Apartment Investing

[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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[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?

 

[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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[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.

 

[zaiteku]

Thank you for this thread SteveO. Great stuff!

 

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[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?

 

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[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

 

[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?

 

[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]

Have you found it difficult dealing with commercial lending guidelines?

No. Sometimes they are a pain in the a$$. For the most part, they are easier than home loans once you become a preferred customer.

 

[Dicky Dee]

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.

Hey @SteveO just wondering if you could explain how you went from a four plex to 33% of a 45 unit project in 2 years? I've got 3 properties on the go about 700k in total up here in canada and would love to know how i can increase that amount. I am still a newbie when it comes to real estate investing any advice would be appreciated!

 

[SteveO]

just wondering if you could explain how you went from a four plex to 33% of a 45 unit project in 2 years? I've got 3 properties on the go about 700k in total up here in canada and would love to know how i can increase that amount.

I'm assuming that you are talking about single family? If you are working with conventional lenders, they have formulas that they work with. If you want to continue with single family, I would suggest that you talk to @CashFlowDepot . She uses lease options which will not limit you in this fashion.

Commercial lenders have different criteria. They want to know about the strength/experience of a borrower and the strength of the property. Your liquidity comes into play with them as they want to know that you will have cash in the bank in case there are problems.

To address the original question. Vollucci wrote a book about how to buy in the right place at the right time. His book goes into great detail about how to evaluate the different markets. I used his data to determine that my location was ripe for purchasing. I bought in a soft market with little down and sold in a strong market two years later. I made more than 100K profit off of this first deal.

I went in on a partnership for the next deal that was not in my location. I don't remember the exact details of the apartment as it has been a long time. The seller was an attorney that wanted out of property management.

In both cases, I was able to leverage. I got loans for 75% ltv with seller carrybacks on both of them.

It is not always easy to buy in the right location at the right time. Especially if you plan to buy in your own backyard and manage the properties yourself (my preferred method). In this case, you need to be able to buy at prices that are under market. Most of these types of properties will be mismanaged and not performing well. You will need relations with special financing companies. They will want to see either a track record or a strong financial position in order to take chances on properties like this.

There is a lot of money in apartments. Once you get into the commercial side, the lending rules change.

 

[BJBossman]

Hey SteveO, thanks again for this thread.

Have you had a lot of experience dealing with banks on their multi-units and apartment buildings?

If so how do you go about talking to them and getting deals out of them?

 

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[Greg R]

@Greg Rutkowski
I noticed that you are going through some of these posts in this thread. These were written a couple of years ago. You are probably finding that they are similar to the words from our discussion.

@SteveO Almost identical! It's as if you even took the notes of our conversation for me.

I'm really glad that you didn't tell me to buzz off and just read your AMA!

I really like that fact that your built good long-term relationships with your commercial brokers.

 

[MTF]

Thank you for this AMA, @SteveO. I'd like to get into apartment investing as a way to reinvest my business profits and your posts are very helpful even though the real estate market is completely different in my country.

When you were looking for deals, did you only look for deals in a specific part of the town you specialized in or were you always open to investing as long as the numbers were right?

 

[SteveO]

Very much appreciated and yes, totally understand you won't know the area etc. I am looking to do an owner occupy. They're in a great town in a good neighborhood and they've never had a problem renting. Again, I very much appreciate you taking the time. If you need additional info let me know! Thanks!

Asking is $220,000

Rents are $700/unit

NOI- $21,216

Cap- 9.6%

Monthly Income- $2800

Monthly Expenses- $1843.70

Monthly Breakdown:

• Vacancy-$140.00 (better safe than sorry I suppose!)
• Water/Sewer/Trash- $176.00
• Repairs - $196.00
• Insurance - $83.00
• Taxes - $247.00
• Mortgage - 811.70 (This will be higher if I do owner occupy. This is based on a 30 yr 4.25% that a lender quoted me)
• Other Maintenance - $190.00

Monthly Cashflow- $956.30

Make sure that you review the leases and the leasing criteria for each tenant. Sometimes a seller will move non-qualified people in because they are willing to pay more (since they cannot find another place). Be sure that they used proper channels for qualifying them.

You should be able to determine the actual vacancy rate including other rental losses by asking for bank statements for the past two years. The actual rent loss will likely be higher that a presumed vacancy rate based on overly optimistic numbers put out by the "powers that be".

Two toilets will cost you more than $196. The repair number is very light.

I am assuming that you have verified insurance and taxes based on quotes and projections.

By other maintenance, are you assuming capital improvements? One person moves out and you could easily be in the $600 range for turnover costs if you are doing the work.

