apartment investing

[Daniel Etheridge]

There is a property I was looking at priced at $875,000. It was appraised at $1,200,000 and that was with a 25% occupancy. The building was previously used for several businesse offices. The zoing was changed to residential (multi family). The building was originally built as an apartent complex.
32 of the units currently need rehab. Which the estimated cost totaling $166,000. The average rent is $600 dollars. It is a 54 unit complex. Here is my question. What questions should I be asking the owner and how do I figure what this building can possibly cashflow a month.
I have plenty of experience in residental but not multifamily. How do I determine what would be a good investment and cover my debts and still allow me to cash flow. I have a basic knowledge and understanding of multifamily but I want to know more!

[Mike Mocek]

Originally posted by @Daniel Etheridge:

There is a property I was looking at priced at $875,000. It was appraised at $1,200,000 and that was with a 25% occupancy. The building was previously used for several businesse offices. The zoing was changed to residential (multi family). The building was originally built as an apartent complex.
32 of the units currently need rehab. Which the estimated cost totaling $166,000. The average rent is $600 dollars. It is a 54 unit complex. Here is my question. What questions should I be asking the owner and how do I figure what this building can possibly cashflow a month.
I have plenty of experience in residental but not multifamily. How do I determine what would be a good investment and cover my debts and still allow me to cash flow. I have a basic knowledge and understanding of multifamily but I want to know more!

Hey There Daniel!  It sounds like you need to get a copy of records, I would go back at least 5 years.  If they do not have 5 years, 2 year.  I would ask for rent rolls, maintenance logs, renovation logs etc.  

Whenever a client of mine is buying a large property like this, I will try to obtain the following items:
-  Copy of Rent rolls (At least 2 years, you may only get 1 year if the tenants are fresh)
-  Copy of Maintenance logs
-  Copy of deferred maintenance
-  Any recent inspections (If there are any community assistance programs paying rent)
-  Copy of any inspections completed
-  Copy of their lease (Does not have to be signed but at least you can get a general idea of what their terms are)
-  Is the property managed professionally or by someone else? (Like the owner, relative etc)

I will then ask the following questions:
-  When was the last time furnaces or other routine items maintained or serviced? (This question is ALWAYS asked before a contract should be written.  If they don’t have an answer that’ll tell you they likely don’t have regular, ongoing maintenance as a priority. That means more money to be allocated in deferred maintenance.)
-  What is the status of the roof, electrical and plumbing?
-  Is the pipes Cast Iron, PVC, PEX?
-  Why is the seller selling? (I note this because: 1031 exchange sellers have a completely different motivation level than sellers looking to “entertain offers”. Estate sales are different from someone who wants to retire and move to Florida. This is a critical piece of info that you’ll want to ask at least 3 times because the answer could change the more you ask.)
-  How long has it been on the market?  If an off-market, why isn't it listed professionally?
-  What is the effective occupancy? (You and I can fill ANY apartment building so it’s 100% occupied. That doesn’t tell us squat. We need to know effective occupancy which tells us how many of those residents are paying.)
-  What is the market occupancy? (You can get this from the property mgmt. company or broker.)(
-  What is the current screening process for new residents?  (Do they take people out of homeless shelters and give them an apartment? I’ve come across this. It’s ok to do but you just know what you’re getting into beforehand. Or do they have rental history, income requirements, work history, credit score and criminal background check qualifications.)

I find that it is important to know when they purchased the property and what did they pay.  You can find this out by asking the broker.  It also informs you what the seller is thinking in terms of what they will get out of the deal.  FINALLY, I ask what kind of financing is currently ON the property.  If their loan is set to mature in a year then that might mean there is more motivation for them to make a deal happen rather than a loan that is maturing in 5 years.

I would be more than happy to discuss this with you, I am located in Ohio but I love asking questions!