Apartment Investing

[SteveO]

4-6 unit buildings ranging from $1.3M-$1.7M.

Wow. Them are some expensive units!!!!

 

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[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!

 

[Dicky Dee]

Also i'd like to mention my income doesnt allow me to be able to get anymore financing on properties.

 

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[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.

 

[CashFlowDepot]

Also i'd like to mention my income doesnt allow me to be able to get anymore financing on properties.

You can buy multifamily or commercial properties with seller financing. There are many different places to find these opportunities. One is to just ASK the seller. There are several multifamily properties advertised at www.GoSwap.org -- do a search for seller financing, multifamily to see what's available there. www.REE.com also has some seller financing properties advertised.

Even if the property is not advertised as seller financing, if the seller is motivated enough they will do the financing so you don't have to go to a bank for financing. Just ask.

You can also offer to master lease the property with an option to buy later. The owner gets a percentage of the rents, you get the rest. When it is time to exercise your option you can either negotiate to convert to seller financing or sell the property for a profit.

A joint venture were someone else (private lender) puts up the money, you find the deals and manage the property works too.

There are a lot of ways to buy real estate without getting bank financing.

 

[SteveO]

I have done multiple deals with seller financing. Probably about 14 deals (a couple over 5M) with some type of seller financing. Many of these were with a second carrybacks. Some have been on master leases. One has been on a full blown seller carry for the entire amount.

Keep in mind that as deals go, everyone wants to maximize what they are able to get. It is unlikely that you will get price and terms.

I personally think that there are many ways to put together the capital stack required to make a deal happen. Seller financing is only one of many. You will not be limited by your personal income in the same fashion with commercial deals.

I suggested getting information on seller financing if your goal was to stay with single family. There are just so many more options with apartments and commercial.

 

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[T14]

@SteveO thanks again for following up with everyone''s questions. This thread has been a big help with showing me the future possibilities in REI especially since I started flipping SFHs this year.

You mentioned Vollucci's book helped with analyzing markets and where and when to buy apartment buildings. Can you recommend any books that help with negotiating terms?

I've been fortunate to cultivate some strong relationships with a few well off individuals who are lending 100% on my flips and are open to lending on commercial apartment buildings in the future. I figure now is as good a time as any to begin familiarizing myself with long term financing options.

 

[SteveO]

Can you recommend any books that help with negotiating terms?

If you can truly uncover the seller's motivation, you can determine the best terms for both of you.

There is an interesting book by Poorvu called "The Real Estate Game". It goes though a lot of interesting deals.

I don't know of any books (not a big reader) that focus on negotiating terms. Perhaps you could do a search on this topic.

Look at a lot of deals. Let the agents know what types of terms interest you. Ask, ask, ask. Ask your lenders about terms you are thinking of.

 

[RealOG]

Also i'd like to mention my income doesnt allow me to be able to get anymore financing on properties.

Most commercial loans are based off the performance of the property, not the income of the individual. When you are borrowing large amounts of cash, the banks know your measly W2 job isn't going to cover the debt service.

Banks care about debt service coverage ($1.25+ of net operating income per $1 of mortgage) and they carry about how much the property is worth compared to how much they are lending.

One quick lending negotiation on a deal we're working:

We contracted a commercial property. It's 46% vacant, but the leases we have on it cover nearly all the debt. Fully leased, the property is worth $3.4MM. The bank is offering 75% LTV at 5.5% interest on a commercial property we have contracted for $2.3MM. They are holding back 5% and will release it once we lease the property. This means we need to come up with 30% down, plus all improvements (~$125k), plus fees ($25k), plus reserve funds ($50k) to close this deal. The bank wants to limit their exposure to 70% loan to value.

I focused on two things for the bank, their interest rate (minimum return) and their exposure (loan-to-value).

To balance this, I offered to keep their rate the same. In return I asked for lending of 75% of the entire balance of what was required to do the deal - the purchase price, improvements, and fees. This would be a loan amount of $1.82MM. We would $150k in an escrow account we would draw from for improvements and leasing fees (controlled by bank) and $50k in reserve account (controlled by us). This lowers the bank's exposure to 65% while allowing us to leverage more for the entire project.