A four-plex has some obvious advantages in that it is bite sized enough for you to do work. Just keep in mind that a bucket of paint costs close to $100 for decent stuff. A couple of plumbing pipes and perhaps a sink, new flooring, broken window, door and/or hardware, window coverings, all add up.

I like to use $3200 per unit per year for expenses. This includes tax prep, admin, repairs, taxes, insurance, etc. It partially includes capital improvements for appliances, flooring, other fixtures and interior paint. It does not include mortgage payments. My number is for me based on my way of doing things. Your mileage and area may vary.

I like to calculate the actual amount of capital needed to get the property up to my standards initially. Sometimes this is negotiated with the lender as I present them with a pro-forma of what my rents will be after the improvements. This is a risk as your pro-forma must be accurate.

One question I have is that you say this is in a nice area. Why are the rents so low? If you were able to do some upgrades like adding 2-tone designer paints, washer/dryer hookups, granite countertops, dishwashers, etc, would you be able to get higher rents? I don't know what type of improvements are currently in these apartments so these upgrades are being tossed out blindly.

 

[SteveO]

Very much appreciated and yes, totally understand you won't know the area etc. I am looking to do an owner occupy. They're in a great town in a good neighborhood and they've never had a problem renting. Again, I very much appreciate you taking the time. If you need additional info let me know! Thanks!

Asking is $220,000

Rents are $700/unit

NOI- $21,216

Cap- 9.6%

Monthly Income- $2800

Monthly Expenses- $1843.70

Monthly Breakdown:

• Vacancy-$140.00 (better safe than sorry I suppose!)
• Water/Sewer/Trash- $176.00
• Repairs - $196.00
• Insurance - $83.00
• Taxes - $247.00
• Mortgage - 811.70 (This will be higher if I do owner occupy. This is based on a 30 yr 4.25% that a lender quoted me)
• Other Maintenance - $190.00

Monthly Cashflow- $956.30

One other note. When I see a cap rate advertised at 9.6, it usually ends up around a 4 or 5 when I get done with my analysis. I have never purchased on a cap rate over 5 on real actual numbers. It is actually a worthless calculation when you really think about it. But, I find ways to add value in other areas. I have purchased zero cap rate properties that made me a lot of money. You just need to add value.

I have some old posts on this forum pertaining to cap rates and value add. Search for them, there may be some value in it.

 

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[MTF]

@Sauce, yes, I refer to cash on cash, specifically not as your primary business, but an addition to reinvest money from your primary business. I don't live in a country where you can buy property for little to no down. And frankly, I don't like this idea much because leverage can work both ways as many people learned in 2007 and 2008. Looks like it can't really work well without financing then, or maybe I look at it from the wrong perspective (perhaps there's more to it than just net yield and I'm unable to see it).

By renting out apartments for short period with efficient management the owner can earn up to 5% net yields

That's still a very low return. You can easily get 2-3% with paper assets (and much more with P2P lending) and little to no work. 5% doesn't seem worth it when you consider so much additional work and risk.

 

[Sauce]

@Sauce, yes, I refer to cash on cash, specifically not as your primary business, but an addition to reinvest money from your primary business. I don't live in a country where you can buy property for little to no down. And frankly, I don't like this idea much because leverage can work both ways as many people learned in 2007 and 2008. Looks like it can't really work well without financing then, or maybe I look at it from the wrong perspective (perhaps there's more to it than just net yield and I'm unable to see it).



That's still a very low return. You can easily get 2-3% with paper assets (and much more with P2P lending) and little to no work. 5% doesn't seem worth it when you consider so much additional work and risk.

@MTF in the US, there are a lot of other factors that can increase your overall yield. For example, lets say you buy a $1MM apartment complex. You are allowed to depreciate the buildings (not the land) annually which will reduce your tax burden significantly (It could be as much as ~$30K). Additionally, you are able to deduct the interest and any ordinary and necessary business expenses against the property to reduce your overall income.

So for me, even though I am cashflowing, I show a net loss for the properties when you take in to account depreciation and deductions. Does that make sense?

As far as over-leveraging, I agree with you completely. However, using secured, long term leverage can be a game changer. Keith Weinhold explained it very well in his podcast here. Start listening at 3:30 through about 12:30.

 

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[Pete799p]

Loopnet or crexi

 

[GuestUser156]

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?

 

[tua79610]

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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[Dr Noisewater]

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.

 

[smartman]

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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[buwatcha]

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]

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!

 

[Windsurfer]

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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[PopEmersen]

Sounds like flipping but over a longer period of time.