REAL ESTATE Random Apartment Questions

[yveskleinsky]

I had some random apartment related questions that were floating around in my head after reading How to Buy and Sell Apartment Buildings, and I'm just curious as to how apartment investors handle these issues.

Here they are:

1. Do you look for or avoid apartments with clubhouses/laundry rooms/pools?

2. How do you determine the difference between a lump of coal and a diamond in the rough? ...I am guessing that what one investor would see as a problem, another would see as an opportunity- and where do you draw the line? (Ex. Foundational issues would be a deal killer, but anything outside of that would be a go.)

3. Would you prefer a class A apartment complex with a low vacancy over a class C with a high vacancy- if the cashflow potential was greater on the class C, but repairs were unknown?

4. How do you really determine repair costs? There is so much upside to riding the economy of scale, but it seems the downside can be just as brutal...if you're off by $200 a door, then it can be a game over pretty quick! How do you tighten up estimates?

5. When verifying the numbers, how do you figure if there is any deferred maintenance?

6. Do you go into a complex and gut all the iffy appliances and AC units, or wait for them to go out and replace them as needed?

Just wondering.

 

Don't like ads? Remove them while supporting the forum. Subscribe.

[SteveO]

1. Do you look for or avoid apartments with clubhouses/laundry rooms/pools?

It depends on the size of the property and the financials. I like to have all of these items. All of my properties have pools and laundry facilities, and most have club houses. Access to laundry faclities or washer/dryer hookups are a must. Pools are nice but only worth the maintenance if the property size supports it.

2. How do you determine the difference between a lump of coal and a diamond in the rough? ...I am guessing that what one investor would see as a problem, another would see as an opportunity- and where do you draw the line? (Ex. Foundational issues would be a deal killer, but anything outside of that would be a go.)

I personally do not like too much repair. The real diamond in the rough is going to be a property with a manager that does not know how to market, lease, maintain resident relations, or understand why they are having problems financially.

3. Would you prefer a class A apartment complex with a low vacancy over a class C with a high vacancy- if the cashflow potential was greater on the class C, but repairs were unknown?

Depends on the price. It is likely that the "C" with high vacancy will present a lot more opportunity than the alternative.

Repairs are not unknown. You have an inspection period to determine what repairs need to be done. I estimate them myself based on experience and call for quotes when I don't know.

4. How do you really determine repair costs? There is so much upside to riding the economy of scale, but it seems the downside can be just as brutal...if you're off by $200 a door, then it can be a game over pretty quick! How do you tighten up estimates?

I have had some major repairs come up that were unexpected and they hurt. You can minimize this by doing a good job on your initial inspection. You do need some ability to handle any unexpected major repairs if they present themselves.

5. When verifying the numbers, how do you figure if there is any deferred maintenance?

You will need to have a due diligence period and have the inspection completed in this time.

6. Do you go into a complex and gut all the iffy appliances and AC units, or wait for them to go out and replace them as needed?

I target $250 per unit, per year in the budget to handle these types of replacements. It is built into the financials. If the appliances are on their last leg, I will negotiate a repair credit with the seller if possible.

 

[JScott]

I'm new to the whole apartment investing thing (there's my disclaimer ), but I'll take a stab at your questions...

1. It depends on your specific investing strategy. What is your entry/exit strategy? What class of building/complex are you looking to buy? Are you going for long-term investment or short-term value play? Where is the greatest opportunity for growth/success in your particular market? There is no right or wrong answer to these questions; but they will determine what an "ideal" apartment is for you.

2. In my opinion, the difference between a lump of coal and a diamond in the rough is the amount of value built into the deal. For example, you say that a bad foundation is a deal killer, but I'd say that if I can get a building at (for example) a $500,000 discount because of a bad foundation (when it only costs $200,000 to fix), that sounds like a great deal to me! To some people, no issues whatsoever would be a good thing. But to investors like SteveO, no issues equals no opportunity.

3. I wouldn't want any investment where the "repairs were unknown." I would want to know what to expect, figure it into my calculations, and all other things being equal (time, headache, effort, etc) go after the one where my return on investment were highest.

4. I imagine that when the cash flow is small (as a percentage of revenue), you have to be more careful about accuracy in *all* your estimates (not just repairs). Working with inspectors, contractors, and others who have done this in your area is probably a good place to start.

5. Have a professional inspector look at any place *before* you buy. He/she should be able to help you figure out the current and expected maintanance needs.

6. Good question, and I imagine it would depend on what your renters will expect, and the impact that decision will make on your ability to get renters in the door for the amount of revenue you need.