Potential Property 11 Unit - As a Newbie... Crazy?!

[Emily Edgar]

Hello All, 

First time posting and looking forward to any insight you guys might have.
I've found a property, looks interesting... have ran numbers and cash flows make sense. Located in a good area, nearby downtown and close to two big colleges so hoping to rent out to college students who might not want to pay insane rents for the newer buildings popping up around the area. But I have some potential hang ups - 

Building is OLD, 1900s-1920s ish, agent/landlord has ownded for past 10 yrs and has done minimal upkeep. If I purchase, it'll definitely require some work but I'm willing to input the sweat equity to make it useful. Buliding smells, everything is dated from applicances to the layout to the paint. 

Is it crazy for me to purchase this building, even though cash flow checks out, due to the level of maintenance/upkeep/rehab that will be needed? This will be my first purchase but I've done a lot of research and believe I'm moderately well prepared as a newbie. 

Thank you in advance for any insight you can offer! :) All the best!!

[Maxwell Manatt]

Hello Emily,

An 11 unit as a first property is a great start!

What you want from the Title company is a "Preliminary Title Report." Basically this will show you the tax records of the property, plus any liens, Easements or any other title issue. Also good to make sure you have a valid contract with everyone who is on the deed (or the correct entity.)

You may have already done this but I would highly suggest recruiting a team to help you evaluate this opportunity. Local Multifamily Brokers, Attorneys, Lenders and Property Managers. Of course you need to preform your own due diligence but it can be extremely valuable  to get second and third opinions.

Also make sure to be very diligent in how you finance this property. Talk to at least 4-5 local banks. Present them your financial projections and collect term sheets from them. Once you have the term sheets go back and see if they can sweeten the deal. Not necessarily on interest rate, but on other factors like interest only period, Prepayment penalty and floating rate versus balloon payment. You will be surprised with all the different offers you get and the degree to which they will negotiate if you make it clear you are looking for the best terms.

Also for an older building like that be extremely conservative with the expense projections. Use AT LEAST  50% of the gross income. And have a property manager help you create a line by line budget for the property. Once you have your expense budget Shop the other buildings near the one you are purchasing. What rents are they charging? What kind of Renters are they attracting (are they getting students like you hope to)? Do they pay for utilities? Or Bill Back to Tenants? What kind of amenities to the nearby complexes offer? What does their occupancy look like? What does their turnover look like? From that info you should have a solid idea of what kind of rent and renters your building will attract. If you find that rents are well higher than what the building is currently achieving and that the tenant base around your potential building is higher that its current tenants it might be a great return to do major renovations.

To much to include on a BP post but you are on the right track to go after something big. I have a decent list of multifamily resources (Books, podcasts ECT) PM me if you are interested. Our group is Currently searching for bigger deals in Little Rock AR and Memphis TN.

Best of luck