13 Unit Apartment Complex - Where We Learned Some Hard Lessons

[Omar Ruiz]

Investment Info:

Large multi-family (5+ units) commercial investment investment.

Purchase price: $650,000
Cash invested: $350,000
Sale price: $880,000

We purchased this 13 unit apartment complex in 2013. It was our second commercial real estate deal. We learned a lot about the rehab process and running a larger property operation. We fine-tuned our tenant qualification procedures and
improved our due diligence skills as it was one the oldest properties we ever purchased - built in the 1940's.

At the time of purchase we were on a winning streak making good acquisitions and consistent cashflows. This property humbled us as it taught us about some of our weaknesses and lack of knowledge. In the end I was very grateful to have had this experience on a smaller property because it made our company stronger for the future. If we had made the same mistakes on a larger property, it could have been financially damaging. However, I wish we still owned it because after all our improvements and continued rent increases, our cashflow would be outstanding now.

We had to use a significant amount of our interior rehab reserves for installing wrought iron fencing for better security and invest in the dated plumbing system. We owned other properties somewhat close by, so we felt confident about it, but we didn't fully know the area. It turned out to be a rough neighborhood (crime, drug dealing, prostitutes). We had to remove or evict practically everyone (except the sec 8 tenant) shortly after acquisitions. Luckily we made a good decision to address the security issues first by installing wrought iron fencing on the perimeter; automatic gates on the driveways and secure pedestrian and laundry room entry. Once the property was safe and all bad elements were removed, our jobs become a lot easier. We turned the worst property in the neighborhood into the best and it helped the neighborhood improve as the multifamily across the street went through a full rehab as well shortly before we sold this one.

Despite periods of non-existent cashflow and tight budgeting, we managed to eek out a 9% return to our investors. It was a tough, long grind but luckily we didn't need to make a capital call and our investors hung in there with us.

What made you interested in investing in this type of deal?

It was the largest multifamily property we owned at the time.

How did you find this deal and how did you negotiate it?

A broker let us know about it and we negotiated what we felt was a fair price at $50k/door for California asset.

How did you finance this deal?

We got a loan from Chase and partnered with an investor.

How did you add value to the deal?

We improved the tenant profile and increased rents over time. We upgraded the plumbing system and installed wrought iron fencing and automatic driveway gates to improve safety. We rehabbed the interior by installing nicer floors, kitchen cabinetry and overhauled the showers. We generated extra income by renting out garages.

What was the outcome?

We increased our cashflow and improved the value, but only managed a 9% return on investment in the end due to intermittent cashflow during the first couple of years.

Lessons learned? Challenges?

We improved out due diligence when it came to older buildings and neighborhood. We also learned to verify rent deposits as many tenants were not paying rents, even though the sellers made us believe rents were current.