What do you think? Jumping into apartment investing!

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What do you think? Jumping into apartment investing!

Simon Cox
Rental Property Investor · Dearborn, MI · Member since 2015 · 177 posts · 48 votes

Hey everyone! (Happy Valentines Day) :D

I'm looking at purchasing an apartment complex and wanted to hear what you all thought about the deal analysis so far.

It's a 23 unit property just outside of the DFW, TX area with all units rented for $550 with plenty of demand for future tenants. I have looked into the area and it seems to be a market that supports renters. The complex is in good condition and I am having someone I trust go to check it out on Tuesday with my agent. (I live out of country). 

I have run the numbers, checked all the expenses, received a rather expensive insurance quote (13.5k), and am currently satisfied with the outcome of the analysis.  

I will provide the numbers below but I'm primarily asking all of you to highlight anything you think I might have overlooked. I want to know what your experiences purchasing apartment complexes have been like! What did you wish you would have considered before you jumped in? 

Gross Scheduled Income: $12600

Expenses (Maintenance, Management, Taxes, Insurance, Utilities (water & trash paid by owner), Landscaping, Common area electricity, CapEx, Vacancy, Internet for complex, security, etc.): $6400

Debt Service (5.5%, 20yrs, 80% of cost): $3700

Cashflow: $2500

Annual COC: 17%

I want to make sure I'm considering everything but also don't want to get stuck in analysis paralysis. I'm also open to hearing about better financing options!

Any feed back is greatly desired and appreciated!

Thanks guys.

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Troy Gravett
Investor · Torrance, CA · Member since 2013 · 144 posts · 73 votes
10y
is the building master metered or individually metered? Are the utilities getting passed on to the tenants? What's the tenant turnover rate, in other words how often are people moving in and out and how long is the average tenant staying? The more often tenants are moving out the more you have to spend turning over the units. Are there any other revenue streams you can take advantage of that haven't been implemented yet? also, have you budgeted for legal and accounting. Always good to have money set aside as reserves for unforseen issues as well.
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  • Nick L.
    Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
    10y

    @Simon Cox Looks like you have thought of all operating expenses. You're right around 50% of rents which passes the sniff test. 

    One thing I would check is whether you might be liable for a large property tax increase as the place gets re-assessed to the purchase price. 

    I don't know the DFW market specifically but from the rents it sounds like this would be on the rougher end of the tenant base. So make sure you are accounting for plenty of vacancies and repairs. 

    Are there any major deferred capital expense issues?

    As for financing you might look at HUD FHA multifamily loans if the loan size is large enough. They are a great deal if you plan to hold the place for 10 or more years but there are pre pays if you sell before that.

    0Reply
  • Simon Cox
    OP
    Rental Property Investor · Dearborn, MI · Member since 2015 · 177 posts · 48 votes
    10y

    @Nick L. Thanks for the advice. I do need to check up on any deferred capital expenses!

    Would I still be able to qualify for the FHA if i'm not planning to be a resident of the property? Loan size would be around $550,000.

    If I can get approved for that I would have to weight the cost of prepayment. I'm thinking about adding some value and exiting with a short term hold (3-5yrs) to trade up via 1031.

    0Reply
  • Mark Creason
    Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
    10y
    Originally posted by @Simon Cox:

    @Nick L. Thanks for the advice. I do need to check up on any deferred capital expenses!

    Would I still be able to qualify for the FHA if i'm not planning to be a resident of the property? Loan size would be around $550,000.

    If I can get approved for that I would have to weight the cost of prepayment. I'm thinking about adding some value and exiting with a short term hold (3-5yrs) to trade up via 1031.

    Occupancy will not effect your financing when you are buying above 4 units.

