mentoring?

I've a view to one day getting in the game myself but currently finishing my degree (2 months left ) £4 cash and no income until I graduate


Sent from my iPhone using Tapatalk
 

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My goal now is to get a building between 100 and 200 units, pay it off and exit the business.

When you say exit the business, do you mean exit the process of repositioning apartments? In other words, you will just buy and hold these 100-200 unit buildings after they are paid off?

If not, what will you do with the cashflow? Gotta keep the money moving to keep the tax man at bay. ;)
 
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SteveO

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When you say exit the business, do you mean exit the process of repositioning apartments? In other words, you will just buy and hold these 100-200 unit buildings after they are paid off?

Yes, exit the repositioning process. In terms of cashflow, I can get by on $50K per month. :rockon:
 

smartman

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Have you had any experience with purchasing houses to turn into 2-3 rental units? Did the investment pay off? What was the experience, if you did try?

There are many victorian sized houses(4-5bdrm) in my city, occasionally some of them go up for sale in various levels of repair. These seem to provide an opportunity similar to what you have described in your previous posts, but on an obvious smaller scale. I am curious to hear your opinion on these. Thanks for doing this thread!
 
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SteveO

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@Swift T , I bumped an old article that gives a rundown of the calculations for evaluating apartments and it includes the cap rate.

You can find it here.

Most people that own these apartment buildings work real hard to hide their identity. If you can find him and catch his ear, that would be fantastic. You had better do some studying first. Read some books, talk to some agents about the market, learn how to find deals in your area and so on. No mentor wants to babysit.

I have had people that want to be mentored in the past. I do not have an issue as long as it does not take a lot of my time. The problem that I have found is that when people offer to help, they want to help on their terms. Apartment work is tedious and mundane.

I have also had people in the past that have offered to find me deals. What I end up getting is straight repetition of the deals that come into my email.

If you are going to approach an owner for mentoring, you need to figure out how you can add value to them first.
 
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SteveO

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What do you think about vacation rentals?

What about buying a single apartment unit? Can they make money or is it only worth it to own the whole building?

Vacation rentals are a different type of business. One that I am not familiar with.
Single apartment units don't track along the valuations with apartments and you will not get the economy of scale. The major issue is the cost per unit.
 

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