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REAL ESTATE Is it possible to go TOO fast? Want to buy 36 unit apt

scine

New Contributor
Jun 23, 2008
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Hello,

I posted about my original plan to buy a small 2-4 unit duplex/quad and some people had suggested that I accelerate my plan. So, I got to thinking:

Is it a bad idea to start out a LOT higher? In other words, I found a 36 unit apartment building for $2.3 million, and I'm thinking about going for it.

However, I am cautious because of course, $2.3 million is $2.3 million.

A side question is do you think the following situation is possible?

Wife and I pull in about $50k a year each.

We have a 4 bedroom home with a mortgage of about $215k on it, home appraises for $270.

$120k in college loans.

about $10k in credit card debt

Our credit scores are almost perfect at 805 and 810 respectively.

However, the only problem that I can forsee is that I can only come up with about 5% down on the property.

So far, the numbers all look good, even on the spreadsheet that's going around here. First year, after everything's all said and done, I'll pull in about $29k a year. Is that too little of cashflow for a property of that size?

So, am I being overly optimistic? Would a bank or mortgage broker even touch me with such a low down? I got all excited when I found this place, so I don't want get my hopes dashed. :)

Thank you all for the great words of encouragement in my last few posts, I just thought I'd give you all an update and ask some advice. :)
 

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biophase

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You will need alot more than 5% down for this property. You will need to come up with at least 20% down, probably more like 25% plus reserves. You'll need to raise about $500,000 to have a shot at a loan.

Can you elaborate more on how you got to the $29,000 a year number?
 

Yankees338

Bronze Contributor
Jul 24, 2007
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If that $29k in cashflow is with only 5% down, you could be on to something here.

How do the numbers look with 20% or 25% down? Perhaps you could offer the rest of the deal to investors for a % of ownership. If you get two investors to throw in $225k, and you throw in $50k (from a HELOC, for instance), maybe they'll be alright with a 3-way split in ownership if you contribute the sweat equity by managing the property.

Just an idea...good luck! Keep us posted!
 

Hoop

New Contributor
Dec 8, 2007
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4
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Find partners.

Use your money to lock it up with the contingency of finding the rest of the money. Then find other investors. Everyone capitalizes the new LLC with cash...you capitalize the LLC with some cash and the contract, and complete the transaction.
 

JScott

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To answer your original question, I think there are a lot of people on this forum who would say that there's nothing wrong with jumping in big on things like this, *ASSUMING* a couple things:

- You have a plan. Last week you were focusing on duplexes, and this week you're focusing on mid-sized apartment buildings. Has your plan changed? Do you even have a plan? If not, put one together. Lay out your goals, your focus, your strategy, a realistic financial plan, and think about how you'll mitigate risks and road-blocks. If you've changed your plan for good reason (maybe you've just started to think bigger!), then great. But, if you don't have a plan and are just grasping at possibilities, this is a recipe for failure.

- You've done your homework. I haven't done it yet, but over the past year I've gone through this multi-leveled learning curve on apartment investing. At first, the thought of buying an apartment seemed daunting; I didn't know where to start, and the prospect seemed akin to building a rocket to fly to the moon. Then I found some great resources (this forum, some books, some other investors, etc). I spent literally a hundred hours over the course of a couple weeks learning the in and outs of investing in apartments. By that time, the prospect seemed not only within my reach, but no longer daunting or even difficult. But then I spent several hundred more hours putting together my plan, looking at buildings, talking to agents, PMs, etc. And once again, the prospect of owning apartments seemed difficult again! So, I don't think anyone here would tell you not to do it, but would caution you to *really* understand what you're getting into first.

- You've found some trusted advisers/mentors. If you've never invested in apartments before, you'll likely make a lot of "common" mistakes that most other apartment investors have made. While making mistakes is not a bad thing in and of itself, in the apartment world -- and when you're looking at $2M buildings -- those mistakes can be expensive. So make sure you have someone or some people who have experience and can help you navigate your first deal or two (or ten). This forum is great for feedback, but won't replace someone standing next to you when you're walking through units doing inspections.