    Mark

    2Reply
  • Troy Gravett
    Investor · Torrance, CA · Member since 2013 · 144 posts · 73 votes
    10y
    is the building master metered or individually metered? Are the utilities getting passed on to the tenants? What's the tenant turnover rate, in other words how often are people moving in and out and how long is the average tenant staying? The more often tenants are moving out the more you have to spend turning over the units. Are there any other revenue streams you can take advantage of that haven't been implemented yet? also, have you budgeted for legal and accounting. Always good to have money set aside as reserves for unforseen issues as well.
    5Reply
  • George Gammon
    Flipper/Rehabber · Las Vegas, NV · Member since 2016 · 174 posts · 251 votes
    10y

    Is the interest rate fixed?  If not, make sure you calculate potential bumps in the future and assume the value of the asset won't increase to be safe.  Do your numbers still pencil out at 6.5, 7.5 or 8.5??  If not you may want to consider a fixed rate (then ask yourself if the math still works).  Remember our current interest rate environment is artificial and potentially unsustainable.  The last thing you want is to go cash flow negative because of something totally out of your control... i.e the fed.  

    4Reply
  • Wade Sikkink
    Real Estate Investor · Lincoln, NE · Member since 2013 · 584 posts · 353 votes
    10y

    @Simon Cox we bought a 14 unit building a couple years ago and my big advice is to be sure you have a realistic read on the deferred maintenance situation.  We had way more work to do than we realized when we bought the place.  We've poured a lot of money in the place over the last couple years and it's in pretty good shape now.

    @Troy Gravett nailed the other items.  Check on everything he listed, particularly opportunities for additional revenue.  We have a coin op laundry in the basement of our building and we were able to double the price from $1 per load to $2 and still be the cheapest laundry option in town.

    Good luck!

    2Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    10y

    So the PP is $687,000 then?  That's almost 2%/mo. which should cash-flow great in most areas of the country.  $550/mo units in my area would be pretty rough.  Higher management headaches and stuff. C-class?  Is the location good?  Sounds like a good find if the location and condition are decent @Simon Cox. If it's been on the MLS for 292 days and everyone else has passed....may be a reason, right? Quiet, off-market deal or MLS?

    1Reply
  • Nick L.
    Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
    10y

    @Simon Cox The HUD FHA loan I mentioned is purely for commercial properties. It's not like a residential 1-4 unit note where you may be required to live there. In fact one of the nice features of that program is that it's non-recourse, so the lender has little interest in your personal circumstances.

    I do hear you about wanting to exit in 3-5 years though - that might indicate regular commercial bank financing is better.

    Why do you feel other people have passed this opportunity over? Or do you have inside knowledge of the opportunity?

    0Reply
  • David Thompson
    Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
    10y

    I have not run analysis on apt properties in Dallas but I have done a boatload of them recently in nearby Austin and San Antonio markets. I can tell you finding anything w/a CoC return of 10% or greater is very difficult in the TX cities w/MSA > 250K. I'm in an MF meetup group and they are bringing deals in from way out in smaller towns to hit 10% and then risks goes up due to smaller town economies w/little pop growth. I like the comment above on areas around deferred maintenance and tenant turnover. I would explore that closely. I use 55% to 60% expenses of SGI depending on factors that might cost me more in a fringe area. If you are out of state, I'd be even more concerned if the area is sketchy. Finding a great property mgt team will be key for you if you do move forward after a careful due diligence phase. Lastly, look at unit mix since the rent rate is so low it makes me think its poor. If the unit mix is all studios and 1 bedroom, I avoid them like the plague. These tenants are likely to turnover much faster than a more balanced mix of 2 bedroom and cost you a ton more in vacancy and make readies. I like to see 70% 2 bedroom as ideal.

    1Reply
  • Simon Cox
    OP
    Rental Property Investor · Dearborn, MI · Member since 2015 · 177 posts · 48 votes
    10y

    @Nick L. & @Mark Creason I didn't know that about HUD FHA. I'm not sure if I would want to hold for 10 yrs but I will have to look into it. Thanks guys.

    @Troy Gravett From what I know so far about the tenant turnover, it seems to be a good situation. I will dig in more and will check on the meter issue. There are laundry facilities on property and there is also a misc budget in place! Thanks for the questions, I love it.

