First Apartment purchase, advice needed. 12 unit

[Michael Hutchinson]

All, I am looking at buying my first apartment building, assuming my research works out this weekend.  I would love to get general advice to look for, resources, etc. to help make sure I evaluate this correct.  Here is the overview:

• 12 unit property (3 singles, 6 two bedrooms, 3 three bedrooms)
• Being sold from investor (red flag for me)
• I am using rentometer.com to estimate rent prior to first meeting.  That tells me I should get:  $500, $700, $900 for the units approximately.
• Building is being sold for just over $400k (second red flag)

I feel like I have a reasonable understanding of single family, but this would be the first time that I have considered this type of investment.  I am curious on things like regulations to look for, normal required services (i.e. trash), security, etc.  Any help thinking this through would be appreciated as I don't know what I don't know.  :)  Thank you!

[John Baughman]

I thought this was a good place to start for due diligence:

https://www.biggerpockets.com/blogs/1398/46694-top-5-due-diligence-items-on-any-multifamily-property

Looks like the #s say it could be a good deal. Dig in and find the true story, good luck!

[David Dachtera]

@Michael Hutchinson,

Why is an investor selling a multi a red flag? There may be a valid reason for selling at this time.

I don't have enough of the numbers to fully validate the asking price, though it seems low.

Have you seen the property?

[Joseph Gozlan]

@Michael Hutchinson using the 50% rule (in the absence of additional information)  it seems like a 11%-12% cap rate if the tenants pay bills or a 9%-10% cap rate if it's an ABP property. 

This is without knowing much about the property age/condition/area/local cap rates, etc.

I'd say proceed with caution and make sure to run the numbers based on actuals and verify every information you're given!

[Nichole Stohler]

@Michael Hutchinson , rent roll, and actual cost numbers will help -- not pro forma.  You'll also want to understand any capital improvements are likely at some point in the future... as an example, in AZ, we ALWAYS look at the age of the air conditioning units.   Maintaining and repairing those can hurt profitability.   Also, what is the neighborhood like and what kind of tenants does the area attract?  What do the crime reports say?

[Michael Hutchinson]

Thanks all. I did see your note in another thread Joseph and watched the video. Will use that as one of my references. I did request rent roll and vacancy rates, information from local HUD office and plan to talk to police in addition to crime research. I ran about 55 rentals in WV and had an issue with Heroin and Meth (my Dad's properties that I had to fix the situation) ... don't want to deal with drugs again.

This property is a small town (about an hour from CLT) and is under 8k in population.  Census data tells me median income is $40k with a median house/condo value of $131k.   Median gross rent is $720/month.  Crime looks to be about double the national averages, but stable so I don't see in the numbers a spike ... just bouncing around (some up, some down ... i.e. robberies/theft/assault down, rape up slightly). 

I am seeing the property next week and will tag back on this thread.  I looked at sale as an issue as the potential rent looked too high for the cost.  I am using ROE as the primary measurement and the numbers seem too good to be true.  Made me think I didn't understand it well (hence the post). 

All good comments/questions that I will write down to look for. 

[Jeff B.]

Sum the actual rents, multiply by 12 months, then multiply by 10 (GRM). The result is a fair guess on the FMV

[Jeff Kehl]

@Michael Hutchinson that's  $33k per unit which is a reasonable price I would look to pay for rents in the $500-$600/month range. It may be that it's just a small town so prices are reasonable. I'd be interested if rentometer is correct on the rents. Here they tend to be too high sort of like zestimates. Economics are just different in smaller towns than around the bigger metros.

[David Benton]

I would not see an Investor selling as a red flag, they own multis. If I can deal directly with the seller, why not? My model is to buy and sell in 3 or 5 years which is the same for many. It's actually a better plan to leverage up than keeping the property but, I guess, depends on your business plan. 

You need his P&L and Rent Rolls to run numbers. If they check out put it under contract and perform your Due Dil, which part of that can be to verify what tenants are paying in rent. Ask a few of them. Would not use rentometer but instead contact a property manager who manages multis and ask them what market rents are for 1,2,3 BR, xBa, that age, location and amenities property.

[Tom Lafferty]

There are a LOT of ways to get burned buying multifamily if you've never done it.  Be super careful.  How do you plan to manage this?  If you're going to use third party management, and the current owner is self-managing, don't put a lot of stock in his numbers.  Your expenses will be completely different.  Also make sure you are aware of how your state (or the one where you're buying) handles property tax increases for new buyers.  In TX, I am always amused when brokers show the previous owners taxes in their pro forma, knowing very well that taxes are going to increase by $100,000.  

As far as rents go, I would not rely on any online service.  I don't do this when its early in the process, but before submitting an offer, I always go and personally visit comparable properties and talk to the staff there.  For smaller deals, that won't be an option, but you can call similar properties and at least get their rates.  As someone else mentioned, a good property manager familiar with the area will be invaluable here as well.