Looking at First Multi-Family deal, what am i missing

Multi-Family and Apartment Investing
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Looking at First Multi-Family deal, what am i missing

Dawn RoofPro Member
Rental Property Investor · Charlotte, NC · Member since 2014 · 24 posts · 6 votes

I'm new-ish to REI, with one single family home purchased last spring so far. That has gone very well, and we are looking at stepping up the game to a Multi Family. The one I have my eye on is 6 units (two triplexes next to each other) (4) 2 bed/1 bath, and (2) 3 bed, 1 bath, and based on all of the numbers I have run (multiple, multiple times) it looks AMAZING on paper. My main question, is how can you verify the numbers that the seller is giving you? I'm so afraid that they are incorrect, or just plain lies. This is a huge investment for us, and I don't want to make a terrible mistake. Another factor is that it's in a not so great neighborhood, but that has signs of revitalization going on. How do you guys make sure the numbers you are working with in terms of rent roll, and operating costs are good??? The seller has said that it's 100% occupied, and has been, but can't give me a history because they have only owned it since Nov of 2015 (they are flipping it; Did some repairs, and raised all of the rents significantly.)

I still have not seen the inside of the units, because we can't get in until an offer is accepted, but it's hard to make an offer, when you can't see what you are buying, and have to take the word of the seller at face value.  Any advice, on how you move forward, and how you verify the numbers would be greatly appreciated!!

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Nancy Curran
Real Estate Investor · Chicago, IL · Member since 2014 · 286 posts · 159 votes
10y

Well, that is one way to verify rents is by seeing a property. If they are saying rent for 2f is $1200 and it's a gross dump, you can bet they aren't getting that. Also, how the tenants act toward you is key.  I find not getting into any apartments at all is ridiculous and it's a red flag. 

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  • Rob Krach
    Lender · Chicago, IL · Member since 2013 · 82 posts · 27 votes
    10y

    @Dawn Roof do you have financing setup? Are you going to pursue it as two separate buildings or one offer and a commercial loan?

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  • Dawn RoofPro Member
    OP
    Rental Property Investor · Charlotte, NC · Member since 2014 · 24 posts · 6 votes
    10y

    It's actually on one parcel according to the city tax records, so it has to be purchased as one together, which unfortunately means a commercial loan. We have already found someone that will do the loan, with 25% down and 7% interest on a 30 year FIXED. No balloon payment. YAY! I don't love the 7%, but we certainly can't have a balloon payment. The purchase price is less than $500,000, so we had some difficulty finding a lender, but we have one now.

    1Reply
  • Nancy Curran
    Real Estate Investor · Chicago, IL · Member since 2014 · 286 posts · 159 votes
    10y

    seller should let you see one or two apartments and then the rest after an offer is agreed to. You can have the contract contingent on seeing the other places. 

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  • Dawn RoofPro Member
    OP
    Rental Property Investor · Charlotte, NC · Member since 2014 · 24 posts · 6 votes
    10y
    Originally posted by @Nancy Curran:

    seller should let you see one or two apartments and then the rest after an offer is agreed to. You can have the contract contingent on seeing the other places. 

     The seller said no to viewing prior to a contract, so we don't disturb the tenants. My agent has assured me we can put in the offer that it's all contingent on actually seeing the units. I just wanted to see how you all go about verifying what the seller has stated for the gross rental income. 

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  • Nancy Curran
    Real Estate Investor · Chicago, IL · Member since 2014 · 286 posts · 159 votes
    10y

    Well, that is one way to verify rents is by seeing a property. If they are saying rent for 2f is $1200 and it's a gross dump, you can bet they aren't getting that. Also, how the tenants act toward you is key.  I find not getting into any apartments at all is ridiculous and it's a red flag. 

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  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    10y

    It's customary in my market to provide access prior to making an offer.

    Most apartment flippers are savvy enough to sell a property at market value, which may leave a fair return for the buyer, but not amazing.  Amazing typically comes with being able to add value and it sounds as if the seller has already done and realized the value add.