    @George Gammon Interest rate is fixed for 5yrs. If I decide to hold longer than that I will most likely look into a different option for financing. Great point. 

    @Wade Sikkink The deferred maintenance schedule is at the top of my list to find out! Thanks for the tip with the laundry. The owner didn't mention any revenue coming from that  as of now but it's on the property so I'm sure there's some potential there!

    @Steve Vaughan Purchase price is $720k but my highest offer might be around $675k considering the seller attempted to sell last year as well and it didn't happen. I'm wondering what my "team" will find when they check it out tomorrow. If I decide to go for it, do I make the offer with an inspection contingency to have some thorough searches on the property? If anything comes up, I would hope to adjust the purchase price. We'll see!

    @David Thompson That's smart thinking with the 2bdr vs. studio/1bdr. They are all 2bdr which is great. The numbers seem pretty great which is why I wanted your opinions on what I might be missing. Extra expenses will be sure to come up; I just want to be sure i'm in a good spot before they do so I can handle them! I think class C is a pretty accurate description. Property management is going to be key. Systems systems systems.

    Thanks again guys, I really appreciate it.

    2Reply
  • Mark Creason
    Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
    10y
    Originally posted by @Simon Cox:

    @Nick L. & I didn't know that about HUD FHA. I'm not sure if I would want to hold for 10 yrs but I will have to look into it. Thanks guys.

    On 4 units or less, occupancy would matter for your down payment requirement. On 5 units and up, FHA is not doing 3.5% down payments.

    Mark

    0Reply
  • Gino BarbaroPro Member
    Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    @Simon Cox

    Hi Simon

    Look to see if you can get better terms with the bank.  I got these terms on my first deal, a 25 unit.  On my last deal, I am getting 4.25%, 25 yr amort and 10 yr terms.  The longer amort will allow you to cash flow better.

    Expenses run around 50% of income.  Look at centimeter.com for rents in the area.  Hopefully, they will be a bit low and you can raise revenue there.  Look to see if there are any fees being generated, pet fees, application fees, late fees, etc.

    What type of property is it ( A B C D). What is the cap rate you are purchasing it at?

    Gino

    Podcast Guest on Show The “Conveyor Belt” System That’ll Build You a BIG Rental Portfolio Quickly
    0Reply
  • Simon Cox
    OP
    Rental Property Investor · Dearborn, MI · Member since 2015 · 177 posts · 48 votes
    10y

    @Gino Barbaro

    I think that might be a good idea, I'm surprised in looking at the numbers how big of a jump in payment/cashflow such a small percentage can make. 

    I'm planning to raise the rents over the next couple of years. There is currently a waiting list for the property which tells me the demand can handle an increase of sorts while adding some value at the same time. 

    I will work those fees into the management structure since I will have to bring in new management. The property has been managed by the owner up to this point.  

    Can't say for sure on the property yet, B or C. Seems to be in great condition, rent that low suggests C though. We'll see. Purchasing at 11%

    Thanks Gino! Great suggestions!

    0Reply
  • Gino BarbaroPro Member
    Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    if there is a demand then rents are low.  We try to raise one or two units depending on size of property per month. Our our 136 unit we were raising by building, about 6 per month as the leases allowed. Just make sure to add value, whether it is landscaping, painting, customer service, etc

    All you're doing is raising to market. The majority of tenants will not leave for a nuisance 30-50 rent bump to market.  Ironically tenants know market rent better than landlords

    Look into instituting RUBS if they don't have a program.   It just means billing back tenants a portion of the utility

    Gino

    Podcast Guest on Show The “Conveyor Belt” System That’ll Build You a BIG Rental Portfolio Quickly
    0Reply
  • Simon Cox
    OP
    Rental Property Investor · Dearborn, MI · Member since 2015 · 177 posts · 48 votes
    10y

    @Gino Barbaro

    That's the plan, add some value for the tenants and raise up to market.

