Apartment Investing

[SteveO]

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!

These have been done for years. I have never done them. The process is the same for buying any fixer. You just need to understand your costs going in and expected returns.

 

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[ZCP]

SteveO, could you talk through issues you have had with management companies and any advice on using one? one issue I have is being tied up in my current businesses, so I would need to use a management company or bring in a friend/relative to run that part. any advice for what a management company or person would have to show you and do for you for you to turn that part over to them?

appreciate you doing this. been fun reading your stuff over the years. glad you survived the down years!

 

[SteveO]

SteveO, could you talk through issues you have had with management companies and any advice on using one? one issue I have is being tied up in my current businesses, so I would need to use a management company or bring in a friend/relative to run that part. any advice for what a management company or person would have to show you and do for you for you to turn that part over to them?

Finding a good management company is difficult but not impossible. They are out there though. I would not go the route of friends and family. This business is tough and requires someone knowledgeable.

Another alternative is to jump in with apartment deals as an investor. This way, the manager has a vested interest in the deal and you can get a history of the track record. PM me if you want to talk more about this.

 

[Windsurfer]

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!

@smartman - Be careful on these. In many cities you have to get these buildings rezoned for multifamily - which can be a long and arduous process - not to mention expensive in potential legal fees. In Minneapolis where I am you better have a fantastic deal on a SF house if you want to make it worthwhile. I also know of another investor who bought a duplex without checking that it was zoned as a duplex. The city came in and said he could only rent it as a single family even though it had two distinct units. In other words, b-bye to 50% of your cash flow unless you pay a bunch to remodel it.

 

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[Deleted15476]

What is your goal when Apt investing? Are you trying to own a building? Or do you just want to rent/resell?

Also have you used Air B N B t all?

 

[T14]

@SteveO thanks for taking to time to start this AMA. I jumped into real estate investing last year working with my mentor who rehabs houses and buys rentals. I have nothing to ask just yet. Just wanted to say thank you and I look forward to reading your responses to all of the questions here.

 

[SteveO]

What is your goal when Apt investing? Are you trying to own a building? Or do you just want to rent/resell?

Also have you used Air B N B t all?

My goal is to buy and sell until I reach my goal. The rental part is certainly part of the equation.

I have not used Airbnb. Not even familiar with them

 

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[smartman]

rep transferred for doing this. I appreciate this thread very much!

 

[Pete799p]

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.

Same here, city apartments in good neighborhoods are trading as low as the 4's-5's. It's pretty crazy.

 

[SteveO]

Same here, city apartments in good neighborhoods are trading as low as the 4's-5's. It's pretty crazy.

Do you own any? Where are you located? Is this the reported cap rate?

 

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[Pete799p]

Do you own any? Where are you located? Is this the reported cap rate?

I don't own anything yet. I am currently a CRE broker in Chicago but used to work for a real estate PE company, also in Chicago. You can still find high CAP properties on the south and west sides of Chicago but many northside apartments are trading in the 6%-7% CAP range on the high side with the "hot" markets in the 5s% CAP; I have even seen CAPs in the 4%s and it's starting to be more common. The suburbs you can find CAPs in 7%-8% range with some outliers. As always there are still deals to be had.

The apartment and single tenant net leased markets are starting to feel a little bubbly right now but time will tell as record #'s of apartment units start to hit market over the next 5 years.

 

[SteveO]

Good to have you here @Pete799p .

I have not really ever found these reported cap rates to be very accurate either. I have evaluated properties that I saw as 5-6 caps and passed on them. Once the sale was made, they were reported with much higher numbers. In fact, I have sold properties that have shown up on the sold list with higher cap rates than they actually had. It seems that whoever gives this information to the reporting firms, can exaggerate without any oversight.

I don't trust these numbers. This makes it real hard to come up with real comps other than cost/unit.

 

[IceCreamKid]

I don't trust these numbers. This makes it real hard to come up with real comps other than cost/unit.

This has been one of my greatest struggles as I move forward with the learning curve. All of the advertised numbers can be easily faked.

Do you end up creating your own itemized rules of thumb for your general area then apply them to the properties?

For example...

Insurance: $225 per door
Property taxes: 1% of purchase price
Landscape: $100 per door
Common electric: $60 per door
Maintenance: $300 per door
Administrative: $250 per door
Garbage: $100 per door
Etc.....

Am I on the right track with this or is there a more effective way of attacking the issue of misrepresented numbers?

 

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[SteveO]

Do you end up creating your own itemized rules of thumb for your general area then apply them to the properties?

The advertised are not only easily faked.... they are faked. 99% of the time they are listed as proforma numbers and not actuals. You can get actuals when you get the property under contract but these must be approached with care as well.

I will get as many quotes as I can once the deal is locked-up in contract. Insurance can be quoted, taxes can be calculated, you can get a utility run or have the seller provide you with the bills, everything else can be estimated or quoted.

I use a preliminary expense number when doing a back-of-the-envelope estimate of $3000/unit/year.

ICK, it looks like you have done some looking at this. Some people try to use a percentage for expenses like 45%. These percentages don't work.