    Regarding the financials, they likely will be incorrect, especially if they are not providing a system generated T12. Even then, you have to generate your own figures. Regarding history, they've had the property since November and can provide that history...they likely just don't want to. If they or you are working with a good broker, the broker should be able to help with this.

    Rent - Once under contract, you can perform a lease audit to validate the rents and the tenant's credit/background.  The rents will help with your projections and the credit/background files will help ensure they did not just fill up the place with deadbeats.  You can also figure out a way to survey the area to see what market rents are and how that lines up with the seller's information.  Survey the area as well to determine your vacancy factor.

    Insurance - have your agent quote it

    Taxes - look them up on the county records and make adjustments for the new assessed value with the property trading hands

    Management - find out going rates and include them

    Trash, pest control, landscaping - same...figure out going rates, if applicable

    Utilities - not sure who pays

    Maintenance and cap ex - Highly debated topics on BP; so, I'm not going to get granular...have to search the site.  For cap ex, you can create a spreadsheet for all the building components, their cost to replace and divide each by their respective lives to estimate monthly/yearly cap ex.  My guess is that if the overall figures appear amazing, maintenance and cap ex are underestimated.

    Maybe trying running your figures through the rental property calculator on BP.  It has some helpful hints.

    Hope this helps...good luck.

    5Reply
  • Mont Boardman
    Salt Lake City , UT · Member since 2015 · 4 posts · 1 vote
    10y

    100% occupied, and has been. But can't give you history because they have only owned it for 9 months?

    Not even last month's rent receipts?

    What repairs were made while 100% occupied?

    It's not unusual to require an offer, just make sure it's subject to inspection.

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  • Carl Mcknight
    Rental Property Investor · TN · Member since 2013 · 54 posts · 50 votes
    10y
    You mentioned it's in a "not so great neighborhood", that usually means a C +/- area. It takes a certain personality (usually a high threshold for crap) to prosper as a LL in those areas. High cash flow doesn't always mean easy cash flow, C class tenants can and will test your patience. Kinda of look at this way, in your day to day life your used to people telling you the truth when you talk with them, with C class tenants, get used to lying and excuses. If your not prepared to deal with the lies and excuses it may not be worth the purchase price.
    1Reply
  • Dawn RoofPro Member
    OP
    Rental Property Investor · Charlotte, NC · Member since 2014 · 24 posts · 6 votes
    10y
    Originally posted by @Carl Mcknight:

    You mentioned it's in a "not so great neighborhood", that usually means a C +/- area. It takes a certain personality (usually a high threshold for crap) to prosper as a LL in those areas. High cash flow doesn't always mean easy cash flow, C class tenants can and will test your patience. Kinda of look at this way, in your day to day life your used to people telling you the truth when you talk with them, with C class tenants, get used to lying and excuses. If your not prepared to deal with the lies and excuses it may not be worth the purchase price.

     I would say C area for sure. I was definitely going to use a Property Manager for this one, and even with an 8% PM, and 7% interest rate, and all the other things, it's still producing really nice cash flow. I just get nervous because the rents were raised from $450 to $750 on the 2 bedrooms, and from $550 to $900 on the 3 bedrooms. The seller says all the units, except one have been moved up to the new rent rate, and the last one is set to renew their lease at the new rate on 7/15. Is there some way you can fake this??

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  • Dawn RoofPro Member
    OP
    Rental Property Investor · Charlotte, NC · Member since 2014 · 24 posts · 6 votes
    10y
    Originally posted by @Mont Boardman:

    100% occupied, and has been. But can't give you history because they have only owned it for 9 months?

    Not even last month's rent receipts?

    What repairs were made while 100% occupied?

    It's not unusual to require an offer, just make sure it's subject to inspection.

