Getting started in comercial real estate

[Axel Enriquez]

Hello BP community,

So let's dive in, here is a little about me, I have done a couple SFR before in the past but what I really want is to do is large Multi-Family, there is this 40 unit apartment complex in one of my markets I'm quite familiar with the area. I believe I can get the owner to do a 20% seller carry for the down payment and 80% bank financing. Took the deal to my local bank waiting to get approval. So this would be my first apartment complex, any advice anything that you could recommend I do especially during the due diligence period, anything that a newbie may miss. I have gotten rent rolls and requested financial statements for the property to verify that they are actually getting what they say they are getting. Still waiting on them. Of course I'll verify tax records and get quotes from my insurance agent for the property you know the basic stuff. But what else? What else I'm I missing what are some areas in this niche of real estate investing that need special attention, a deeper in depth look at?

Thank very much in advice for your time and for sharing your experience and knowledge with a newbie

[Evan Polaski]

@Axel Enriquez, along the lines of the other posts, initially it comes down to knowing what you are getting.  The financials will likely tell you a good picture as to all the repairs that come into a larger property, that you have likely never seen in a single family.  You need to understand the utilities, who pays what, how are they metered, what's billable back to tenants.  There will be common area maintenance costs that you don't totally have right now: dumpster, parking lot repairs, lighting and security issues, reserves to cover new carpet in the stairwells (if there are interior corridors), house meter for the electric, communal laundry (both income and expense), etc.  

As mentioned, if this is the asset size that you wish to look for, start interviewing management companies. Some will not touch properties that can't support full-time staffs, and some will.  Typically I have seen 3% management fee, plus hourly bill back for labor costs for leasing and maintenance staff.  But also, when you find one you like, work with them during due diligence to build out a budget for the asset.

Finally, you then get into the seller carry and the potential issues with financing.  Depending on the loan amount you are thinking about, if you haven't been told yet, I would expect a 1:1 net worth to loan balance and about 10% liquidity covenant to come with the financing.  I.e. a $1mm loan would require the owners to show $1mm of net worth and maintain $100k in liquid assets, which real estate is not considered liquid.