 

[Pete799p]

Good to have you here @Pete799p .

I have not really ever found these reported cap rates to be very accurate either. I have evaluated properties that I saw as 5-6 caps and passed on them. Once the sale was made, they were reported with much higher numbers. In fact, I have sold properties that have shown up on the sold list with higher cap rates than they actually had. It seems that whoever gives this information to the reporting firms, can exaggerate without any oversight.

I don't trust these numbers. This makes it real hard to come up with real comps other than cost/unit.

I will agree with that, I never trust the data from anything that we didn't sell. The problem is the way the data is collected leads to a lot of errors and it's often up to the brokers or sellers discretion to report. That being said, as I'm sure you know, you can never look at list prices to tell you where the market is being made.

There are still plenty of higher CAP and value add properties to be had here, and if you look to some of the rougher neighborhoods double digit returns are plentiful, but if you want to be in Lincoln Park or the Gold Coast you are going to pay up.

 

[SteveO]

I will agree with that, I never trust the data from anything that we didn't sell. The problem is the way the data is collected leads to a lot of errors and it's often up to the brokers or sellers discretion to report.

Thanks. It is good to have the input from an agent perspective here.

 

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[T14]

@SteveO how old were you or what year was it when you financed your first property? All of my mentors talk about how difficult the lending industry is to work with nowadays. I'm 28 and just started last year with a few flips, so I can't necessarily compare today's strict procedures with the "good ol days" of the early 2000's. What are your thoughts?

How did you finance your first property? My goal is to continue rehabbing houses with private funding and then roll the profits into multi-family properties.

@zen******* recommends getting enough cash to cover the bills from the flips and then use the PM to acquire larger apartment buildings (50+ units). I'm curious to see what you think about this approach. Easier said than done? or is it doable by someone with limited experience but a great work ethic and helpful contacts?

Thank you

 

[MillionairesHQ]

What would be the first steps an absolute beginner should take before he/she can get started in apartment investing? -From not knowing anything about apartment investing to getting that first apartment?

 

[Dr Noisewater]

Thank you for your take on things Steveo!

 

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[G_Alexander]

@SteveO

Have you ever purchased a building that was fully vacant and in need of rehab? This scenario does not allow the use of traditional bank leverage on the front-end (due to the obvious lack of cash flow generation at acquisition) but is an attractive scenario if you have the equity investors available to stake you. This is not revolutionary, but wanted to hear your thoughts as I know you have done syndication (just not sure if it has ever involved a vacant project).

Theoretical example
Property: 15 units
Asking Price: $450,000
Vacancy: 100%
NOI: $0
Purchase price: $300,000 Cash
Closing costs, rehab, and lease up (6-8 months): $175,000
Total project costs: $475,000 Cash
Gross Rental receipts: $15,000 / mo ($180,000 / yr) -- ($1,000 per unit avg., assumes no laundry or vending for simplicity)
Net Operating Income: $105,000 / yr
Cap Rate: 10% (more of a "fringe" neighborhood)
Net Value end of Year 1: $1,050,000

Refinance, pay off the equity investors their $450,000 plus a preferred return of 12% as well as 50% NOI split post lease-up to sale.

Cash out at Refinance: $787,500 (75% LTV)
Cash to investors: $532,000 + 17,500 (4 months, $4,375 a month after lease up)
Total Cash to Investors: $549,500
Cash Received: $238,000
Remaining Net Equity: $262,500 (25%)

We have just created $500,500 in value to ourselves. We hold the property at 75% LTV post-rehab after paying all investors off and realize both long-term cash flow and substantial liquid equity for our next project. We have also now established a track record with investors who are begging for more 12% preferred returns all without involving banks until we get to the long term hold period period.

Syndication is not a revolutionary concept, it just takes valuation skills, a track record (first deals can be family and friends), MARKETING ability (get people to rally behind you, and speak with their $$$$), a defined plan (entry and exit) and a little structure. The scenario I laid out is very rosy, but if you have cold hard cash banks will move mountains to offload "non-performing" assets to you.

I know that you will have some insight on this topic and figured I would ask this publicly so others can benefit.

Thanks again SteveO, not just for this thread but for everything you have done for this forum. I have said it many times before and I will say it again... @SteveO, @RealOG, @GLC65 and of course @MJ_Demarco. You guys are all the greatest bunch of RE mentors anyone could ask for and hold a special place in my heart!

 

[Pete799p]

@SteveO

Have you ever purchased a building that was fully vacant and in need of rehab? This scenario does not allow the use of traditional bank leverage on the front-end (due to the obvious lack of cash flow generation at acquisition) but is an attractive scenario if you have the equity investors available to stake you. This is not revolutionary, but wanted to hear your thoughts as I know you have done syndication (just not sure if it has ever involved a vacant project).

Although it was not personally my property, not my cash in, I have done a bunch of this, particularly in the "fringe" neighborhoods of Chicago, over the last few years across a number of different assets, for a few independent developers, and investors. We would even pull buildings out of demo court among other things. I also worked for a PE company that buys bulk REO portfolios and non performing loan portfolios, many of which where either completely vacant or filled with squatters and dealers that needed to be booted out anyways, fun stuff.

