I think I found an 8-Unit Apartment deal. Can/Should I Pursue?

Question

Hi All,

I'm new to this forum so here's a bit of background on myself: I'm a young, new real estate investor that currently owns 1 residential investment property (it has 1 main house and 2 accessory dwelling units in the back, so 3 units total. I think this was classified as a residential multi-family). I'm currently renting to students by the bedroom, and my projected profit is approx. $2k per month once the main house is completely rented out.

Now, I have  a lot of questions on commercial real estate (multi-family/apartment) investments. I was browsing Loopnet and found a CRE deal that looks fairly promising. The list price is $800k for an 8-unit apartment. There are (5) 1x1, (1) 2x1, and (1) 3x1. That only comes out to 7 units so I'm not sure what the 8th looks like. It was built in 1924 with wood frame construction, so that's where I'm a bit skeptical. The sale notes mentions the single two-story building has undergone major renovations within the last 18 months. As such, the pictures they've shown looks like a result of the renovations, but I'm not sure if all the units are like that (i.e. new granite countertops, etc). It is listed at 5,600 sq ft on a 0.15 acre lot size. It's also located in a very convenient neighborhood and I reside just a few mins away.

For a CRE loan, I'm not really sure where to begin or if I even qualify for one due to my limited history in real estate and whether I have enough income/capital to obtain this type and amount of loan. Is the process very similar? How do I know if I qualify for this type of loan? My family and I started an LLC, but we've obtained loans in our personal names for houses. My brother owns a similar investment house to mine and we have our tenants pay to our LLC directly. Eventually, we want to put the properties in the LLC's name, but still new to all of this!

Don't really want to rush or be too greedy on trying to purchase our first small 8-unit apartment complex, but this sounds like a decent deal, maybe if I can purchase it for $700-750k? They mention a 7% cap rate too. Where can I even begin? Should I pursue this opportunity?

Any help will be awesome and greatly appreciated!

Thanks,Kelvin

Michael Swan · Answer

Tread very lightly!! Read David Lindahl's Multifamily Millions and read it like you are a student and your financial survival depends on it.  If you don't follow proven methodology and you don't know what you are doing, you can lose a ton of money. You need to get lots of education to do true Multifamily Apartment Commercial.

Heed my warning!! I lost $300,000 on my first 2 apartment complexes and learned my lesson the hard way and sold those two dogs this past December and would of been making $200,000 cash flow per year, instead of the current $160,000 cash flow.  Now I have 8 apartment complexes, 4 single family, for a total of 122 front doors and counting!!

The commercial brokers lie and sellers lie too.  It is a vicious cycle.  Often listings on Loopnet are only there because the real buyers don't like it due to being a bad deal.

I only buy value plays now that are approximately $100.00 or more per unit under market rents in solid C plus blue Collar hard working neighborhoods. These are pocket listings for burnt out old sellers that are done and have the properties primarily paid off and are not doing this right.

Buyer beware!!  The complexes that look good are not where the potential exists.  I want parking lots a mess, dilapidated fencing, high flush toilets, high flow aerators on kitchen and bathroom faucets and High flow shower heads, poor looking landscaping, siding etc.. I want to purchase at $5,000-$8,000 per unit under anything else sold in that area same size units the last 2 years.  I want the worst looking complex in a solid C plus neighborhood.

I am really wanting the worst Property Manager ever currently managing the complex.  You know who that is?

You guessed it.  The seller is managing the property.  Plus, a huge bonus is if the seller is living in the complex and is way too close to these lower class tenants, due to him/her rigging things instead of replacing cap ex items.  That encourages a lower class resident paying very low rents to stay and not tell the seller when their place needs costly improvements completed.

It is a losing recipe.  Sometimes you get drug use, prostitution, and just a lower class tenant base.  The seller is cutting costs in the wrong manner.  Often it is comical!!

Most times these sellers are in their late 70's to early 80's and are still doing the landscaping, cleaning common areas etc... too.

I buy the complex, improve the image of the complex in the community, remove the bad element, slow payers, non payers and replace with a much higher class tenant, which attracts a higher class tenant, replace things, install water saving features, provide a much better living environment for residents, raise rents substantially, increase NOI dramatically and correspondingly exponentially increase the value of the apartment complex in a 2-4 year period.

Then, 2 choices. Refi and take out all money invested or 1031 Exchange into a March larger complex.  If investors in Deal, sell in year 5 and give back 100% total return on their investment as our goal. If they invest $100,000 our goal is to give them $200,000 in total return.  Of course those are just projections.

I love this stuff!!  If you are a newbie, you won't get those incredible repositioning deals I am getting.  The Brokers send you (newbies) really bad, supposed yield deals and if anything goes wrong in the first 6 months on a yield deal, you vastly overpaid and in year 5 when your loan percent goes from 5.75% to 7.75% which is the current trend, you are screwed.

Swanny

Alina Trigub · Answer

@Kelvin Choy

1) Congrats on finding the property and on starting out young!

2) Commercial properties are evaluated based on the income. So you'd have to use a commercial property evaluator to see if this one makes sense financially. You can find them on BP under Tools. Alternatively feel free to PM me and I'll send you one.

3) In terms of getting a loan under your name versus LLC, you'd probably want to do it through an LLC to keep yourself and your family protected.  I'd personally open a standalone LLC for this property only, but I'd say you can consult with attorney to determine what works best for your personal situation.

4) As for the being qualified for a loan, the best is to speak with a specialist. @Upen Patel perhaps can help you out.

Have additional questions, feel free to PM me.

Best!

Bjorn Ahlblad · Answer

Absolutely look into it further. Alina above, gave you some important pointers move along one step at a time, skip nothing, and be extra diligent in this market. Any offers make them contingent upon inspection. The hype in many areas on caps seems to be '5 is the new 8' lol. Don't listen to any of it. The few sellers that are on the market, have all got ribbons on their dogs! Best of luck and keep us posted.

I think I found an 8-Unit Apartment deal. Can/Should I Pursue?

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