    The updates made included new roof on both buildings, new gutters,fresh exterior paint on both, new screen doors, poured brand new concrete parking pads for both buildings, and serviced the tree canopy, all in 2016. I have asked my agent to push back on the rent roll/history, as well as the operating expenses, and as of this evening, we haven't heard anything back.

    It's also been on the market for over 100 days, but I'm guessing that is because it's hard to finance being that it has to have a commercial loan, but is less than $500,000.

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  • Amit Kal
    Investor · Sunnyside, Queens, NY · Member since 2015 · 213 posts · 159 votes
    10y
    Make an offer but make it contingent to (amongst other things) seller being able to provide documented evidence of rent payments going back at least three months. Request the leases as well. Your property manager should also visit the place with you and have a good handle on if the rents are in line with comps in the immediate area. YOU should be also be looking at comps in the area to get a feel for how the units compare the one you are making an offer on. This ain't just about paper analysis and pointing and clicking only.
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  • Dawn RoofPro Member
    OP
    Rental Property Investor · Charlotte, NC · Member since 2014 · 24 posts · 6 votes
    10y
    Originally posted by @Amit Kal:

    Make an offer but make it contingent to (amongst other things) seller being able to provide documented evidence of rent payments going back at least three months. Request the leases as well. Your property manager should also visit the place with you and have a good handle on if the rents are in line with comps in the immediate area. YOU should be also be looking at comps in the area to get a feel for how the units compare the one you are making an offer on. This ain't just about paper analysis and pointing and clicking only.

    Good points for sure. I'm having trouble getting good comps, because there aren't any other properties like this one. Could I use a 3 bed/1 bath and a 2 bed/1 bath in a nearby apartment complex as a comp?? Or there was also a SFH that was 3 bed/2 bath, that was of a similar size. There just aren't any other triplexes to look at, and I know that as similar as possible makes for the best comp, but what do you do when there aren't any??

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  • Carl Mcknight
    Rental Property Investor · TN · Member since 2013 · 54 posts · 50 votes
    10y
    Your property manager should give you an idea what comparable units are renting for. Regarding the sellers stated rent increases, it's been my experience C class tenants are usually hourly wage earners and some may be getting cash aid (food stamps, welfare, EBT cash, etc), to raise the rents $300+ in 9 months would be a major financial burden to their families. I would think the majority would bail and move, the ones that do stay may be struggling each month to pay rent and with struggle comes late rent and excuses. VERIFY rents and tenants income before closing.
    1Reply
  • Neil Schoepp
    Real Estate Investor · Milford, PA · Member since 2014 · 395 posts · 299 votes
    10y

    @Dawn Roof

    More times then not the gross income will be over stated and the expenses will be under stated.  They say trust but verify. VERIFY EVERYTHING! 

    Submit your letter of intent based upon the numbers provided. Make sure you have the proper contingencies in it. Due diligence, inspections, financing, extension periods, renegotiating base on new information you discover, etc.

    this will lock up the property for you and the seller will need to get you the financials and any other inspections/paperwork you may need or that they may have (ie: lead base paint, phase 1, any ongoing warranties or contracts etc) 

    As you get more and more info you can then adjust your offer price.

    For example you always plan for vacancy

    Also, What was  the seller basing gross income upon. Was it what you could get in rent? Remember your offer should be based upon what the actual gross income is right now, not what it might be in the future. 

    To verify the sellers numbers

    1. Call three insurance brokers and get three different quotes, you'll be surprise sometimes how different the spread will be.

    2. Call the trash company and ask them

    3. Call the utilities and ask them (electric, propane, gas, oil, water and sewer)

    4. Call the tax office and ask them

    5. Call your property manager and ask them what they see as being potential problems (imminent repairs and not so imminent). Is this specific area, even this block rentable. @Carl Mcknight makes a great point in that large increases could spell massive vacancy in the future and even evictions. Ask you PM about this. 