I have seen it work out really well and go really bad. One commonality I have observed with successful ones is you need to know your numbers, you have to be able to work a crew, and especially in Cook you need to have the funds to absorb the carrying costs. I have seen construction over runs eat up all the profit and then some and vacant properties sit on the books for years waiting for permits to clear. With the PE company we were able to get buildings done for ridiculously cheap because of the economies of scale and the economy. When you order appliances by the truck load, or have a painting crew do 100 units at a time you tend to get a discount, especially when there is no good custom home work. As a whole not every building was profitable at any given time, some ended up costing too much in reno, some where is terrible locations, but some were complete home runs, it usually balanced out in the end. Most of this was because the bank made us take it all, for better or worse. On the smaller scale we would put together our own crew of guys and run the job ourselves Be prepared for a lot of turn over if your working under a tight budget, many of your good guys will bounce when they get a better offer.

PS. for a project like your describing vacant is usually better then partially occupied, in my opinion. I found it easier to do the whole building at once then try to work around tenants and the eviction process can be a long, expensive unknown in Tenant Friendly IL.

 

[100k]

Have you bought land with/without planning permission and built apartments yourself?

What are your views/reasons for doing it or not doing it.

Cheers

 

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[SteveO]

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?

I do use individual LLC's for each property. LLC's and inexpensive and easy to use in most states. I also have another LLC for my management company. This way, my management of the property and the actual property are operating separately.

I have leveraged equity in the past. It is probably better to sell the property with the equity and roll it into a larger one if your plan is to keep growing. If you find some fantastic deal and the only option is to leverage equity, then you have more to think about. Leveraging your equity means both properties are at risk if one has problems.

 

[SteveO]

@T14

How did you finance your first property? My goal is to continue rehabbing houses with private funding and then roll the profits into multi-family properties.

@zen******* recommends getting enough cash to cover the bills from the flips and then use the PM to acquire larger apartment buildings (50+ units). I'm curious to see what you think about this approach. Easier said than done? or is it doable by someone with limited experience but a great work ethic and helpful contacts?

Thank you

@T14. I don't think it is difficult to find loans now. There is plenty of liquidity in the market and lenders are getting more aggressive. A couple of years ago it was tougher. I am not sure that it is any tougher now than when I started in 97.

I have financed many deals with 75% from the bank and 10% from the seller.

You get the economies of scale with the larger properties. I would start smaller though until you learn the ropes. But it really depends on a number of factors. Will you be heavily involved with the management? If you are doing most of the work initially, you will not need to worry about employees and management companies. If you do not plan on being involved and need to hire employees to run the property, then 50 units should be a minimum. That is what it takes to get a full time maintenance and manager.

 

[SteveO]

What would be the first steps an absolute beginner should take before he/she can get started in apartment investing? -From not knowing anything about apartment investing to getting that first apartment?

First you need to get yourself educated on how to analyze a property. You need to understand cap rates, NOI, cash-on-cash, etc. You need to understand your market and the sub-markets intimately. You need to have a plan for what types of properties you are going to want to invest in. Is it rehabs, straight cashflow deals, etc.

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

 

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[SteveO]

Have you bought land with/without planning permission and built apartments yourself?

What are your views/reasons for doing it or not doing it.

I have bought land with the appropriate zoning and built office buildings. Not apartments. I made money on the deal but it was a major distraction which required a lot of attention.

It is tough in my area to buy small lots and do a 20 or so unit build. It costs more to develop these small units than they are worth. I am not inclined to want to practice on a 300 unit complex which is what it would take to make sense economically.

I am an apartment operator. Not a developer. I like to stay focused.

 

[SteveO]

Have you ever purchased a building that was fully vacant and in need of rehab? This scenario does not allow the use of traditional bank leverage on the front-end (due to the obvious lack of cash flow generation at acquisition) but is an attractive scenario if you have the equity investors available to stake you. This is not revolutionary, but wanted to hear your thoughts as I know you have done syndication (just not sure if it has ever involved a vacant project).

Excellent!!!!!!!
I really wish that I had your head at your age!

I have purchased vacant deals with investors. I kept them in the deal after the refinance though but based their return on what money they had left in the deal afterwards.

12% money is tough to find on something that has this type of risk. I was able to get that number to 8% on one deal by allowing the investor a decent share of the total project. They invested 100% of the money needed for the project. They got 75% back after the refinance. The remaining money gets 8% preferred with a 50/50 split after. On sale, the investor gets 35% of the profits.

You can expect some pushback from the bank if you try and refinance close to the first year. So allow yourself more time like 1.5-2 years.

Again, great plan!!!

 

[JohnZ123]

How much does an apartment generally cost?

 

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[AroundTheWorld]

I just have to say.... @SteveO you are a stud. Thanks for the thread.

 

[SteveO]

How much does an apartment generally cost?

You can get a general idea by signing up at www.loopnet.com and performing a search in your area. The cost will vary by location. You might get $200K per unit in California and $25K per unit in parts of Texas.