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. We learned a lot about the rehab 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. It was also our toughest property to operate due to the buildings mechanical systems and rough neighborhood.

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

It was the largest multifamily property we owned at the time. At the time of purchase we were on a winning streak making good acquisitions and consistent cashflows. We later found out the seller had deceived us about the rents being current and the neighborhood was rough (crime, drug dealing, prostitutes).

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.

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 financial damaging and lost money.

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?

Because we didn't verify rent deposit at acquisition, we had to evict almost everyone after purchase. We improved the tenant profile and increased rents over time. We upgraded the plumbing system and installed wrought iron fencing and automatic driveway gates and secure access 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 had to use a significant amount of our 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 neighborhood. Despite periods of non-existent cashflow and tight budgeting, we eeked 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.

Lessons learned? Challenges?

We improved our due diligence when it came to plumbing and electrical on older building. We do extensive research on incomes and demographics in the neighborhoods. We also learned to verify rent deposits as many tenants were not paying rents, even though the sellers made us believe rents were current.