They have tentatively accepted.

Bottom line: focus on solutions that meet the banks needs. Smaller banks are more flexible than large ones, start there. The better your reputation, the easier it will be - but we all started from zero so don't give up. Even if it takes 100 calls!

 

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[BJBossman]

Instead of spending a ton on direct mail, who are the types of people that one should be networking with for apartment leads? Especially if you're more interested in those 50+ unit apartments so that you don't need to manage them yourself?

 

[SteveO]

Instead of spending a ton on direct mail, who are the types of people that one should be networking with for apartment leads? Especially if you're more interested in those 50+ unit apartments so that you don't need to manage them yourself?

Commercial agents that specialize in apartments. They have a list of names/organizations that are known buyers and sellers. You need to convince them that you are a real buyer before they will add you to the list.

 

[MyronGainz]

Great thread Steve. Have you ever considering going public via REIT? Not sure about the U.S. but they are quite popular in Canada

 

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[SteveO]

Have you ever considering going public via REIT?

I have raised money and done deals. I had over 900 units at one time.

I have looked into starting a reit recently. Check it out here. Still may do it. I would like to go back into retirement and this would not help.

 

[Sid23]

Steve,
Not sure if you remember me, but we used to correspond several years ago on this site. Haven't been on this site in a while but saw this thread and wanted to say hello.

I'm currently living in Minnesota and working in apartment acquisitions for a large local investor. We've acquired over 3,000 units in the past couple of years throughout the Midwest and South. It's been quite a ride.

Have you checked out biggerpockets.com? Some great real estate stuff on that site.

Take care,
Sean

 

[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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[ck4750]

Hey @SteveO, still kickin around here? I'm looking to start investing in apartments with income from my current company. Right now I've got a whopping 15k saved for this so far. Would you suggest I continue saving and look for a bigger deal or start with a smaller property? Ideally I was thinking of starting with 8-12 units.

 

[SteveO]

@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]

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.

Sorry, I have not looked at this thread for a while.

I have sold out of all of my apartments. I still have a commercial strip center that brings in good cashflow. Thinking of selling that as well but not sure yet.

I started another reposition with the golf course. It is a time consuming project though.

 

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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.

 

[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.

 

[SteveO]

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?

I have some experience with dealing with banks. Once they have a non-performing situation, they usually like to liquidate and not have anything to do with it. I have tried to negotiate temporary loans on a couple of deals but could not make anything happen.

 

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[SteveO]

Hey @SteveO, still kickin around here? I'm looking to start investing in apartments with income from my current company. Right now I've got a whopping 15k saved for this so far. Would you suggest I continue saving and look for a bigger deal or start with a smaller property? Ideally I was thinking of starting with 8-12 units.

I like the idea of going as large as you are capable of with the funds that you have. Keep in mind that there is a learning curve though. Perhaps better to learn the first deal with a 4-plex or so.

I would be leary of getting into this current market though. It would take an awfully good deal to get my attention right now. The apartment market has been hot for a while.

 

[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]

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?

When I started, I looked more at the numbers. I began narrowing my focus as things progressed. The ability to understand all the dynamics of a location is very helpful.

I would draw circles on maps and give them to the agents I was working with. I told them that if a really good deal popped up outside of the map lines that it may be considered. In the last few years, I did not vary outside of my desired regions.

 

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[MTF]

Thank you, it makes sense to become an expert of a location.

 

[ck4750]

Perhaps better to learn the first deal with a 4-plex or so.

I've actually got a 4 plex I'm looking at now and everything looks great. It's in a good location it never has a problem being rented and the numbers work. But I was curious if you had a second to give it a quick glance? It would be hugely appreciated!

 

[SteveO]

I've actually got a 4 plex I'm looking at now and everything looks great. It's in a good location it never has a problem being rented and the numbers work. But I was curious if you had a second to give it a quick glance? It would be hugely appreciated!

Post the numbers.

General information can be given and I will be happy to help. You need to keep in mind that rents, vacancies and other rent losses, and expenses tend to vary by localities. Also, someone on the outside looking in cannot see the actual property and will not understand local dynamics.

 

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[ck4750]

Post the numbers

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

 

[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.