Would diversifying to SFR make sense

Question

Currently have a 78 unit apartment complex that currently manage in house.  Have a excellent non-recourse loan and assumable when time comes.

When this is put up for sale a 78 unit complex numbers are tight when a property management company is in place.  Management in this area is 8% + and manager / maintenance wages are high.  Need more doors to be attractive if not independently managed. ( If % rates goes up we do sit perfect tho)  Other Multi- in area is limited that is for sale or the price is not workable.

So my thoughts are to start buying some single family homes as our market is still way down.  Have 1 under contract and would like to have more.  Having the apartments every day have traffic of family's that need a house because of their size and current tenants that are wanting a house.  On my end getting a house occupied is not a worry. It is just what it will bring to the table when the complex is sold.  All the homes would be in a 1-5 mile radius.

Would having SFR's that is positive on equity / revenue along with a 78 unit complex work down the road next 3-5 years when put up for sale.

Doug B. · Answer

Just saying over the last 5 years average 3 tenants a yr that have to move from one of our  2br Townhouse to a 3 br house / Apt elsewhere because of family growth. They are or have been the ones you would want in a property.  Also, have traffic weekly that if had a 3 br house / apt could have something to offer.

My market at moment sfr still is a buyers market.  I have no fear of leasing any of homes purchased.

I was wondering if a mix of 78 unit complex and residential would be a good sale package.  thoughts now is to keep the 2 apart and pick up few multi that to get closer to 100 doors there. Keep residential long term and sale individually when market improves.

Doug B. · Answer

Aaron the way lending is currently only options for some would be a lease to own.  Will give some thought to that.

Thanks

Aaron Montague · