6-Unit Apartment Complex. My first investment. What pitfalls?

Question

Hey guys & gals,

I'm going to invest in a 6-unit complex all cash. This is my first adventure into real estate rentals. My goal is to run it myself for a year, and cash out re-finance after I get a track record.

The numbers work ~ 500k sell price, 5 out of 6 rented at 950/m each.

1) it's 6 units x 1bed/1bath - is there a pitfall with 1bed/1bath units?

2) I want to buy in cash and hold into an LLC for protection. Will this harm my ability to refinance down the road?

3) It's an older product at 1940. Passes lead free, with recent renovations. Roof redone 2017

4) The units don't have laundry. There is room in the basement, but it would expose the guts (furnaces, meters, water tanks) of the house to tenants. <-- I think this is a pitfall I might be missing. Each unit is 550sqf. I am not sure there is room to add it into each unit. What is a way to solve this?

5) Some more expensive apartment complexes were built this year adding a lot of product to the market. These are higher end units at 1700/m+. A lot of them have been added into the market. This could be another potential pitfall.

6) Pristine A+ location.

Basically what I'm asking is: what are some things/traps I should be mindful of before investing.

The numbers work out.Thank you for your time and knowledge. I appreciate you.

Daniel

Bjorn Ahlblad · Answer

Account Closed Rates will vary by market..........In Wa they would run maybe 800 dollars. Make some phone calls for licensed inspectors in your area. Make sure you see the inside of every apartment. No exceptions.

Bjorn Ahlblad · Answer

Account Closed What others have said and don't rely on numbers from the seller or his broker. Get your own. Have the tenants and LL sign Estoppel Certs verifying everyone is on the same page. Review the leases. Any deposits and pre-paid rents get them at closing or you will never see them. Congrats and all the best! 1940 was a while back get the property inspected by a pro.

Matt Moreland · Answer

Hey Account Closed! Nice choice making the decision to get into real estate investing, what an exciting new chapter.

As far as potential pitfalls - there are a few that I would be mindful of on a 6-plex built in 1940. Plumbing is something to check out, most MF properties that old are going to have some backups in the sewer lines that will need remedying or replacement, so get some quotes and consider budgeting for that. On electrical, make sure that it is in good shape and nothing is overly corroded or in need of replacement. Some or most outlets are most likely not up to current safety standards, and could need replacing in order to prevent any liability if there is a resident injury or fire related to non-GFCI outlets.

As far as the LLC goes in protecting you, at the end of the day it is not too hard to pierce the corporate veil if someone really wants to get aggressive with litigation so I would do it but not expect to be completely protected from any and all things that can go wrong.

The laundry pitfall is a great opportunity to force appreciation by installing a laundry room down in that basement and increasing that NOI. Put up a simple cyclone fence with a lock to keep residents from accessing any furnaces, boilers, etc. (moreso as a risk to them not to your equipment) and utilize the rest of the space.

Being an older property, it is likely VERY inefficient as far as utilities go, particularly water. Might reach out to someone like Anselmo Torres or someone similar who offers great products that cut utility bills significantly and boost your NOI.

Same for electric, see if you can't get it individually metered during that first year.

Those brand new units should not be too much of an issue for you, as the $1700/mo tenants are not likely going to be looking at the $950/mo units, so that should not cause you too much trouble!

Hope this is helpful, it sounds like you've got a great opportunity in front of you! I'm excited for you!

Account Closed · Answer

Thanks Bjorn!

Account Closed · Answer

Thanks Bjorn - what is a good average rate for an inspector?

Thank you for sharing those tips. Great help.

Account Closed · Answer

Thanks Dan! Good tip, will run for this tomorrow

Account Closed · Answer

I forgot to add that the building does not have central air. It gets hot in summer. This is probably a big pitfall I forgot to mention. What are your thoughts?

Account Closed · Answer

@Matt Moreland

Brilliant! Love it. Exactly what I was looking for. My thoughts for the basement laundry room exactly the same. I appreciate your input! Thank you!

Dan Travieso · Answer

Congratulations. Numbers look good but like @Matt Moreland said there will no doubt be some expenses to get the property up to code. If the owner had it for a long time he may have been grandfathered in on some code updates but once it sells you will be responsible. May be a good idea to go to your city/ county permit office and have them run the address to see if there are any updates that they are tracking you may need to make as well as the timeframe you will be expected to. There could be alot of expenses associated with these mandatory updates so best to find out before you purchase so you can factor those costs into your budget.