My 1st Apartment Building “Flip” - lessons learned

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Aloha BP community! It's been awhile since my last post. I've been focused on building my REI portfolio. But I have some updates and also lessons learned that I hope the mid-level REI MF investor can learn from.

Updated Good news: I bought a class C Tucson, AZ 19 unit apartment building (10/2018) for $750K, put 20% down on 5 year seller carry (30 year amortization for 6%), and sold it for a whopping 1.2 million. Net Proceeds is about 350K (minus included 40K CAPEX over 2 years).

I learned a couple of things that I hope will help other investors looking at their first class C apartment:

1) Class C is a broad asset class, if you do take a “slum” and decide to add “sweat equity”, make sure you do hire an onsite property manager who has access to “value” sub-contractors

2) Swamp coolers are the most common things to break and get replaced. Don’t band-aid - it’s about 450 for a new one. It will save you time and headache. Especially for AZ.

3) Class C tenants - can abuse equipment/appliances; definitely look at secondary markets for replacements.

4) Drywall, HVAC, and a General “handyman” is essential to the team

5) Numbers driven, know you market and definitely be conservative in reserves for repairs, I would definitely stick to 10% of gross rent roll

6) It is extremely lucrative in passive cashflow if you get things dialed in. It was doing about 10K NOI or got made into a 10 CAP when I got done with it.

7) Stay the course - and don’t get discouraged, some days will be unique. I had to two tenants die in ONE Week!!! One of natural and another that is not. Make sure you understand your legal obligations to your tenant and his/her family. You will need to remind yourself of the “Why”; many days.

8) They are people, and people are odd. I love non-profits and also Section 8. Just right now, it is good to make sure your break even in OpEX and DSCR is covered by those tenants. Tenant diversification is key, you will want some W2 tenants also.

9) Sub-contract or outsource you laundry facilities to someone else. Make sure they do offer non-coin based solutions. In fact, now with COVID all the better. Can’t tell you how many got replaced due to theft and attempted theft.

10) Know your exit strategy and number, is there upside? I had a number, and this even exceeded mine (it was a million). And know your market, as we all know real estate is localized. Even during Covid-19 it is possible to get buyers.

11) Your broker is key, work with someone who is well connected outside your market. The buyer was a 1% from CA.

Hope this helps. Now onto the next deal. Looking at another class C (50+ unit) in AZ at $4-5 million. Ideally would like +8CAP and value add opportunities. If anyone who knows of an off market deal, broker, or is a current landlord in Phoenix or Tucson market - please DM and let’s connect.

Hope everyone is crushing it this year!