    So RUBS is basically splitting up the utilities (if they aren't sub-metered) proportionally by bedroom, sq ft, etc?
    Sounds like a great idea.

    0Reply
  • Gino BarbaroPro Member
    Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    look at a company called nwp if you don't want to do it yourself

    You take a proportion of water, electric, garbage etc and split it among the tenants based on number of occupants or number of bedrooms. No metering and rather quick to implement. It only works if the rest of the market is doing it

    Fortunately our market charges back the tenants 

    Podcast Guest on Show The “Conveyor Belt” System That’ll Build You a BIG Rental Portfolio Quickly
    1Reply
  • David Thompson
    Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
    10y

    Good simple explanation and example of RUBS.

    http://www.accurateutility.com/rubs.html

    The beauty of moving to RUBS is the "forced appreciation" w/this move.  If you were able to bill back say $25 per month for all 23 units = $575/mo cost reduction or $6900/yr.  At $6900 divided by the cap rate (say its 8%) = $86,250 increase in value.  Great suggestion Gino !

    1Reply
  • Mitch Dowler
    Investor · Tacoma, WA · Member since 2014 · 83 posts · 40 votes
    10y

    What is your exit strategy? What do you plan to do with this apartment complex to force value and increase rents so that if you want to sell it off in five years you can do so at a handsome profit. Analyze the property and budget for the improvements needed to make it a much more valuable property than what it is now.

    0Reply
  • Simon Cox
    OP
    Rental Property Investor · Dearborn, MI · Member since 2015 · 177 posts · 48 votes
    10y

    @David Thompson Thanks for the example on RUBS, I'll have to check if the market supports it.

    @Mitch Dowler
    Exit strategy is to improve the property upping the value in the next 3-5yrs to sell. If selling isn't looking to hot after the next couple of years, I will look into a refinance!

    0Reply
  • David Veeder
    Investor · Dallas, TX · Member since 2014 · 112 posts · 83 votes
    10y

    I agree with the figuring the property taxes at the purchase price.   Both apartments my group purchased in the last two years were bumped up based on purchase price.  The first one we purchased we had to litigate with the city to get them reduced.

    To figure out purchase price you should discount gross rent.  There will be some vacancy.  I would probably 5 to 7 % vacancy.

    Gross Rent:  23 x 550 =12,650
    Vacancy:      12,650 x .93 = 11,754.5
    Yearly:          11,754.5 x 12 = 141,174

    Annual Expenses per door:  23 x 3,500 = 80,500  Tenant paid Electric

    NOI: 60,674

    Divided by Market Cap rate:   60,674 / .08 = 758,425 value
    Determined by market you are in.  Dallas cap rates for C properties have fallen probably to 7 to 8% and maybe even lower, however in out lying area's they may be higher.

    Defiantly have some money in reserve for Cap Ex even if not currently needed. Many banks will require at CAP EX set aside of $300 per door per year.

    Keep in mind if you are paying for a management compay to manage the property of this size it will be close to 10% of gross rent collections.   The $ 3,500 figure is figured at closer to 5% for management and does not include debt payment.  

    0Reply
  • Simon Cox
    OP
    Rental Property Investor · Dearborn, MI · Member since 2015 · 177 posts · 48 votes
    10y

    @David Veeder 
    Thanks for the input!

    I've currently got vacancy at 8% which allows for 2 a month which seems to suffice. that's good to know about the capex reserves, i'll make sure to have that on hand!

    Thanks again

    0Reply
  • David Veeder
    Investor · Dallas, TX · Member since 2014 · 112 posts · 83 votes
    10y

    You may have higher vacancy and turn for a few months as well.  Every apartment that I have been involved in or talk to people about has an our flow of people when taken over.   Then there will be the few that you need to evict as well.  Usually takes a few months to get everything stabilized.  

    1Reply
  • Simon Cox
    OP
    Rental Property Investor · Dearborn, MI · Member since 2015 · 177 posts · 48 votes
    10y

    That makes sense. Upping the reserves again.. :D

    0Reply
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