Purchasing my first apartment building (8 units) for under 350k

[Dennis Perry]

Hey Guys,

First Post. I recently got my first investment property (SFH) and I will be wrapping up soon. In the process of finishing, I came across a deal for an 8 unit apartment building for under 350k. At first glance, it seems like a good deal and I want to proceed with investigating further, but I am not exactly sure how. I need advice.

1) Should I start with the lender or the seller?

2) If the seller, should I approach the agent of the seller myself or employ an agent of my own to do so on my behalf?

3) I know what information I would want to know, but what all professional jargon should I be familiar with in requesting all the information so that the seller knows that I am serious? For example, I know I want to see paperwork on inspections, deferred maintenace (if any), and tenant occupancy history. Is there a term or terms that would include all of that and anything else I would need to make a good assessment?

4) In regards to lending, I have noticed some commercial restate loans are targeted at people investing in the millions and have all kinds of requirements like net worth and 10% liquidity post close. This does not seem to be in the same ball park.  Should I expect the same net worth requirements? While liquidity and down payment are not my largest concern, net worth could be a problem as I am just getting started. This is where I need the most guidance.

Thank you in advance to anyone that can help!

[Joshua Ferrari]

1. I would start with your own ability to close first. See what all your lending options are and have that squared away, with a few backup plans, just in case.

Lending is tightening up pretty significantly, as well, in all facets of real estate.

- LTV's are decreasing (Higher Down Payment)

- DCR's are increasing (Higher Equity in the Property)

- Lenders are requiring up to 12 months cash reserves in operating expenses at closing

- Interest rates are currently down

- Net Worth requirements are increasing

- Rate Locking for loans is being pushed back further and further in the closing process causing an unsettling of knowledge on whether the deal will make sense or not

2. Since the deal is only 8 units, it’s probably a mom & pop owner whom you could approach yourself, but it depends on your end goal. A lot of brokers already have close relationships with commercial sellers and could get you a better deal than if you went straight to the seller. You’ll just need to find out who the broker is, if there is one, and let them know you’re interested in the property. 

3. Typical due diligence jargon for multifamily properties includes: 

- T-12 (Trailing 12 months) Includes the last 12 months of operating expenses & typically any renovations they’ve done to the property 

- Rent Roll includes all current tenants, lease renewal dates, vacant units, rent owed for each unit, rent collected or not, security deposit info, etc. 

- OM (Offering Memorandum) The broker will have the OM only if the property is on the market. If it’s off-market there’s no need to ask for one. Every broker’s OM is different, but it’s typically an analysis of the surrounding area, their version of the financials, their version of a pro-forma (how they think the property will operate after you renovate or purchase the property), what they believe the cap rate to be if purchased at asking and if all their numbers are correct, pictures of the property, current property vacancy rate, etc. 

- Property Tax Information. The good brokers will send you what the current property tax info is & you can calculate from there what your new taxes will be based on your purchase price and what the city will say is your new assessed value times whatever the Millage Rate is for your area. Calling the city for a general idea is usually what you have to do for upfront due diligence. If you get the property under contract, then you’ll need to really narrow down what that number will be. 

This is mainly all you’ll need from the seller, and all other due diligence will be up to you. Be sure to have all your numbers right before making offers. 

4. I don’t see net worth being an issue for a property as small as this one. You could even go the private money or hard money route for something at $350K. If the lending route you choose to go decides they do require a certain net worth, you can always find a guarantor that will sign the dotted line on the lending that will, in essence, have them take on the responsibility of the loan in return for a fee or a percentage of equity in the investment. Their percentage, or fee structure, depends on the level of risk they are encompassing. If the loan is non-recourse, for instance, they might not need a higher return & vice versa.