- You've done your due diligence. You said you ran the numbers through some analysis, and you mentioned a $29K/year cash flow, but you didn't seem to know if that was good or not. This is only a partial analysis, and if you don't do a tremendously thorough job of due diligence (on financials, the property condition, the level of effort, etc), your going to run into problems. The lack of detail around your question already indicates a lack of attention to detail (or maybe lack of knowledge around what to look for)...why is that?

- You've built a strong team. Before buying a $2M property, I would hope you have a great CPA, real estate attorney, property management company, inspector, etc lined up to support you. If you have to find these people *after* your offer is accepted, you're in trouble.

Again, I haven't done this yet, so I'm not the best person to be giving advice here, but I would say that you certainly *could* do what you're talking about successfully, but only after some major preparation, education, and planning.
 

Russ H

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MrPink said:
If you don't know what you are doing then you are going to fast.
With all due respect to Mr. Pink, ALL of our big deals were situations where we didn't know what we were doing when we found the deal.

We learned as we went along, before close of escrow.

That's what due diligence is all about.

It's also how to move FAST.

If you wait until you have experience, you will never do your first deal.

You gotta start somewhere!

That being said, all of the cautions here are correct-- you really need to do the numbers, and bounce them off a seasoned investor to determine if this really is a "deal" or not. We've already had a few fastlane members buy condos and other RE props that did not cashflow positive after taking vacancies, maintenance, prop taxes, and other items into account.

Don't make that mistake.

Figure out a good way to finance the property (one may be having the owner carry back part), and then lock it up under contract. While it's under contract, work your butt off to get inspections of the property, the books, and the title.

THEN (and only then) will you know if it's worth doing.

Good luck. We were terrified when we did our first big deal ($1.275M) back in 2003.

Just a few months ago, we pulled a million in CASH out of this property. :)

It does get easier. :banana::banana::banana:

And more fun!

-Russ H.
 

MrPink

Contributor
Feb 26, 2008
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Toledo, OH
"we didn't know what we were doing when we found the deal."
Good job on seeing an opportunity

"We learned as we went along"
I hope that we are always learning

I don't mean to imply that you have to have experience in everything you do, just make sure you know what you are doing (as you said: due diligence)

therefore to answer the thread's original question:

if you don't know what you are doing then you are moving too fast

how do you know you are moving to fast?
I think this thread is a great example of bouncing your ideas off of others that may bring in a different perspective
 

SteveO

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It has already been said a couple of times here. If you want to buy mid-sized apartments, you need to make plans to do so. You need to evaluate the area and shop all the properties that are on the market, understand the financing needs, line up management, etc....

Your due diligence is very important. It is highly unlikely that the financials will be as reported.
 

Sid23

Bronze Contributor
Aug 9, 2007
683
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POSSIBLE HIJACK (if so, mods please move)...

Let's assume that the original poster has done the proper due diligence and this deal fits into his PLAN.

Given his perameters, how would you put the deal together? I think it would be informative for the members of the forum (and myself) to hear different ways to put a deal like this together.

Thanks,
Sid23
 

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OP
OP
scine

scine

New Contributor
Jun 23, 2008
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Hey guys! Thanks for the quick replies! I've had a very busy day at the office. :)

Yes, I fully agree, I need to speak with an attorney, CPA, investors, and take care of a host of other issues LONG before I sign document one. :)

I was just trying to figure out whether or not my first purchase would or should be the multi-million dollar range.

My ideal plan is to have several mid-range apartment buildings many, MANY years in the future. :)

I've already spoken to my realtor, asked a bazillion questions, and I have a sit down with my friends father who was a RE investor for many, many years.

Afterwards, I plan on sitting down with a CPA to see about setting up an LLC or some other type of thing that will allow me the most protection against financial disaster, an attorney to help with the legal bits, and a management company to see about all the other misc. things.

I came to the $29k per year, I used JScotts spreadsheet, which my realtor loved, btw. :)


I had $2.3 million for the purchase price, 7.5% interest, and adjusted the numbers to match things like taxes, rents, etc. with my 5% down.

However, with 20% down it shot up to $41k per year.

Of course, I'm at least smart enough to know that I don't know everything, so I've been asking more questions and probably making a pest of myself, but I'd rather be prepared for the worst, and be able to roll with it, rather then not know, and get hit financially hard. :)

Although I am glad to hear you guys were scared out of your minds as well when you bought your first big property. I know I was when I bought my first condo many years ago for $120k. I thought to myself (oh great, what have I gotten myself into) a few times, but after the first year, I calmed way down and was ok.

Thank you all again so very much for your advice, I greatly appreciate it.
 
OP
OP
scine

scine

New Contributor
Jun 23, 2008
46
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If that $29k in cashflow is with only 5% down, you could be on to something here.

How do the numbers look with 20% or 25% down? Perhaps you could offer the rest of the deal to investors for a % of ownership. If you get two investors to throw in $225k, and you throw in $50k (from a HELOC, for instance), maybe they'll be alright with a 3-way split in ownership if you contribute the sweat equity by managing the property.

Just an idea...good luck! Keep us posted!
I was actually wondering about a HELOC just a few days ago and was going to search around here and/or start a new thread about it.

I've got about $50k in equity on the house right now, and before the "bubble" burst, I had about $100k in equity. :) I assume that going this route has it's ups and downs correct?
 

8 SNAKE

Contributor
Aug 15, 2007
239
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25
Midwest
POSSIBLE HIJACK (if so, mods please move)...

Let's assume that the original poster has done the proper due diligence and this deal fits into his PLAN.

Given his perameters, how would you put the deal together? I think it would be informative for the members of the forum (and myself) to hear different ways to put a deal like this together.

Thanks,
Sid23
Here are three options that come to mind. It will be interesting to see what others have to say as well.

Option one:
Get the property under contract and then sell the rights to someone who has the cash to close the deal (assuming it's a good deal in the first place).

Option two:
Get the owner to carry a note on the difference between your 5% down payment and the amount that a bank will loan on the property. Another twist on this would be to get the owner to finance the entire deal.

Option three:
Take on partners to build up enough cash for a larger down payment.
 

Runum

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The cashflow on this sounds great. Is that your only angle for profit on this property or are you looking for forced appreciation? How long do you plant to hold it? What would be your exit strategy?:cheers:

As far as too fast, as long as you take time to do your DD, you're going fast enough. I saw many people in the last few years buy "investment property" based on feelings and irrational exuberance. Now they are losing their investments.
 

Russ H

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My big "?" on any new investment RE is:

How much deferred maintenance is there?

This one thing can kill your budget.

A roof that needs replacing. A foundation that's on its last legs (pun intended). Plumbing that is long past its usable prime.

The list of potential deferred problems is ENDLESS.

We actually specialize in buying props w/deferred maintenance. We pay more than they're worth, but less than the seller wants, in most cases.

The reason we pay more than FMV, when we take the cost of repairs into account?

We have figured out how to use the property in a way that generates LOTS more income/revenue.

Bought a B&B that grossed $400K a year w/10 rooms, and turned it into a 9 room B&B that grosses over $750K a year (almost double, with less rooms).

Bought a rental house for $500K, dumped another $200K into it, and we had a house that was only worth about $650K for a SFH. But we're going to take in over $100,000 in gross this year alone from this prop as a vacation rental-- and we use it as overflow for guests who wanted to stay at the B&B, but couldn't b/c we'd run out of rooms!

Note that staying at the vacation rental is NOT the same as staying at our B&B-- but for some, it's an OK alternative.

************

You may or may not have these kinds of creative options w/an apt building. The whole key to making this work is to figure out how to get more $$$ out of it than the people who own it are doing today.

SteveO is a whiz at this. I guess we are pretty good at it, too.

I'd caution you against just putting in higher rents in the calcs columns. This is the #1 mistake made by new multifamily buyers. They see that by raising rents on each apt only $20 or $30 a month, everything gets rosy.

Thing is, rental markets don't work that way.

You have to strike the right balance between vacancy and rates.

Search for SteveO's posts on this. They're great.

-Russ H.
 

I85

Contributor
Mar 22, 2008
183
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Iowa
I had $2.3 million for the purchase price, 7.5% interest, and adjusted the numbers to match things like taxes, rents, etc. with my 5% down.

However, with 20% down it shot up to $41k per year.
Am I missing something here? Shouldn't putting down the extra 15% just about double your cashflow?
 

Corrado79

New Contributor
Sep 24, 2007
86
4
12
Santa Monica, CA
Am I missing something here? Shouldn't putting down the extra 15% just about double your cashflow?
Loans are typically amortized over a 25 or 30-year period. Accordingly, the additional 15% money you put down would mean a reduced loan amount, but that amount is amortized over that long period so it's not a simple 1-for-1 ratio of money down to CF.
 

M&T

New Contributor
Oct 2, 2007
169
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Hershey, Pa.
Be up front and honest with the seller. Tell him your position. Make him an offer on the building with a twist. You will buy the property and sell him the land underneath it. You will pay him a lease on the land and he will put that money up to you to purchase. The lease will be a tax deduction, you will have money to purchase and the owner can feel safe knowing that you are not going to take the building and go home. Ask an attorney about this and how it can work.
Creative....
 

M&T

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Oct 2, 2007
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Hershey, Pa.
P.S.
It is possible to move too fast. I know because I'v done it. 7 buildings in one year. Not that that is too many but I needed to get them in order first.Then move on.I have that conquer and destroy personality....Not that thats bad in R.E. but sometimes ya gotta draw a limit. Back then I was also working 60 hrs in a steel plant. I like to stay busy...
 

JScott

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Here's an analogy...

If you're driving in a straight line, going fast is not going to hurt you. But, if you're constantly swerving, going too fast is going to cause problems.

As an analogy, if you've created a plan, and you're moving towards it in a straight line, too fast isn't an issue. If you keep diverging from your plan or don't have one (swerving around), too fast can destroy you.

Okay, maybe need a bit of work, but I like it! :)
 

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White8

Contributor
Dec 6, 2007
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Salem, OR
My big "?" on any new investment RE is:

How much deferred maintenance is there?

This one thing can kill your budget.

A roof that needs replacing. A foundation that's on its last legs (pun intended). Plumbing that is long past its usable prime.

The list of potential deferred problems is ENDLESS.
FYI: The expenses Russ is talking about are NOT the type that can be covered with a credit card. We have 24 units and painting was $20k in 2006. Roofs in 1997 were about the same. These were not deferred maintenance but just the normal expenses associated with properties of this size so they didn't include major repairs before the real work started.
 

White8

Contributor
Dec 6, 2007
272
45
30
47
Salem, OR
P.S.
It is possible to move too fast. I know because I'v done it. 7 buildings in one year. Not that that is too many but I needed to get them in order first.Then move on.I have that conquer and destroy personality....Not that thats bad in R.E. but sometimes ya gotta draw a limit. Back then I was also working 60 hrs in a steel plant. I like to stay busy...

M&T: I have to ask, did you have adequate reserves for 20% downs on those 7 buildings or did you get creative?
 

Yankees338

Bronze Contributor
Jul 24, 2007
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Here's an analogy...

If you're driving in a straight line, going fast is not going to hurt you. But, if you're constantly swerving, going too fast is going to cause problems.

As an analogy, if you've created a plan, and you're moving towards it in a straight line, too fast isn't an issue. If you keep diverging from your plan or don't have one (swerving around), too fast can destroy you.

Okay, maybe need a bit of work, but I like it! :)
I just gave you speed in another thread, but that's a great analogy! I fully understand it; it makes perfect sense.
 

M&T

New Contributor
Oct 2, 2007
169
19
23
Hershey, Pa.
We didn't have any owner financing.No land leases either.They were all pretty much straight deals.Now we bought them one at a time so it wasn't commercial deals we were doing either.We could go in at 10% on some. Mostly all 4 units.The stuff that took so long was converting them over to tenant paid heat.Also weeding out some of the tenants you inherit.Lots of people like to get just anybody in to say the building is fully rented.They have a years lease and it's a nightmare.Sometimes I think it's easier to vacate an entire building and do your work increase rents and start fresh, if you can afford that...
M&T
 

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