Does partial Multifamily sale work?

[Punit Kumar]

Hi,

I found a reasonable deal with an above average cap rate (5% vs 4%) that will have a positive cash flow with the current market interest rates. Will send out a detailed post on the deal to get input on the number and confirm my thinking. There are a few issues with the deal that I would like to have input from experienced multifamily investors.

The seller(s) own 200+ doors in this apartment complex and selling around 20 of them. Each of the unit has its own APN and is built condo/townhome style. All the 20+ APNs are in individual buildings but are somewhat spread out across the complex. They are recommending using their existing management company which could be potentially the owner of the complex. Here are the questions/thinking I have that I will appreciate input on:

1) Have you seen such deals where a large complex is partially sold? I am trying to figure out the real motive of doing so – is it multiple owners with some of them leaving or owners reducing their investment or some other reason…

2) Since I will end up owning only 10% of the doors how do I ensure equal marketing as the doors are still part of a single complex? Won’t the management prioritize their 90% apartments over my 10%? Is this something doable through agreement with the management company?

3) How do I add provision to remodel/value add my doors independently and increase rent? Will that be even possible?

4) I am planning to negotiate maintenance of the 20 doors to be separated from the management company and to be done by me as I think the current expenses are too high and there is room to reduce and improve net income. Will that be possible? Will depend on the seller but I think there should be a way to come up with some fee for common area maintenance and rest taken up by me. Thoughts?

5) Will I have problems in selling such 20 doors in the future as it seems to have restrictions compared to an independent 20 doors?

6) Has anyone dealt with and successfully bought -> managed -> value added -> sold such a property? Will love to hear any such experiences

I know it is a unique situation. The numbers look good – that will be qualified during due diligence – and seem worth going through some creativity to overcome such restrictions/challenges.

Thanks

Kumar

[Ryan Daigle]

Hi @Punit Kumar. I have underwritten and evaluated a variety of broken deals in the past. The only time I've heard of such an ownership split work within the same property is if you own 90-95% of the units AND have operational control of the whole property (i.e., YOU are the one that controls the HOA, property management, etc...).

In this deal where you are buying into a minority number of units AND are at the whims of somebody else's managements would be a hard pass for me. Even if you were to get into the deal and get to cash flow, your exit will be severely compromised as many lenders (and thus buyers) will not be willing to finance such a deal.

Think very hard about entering into a deal where you do not have full operational control. PM and expenses can make or break any deal and you want to have full oversight!

Hope that helps (without being too negative 😬)?