    6. If it is on a septic as oppose to public sewers then bring an inspector in that specializes in septic systems. This should be in addition to your general property inspection. Roofs, septics and foundations are the three big ones. And anything local, I know some locals have termites, I locally have radon gas concerns.

    7. The best way to verify rents is with tenant estoppels. Basically a form the tenant will sign verifying what their rent is. I would also verify what was paid at time of moving in. Was it first last and deposit. Or something else. And how much was that deposit, don't assume it was one months rent.

    Compare what the tenant is telling you, to the signed leases, to the rent rolls.

    To your success.

    3Reply
  • Tom MolePro Member
    Investor · Sunland, CA · Member since 2013 · 260 posts · 240 votes
    10y

    @Dawn Roof. about comping your project when there are not realistic comps available, this happens all the time with apartments. Your two triplexes constitute a six plex, which in the real estate biz is technically a small apartment. As a performing apartment you should start with an income valuation. It goes like this:

    • Determine the market cap rate and vacancy rate. (A good commercial broker can help a lot with this.)
    • Determine the market rent. (A good property manager is your best source for this.)
    • Figure your Gross Scheduled Income (GSI). (Generally, this is your total rents if you had no vacancy, concessions or tenants that fail to pay.)
    • Figure your Operating Expenses. (This should include Taxes, Insurance, Management, Maintenance, Utilities and Repairs.)
    • From your GSI subtract your Operating Expenses and the market vacancy rate times GSI to get your Net Operating Income (NOI).
    • Divide the NOI by the market Cap Rate to get the current market value (aka The Price)

    Do not buy the lie that they don't know the trailing 12 before they bought the place. They got that information from the previous seller, so they know. If they deny having that information, they are lying. You can get past this tactic as well.

    Here's what I do: Whenever the seller fails to provide data that I need to do my due diligence, the offer price goes down to compensate. For example, if I can't determine how much rent the tenant has paid and how reliably it has been collected, I let the seller know that I cannot consider some or all of that tenant's rent in my income valuation. This effectively lowers my maximum allowable offer. Take it, leave it or provide the necessary information.... period.

    If the seller's claiming that he doesn't have trailing 12 data, often enough he will conveniently forget to transfer security deposits. You gotta keep an eye on these guys. As @Neil Schoepp points out, VERIFY EVERYTHING, including and especially getting estoppel letters from every tenant. You'd be shocked how many nice, honest looking sellers there are that will lie to you on Saturday and go to confession on Sunday. That's just how they figure the game is played.

    I hope this helps.

    Cheers!!

    3Reply
  • Rob Krach
    Lender · Chicago, IL · Member since 2013 · 82 posts · 27 votes
    10y

    Dawn,

    7% is horrible, check with community banks, Fannie, or credit unions.

    The good news about this being a commercial loan is that the aprraiser is going to verify operating history over the last two years and give you their cost expectations and verify the rent roll.

    Good Luck,

    Rob 

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  • Dawn RoofPro Member
    OP
    Rental Property Investor · Charlotte, NC · Member since 2014 · 24 posts · 6 votes
    10y

    I can't say thank you enough to everyone that has responded. SUCH good advice and information!!! Unfortunately for us, another offer came in so we lost out on this deal. I think we were suffering a little bit from "analysis paralysis", but we will find another one I'm sure! I really do appreciate all the help!! BP is such a great, supportive place!

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  • Dawn RoofPro Member
    OP
    Rental Property Investor · Charlotte, NC · Member since 2014 · 24 posts · 6 votes
    10y
    Originally posted by @Rob Krach:

    Dawn,

    7% is horrible, check with community banks, Fannie, or credit unions.

    The good news about this being a commercial loan is that the aprraiser is going to verify operating history over the last two years and give you their cost expectations and verify the rent roll.

    Good Luck,

    Rob 

    Hi Rob, I know 7% is horrible compared to a conventional SFH loan, but as far as commercial loans go, I thought it was good?? The purchase price was only in the mid 300s, AND we didn't want a balloon, so our options were limited. I felt like the 7% over a 30 yr fixed was a good trade to not have to worry about refinancing in 5-10 yrs for the balloon payment. Do you know of a lender that could have done better?? I'd love to get in touch with them so we could be ready for the next deal we find!

