How to buy a 20 unit apartment complex

Question

what are some things i need to have in order......in order to purchase a 20 unit apartment complex for $975,000.........i have been managing single family properties for over 10 years now and ready to step it up

Brian Burke · Answer

@Danielle Obiorah if you haven't owned commercial multifamily before, your first step should be to talk to a few commercial lenders. Tell them about the property (or type of property) you are interested in and where it's located and ask about loan programs, rate, term, recourse, etc. You'll need those data points to estimate your debt service so you can do an accurate financial analysis.

You should also ask about LTV constraints, DSCR (debt service coverage ratio) requirements, minimum occupancy levels, cash reserves that you need to have and/or maintain, net worth requirements and experience requirements (and start preparing your resume now).

For some of those questions you can get some fairly specific answers. For others you'll get some general answers or "it depends". Those answers are fine because you can drill down and ask about specific scenarios. For example, when you ask about minimum occupancy they might say there is technically no minimum but if the occupancy is lower than X% they'll have to switch to a different loan program that has a higher rate, shorter term, or whatever, and you can plan accordingly.

After a few conversations like this you'll feel much better prepared to make that offer.  Don't wait until the deal is in contract--do it now so you properly prepare.  If you wait until the property is in contract you might find out that your underwriting that formed the basis for your offer price was constructed with inappropriate assumptions.

Before I make an offer I send my lender the rent roll and trailing 12 month income statement along with details on the property and ask for a debt grid (basically a table of potential loan scenarios) so I can verify (and modify, if necessary) my debt assumptions in my underwriting before deciding on a strike price.

Nick B. · Answer

• Underwrite income, expenses, and immediate capex
• Send LOI to the seller
• Negotiate and execute sales contract
• Do physical and financial due diligence
• Obtain financing
• Close
• Operate
• Refinance or sell
• Repeat

Guy Azta · Answer

Hi Danielle, looks like you got a few replies with lists of items you need to have. When you say you managed single family houses, you mean you own them as well, right?

Can only speak from my experience. I started in SFR and then moved to residential multis (3-plex, 4-plex) and now in small apartment buildings (12 unit). Looking back, it has been a major headache. Several people warned me about this. The theory goes that you want to have a property large enough where you can hire a rental agent and a maintenance person on site. While my SFRs have all been occupied with same tenants for many years (I have 6 right now), the apartments have not. The 3-plex had 2 tenants quitting this year, one was in eviction. The 4-plex had all tenants move out  around the same time, combination of evictions and breaking leases. It stood vacant for a few months until we were able to rent the units back again. Cost me thousands of dollars. The 12 unit is in its own league of headaches. Haven't owned it for a year and already had multiple move-outs, section 8 stop payments and had to renovate bunch of units. THOUSANDs of DOLLARs out the door! Gone. Now, to be fair, I still like apartment buildings and the upside is that you can make more money. But it's nothing like SFRs. SFRs, if you have nice middle class houses, are pretty nice and easy, at least from my experience. Apartments, unless you have a really nice one in a good area, are not easy.

If you don't have a job and like to manage your own properties (I own businesses not in real estate and have zero interest in managing any property) and want to learn from the experience, be sure to do the numbers projects correctly, remember that the taxes will most likely increase after purchase and get really good advice from local experts.

Best of luck!

Andrew Johnson · Answer

@Danielle Obiorah I think I'd go along the pragmatic side of things first.  Do you have $300K?  You'll need ~$250K for the downpayment and I'm guessing the bank will want to see another $50K just hanging around as a fund for reserves.  I'd then (just for kicks) Google and download a "Personal Financial Statement" and fill it out.  Most banks (since they carry the note) will want you to fill out something like it and will likely want to take a peek at the "Net Worth" number.  If your net worth is higher than $975K then you're in a good spot.  If your net worth is $100K, well, that's another story.  In your shoes I'd start with those basic steps that *might* be indicative as to if you can "step it up alone" or if you personal version of stepping it up will involve outside capital, some other entity/structure, etc.

If you can't rock it solo then you'll have to start searching on the forums of all of those fun 'Creative Finaciing' threads...

Brian Burke · Answer

@Mateusz Prawdzik for that size deal you'd be best served by a locally-based lender. Ask the broker selling the deal for a couple of referrals. It's always better to call a lender and say, "I was referred by...", it gets their attention because they want that broker to keep sending them referrals. It can also help you get the deal because brokers want to sell the deal to a buyer that I see working with a lender they trust to get the job done.

Anthony Dooley · Answer

First, you need it under contract, so get an agent that has done multi-family deals before. Secondly, you need at least 25% down on most commercial loans. Once it is under contract, start shopping for lenders. They will tell you what else you need such as P&L statements, rent roll, etc. and order an appraisal. You will need to physically inspect the property to check the condition and possibly renegotiate for repairs. You should know your market before submitting an offer. How else will you know if it is a good deal?

James Kojo · Answer

My major steps are:

• Goal Identification
• Market Selection
• Team Selection
• Deal Flow
• Property Selection and offer 
• Due Diligence
• Business Plan
• Finance + Close
• Operate
• Exit

There's a lot of overlap in those steps, and each have a bunch of sub-steps, (like underwriting deals.)

Do you have any particular area that you are asking about?

Since you seem to have a deal in-hand, the immediate must-do's are:  you need to get a good PM on your team, underwrite the deal and have someone who can double-check your assumptions, then start looking for financing. As part of the underwriting and financing steps, you'll need to figure out your business plan, which will include improving, operating and exiting the property.

I hope that helps.

James

Mateusz Prawdzik · Answer

@Guy Azta So what you are saying is that you wouldn't own more than 1 unit buildings(SFRs) unless there is a PM in place? Out of your experience, how much money would you allocate per unit for a lower-middle class unit that will be renting for around 1500? I want to see where my budgets should be on a per unit basis. Should I get down to what's behind the walls or should I just stick to cosmetic stuff if everything is working fine?

Victoria S. · Answer

Good luck! On a side note, how do you find these kind of deals?

How to buy a 20 unit apartment complex

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