    2Reply
  • Rob Krach
    Lender · Chicago, IL · Member since 2013 · 82 posts · 27 votes
    10y

    @Dawn Roof,

    I work for a commercial lender and even with the under $500,000 loan amount premium our rates would be low 4's for a 5 year fixed amortized over 30 years (it is a hybrid product that after the first 5 years is based on 6 month libor rate.)

    Unfortunately I only have referrals for Chicago and don't know any commercial lenders in North Carolina.

    I did a quick google search of apartment lenders north carolina and a list of lenders popped up so I would recommend starting there, unless you belong to a credit union or have a community bank near you.

    hopefully this helps,

    Rob

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  • Michael Bowman
    Investor · Charlotte, NC · Member since 2015 · 187 posts · 137 votes
    10y

    Hi Dawn! Make sure to stay in touch as I am a local property manager and investor myself. I'd love to offer any advice on particular locations, etc. Look forward to hearing from you! 

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  • Dawn RoofPro Member
    OP
    Rental Property Investor · Charlotte, NC · Member since 2014 · 24 posts · 6 votes
    10y
    Originally posted by @Rob Krach:

    @Dawn Roof,

    I work for a commercial lender and even with the under $500,000 loan amount premium our rates would be low 4's for a 5 year fixed amortized over 30 years (it is a hybrid product that after the first 5 years is based on 6 month libor rate.)

    Unfortunately I only have referrals for Chicago and don't know any commercial lenders in North Carolina.

    I did a quick google search of apartment lenders north carolina and a list of lenders popped up so I would recommend starting there, unless you belong to a credit union or have a community bank near you.

    hopefully this helps,

    Rob

    Would you have anything or know of anything that was a 30 yr FIXED for a commercial loan that was less than $500,000? We're not wanting a balloon payment, or ARM. Which is why we were looking at the 7%, because they offered it fixed over 30. It had a descending prepayment penalty over the first 5 yrs., but after that none.

    0Reply
  • Ashour Rehana
    Real Estate Broker · Chicago, IL · Member since 2016 · 57 posts · 23 votes
    10y
    Dawn Roof im a broker in Chicago and actually in a deal like this myself. Theres nothing to worry about with making an offer prior to seeing the property as you have the attorney review period and the inspection period to walk away if you don't like what you see. The great thing about this is your attorney can keep extending the attorney review period before each time it ends until you can verify and be content with all the information the current owner provides. I'd also suggest you have your attorney immediately upon an accepted offer send a letter to their attorney allowing the viewing of each unit and a copy of the rent roll prior to the delivery of Earnest Money. Fortunately with an attorney state you have many way to get out of the deal once its been accepted. I'd start by calling your attorney and asking how to proceed with the deal and stay protected.
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  • Steve Faucette
    Rental Property Investor · Baldwin, NY · Member since 2015 · 69 posts · 21 votes
    10y

    In your case, the best advice i could give you is to read: 

    The Advanced Guide to Real Estate Investing, by ken mcElroy. he has over 8000 rental units.

    0Reply
  • Erik Sherburne
    Investor · Saint Paul, MN · Member since 2015 · 98 posts · 64 votes
    10y

    Just a quick note to everyone on this thread.  There is a lot of amazing of advice in these series of posts.  Info that could fill a book or two.  Thanks to all who contributed.  I was struggling with some similar questions myself.

    2Reply
  • Keith N.
    Investor · Raleigh, NC · Member since 2015 · 189 posts · 102 votes
    10y

    @Dawn Roof I would be very skeptical about this deal considering A) they won't let you into the house until an "offer is accepted" and B) they won't attempt to provide you with any sort of rental history.  It could still be a great deal, but you should do extra homework.

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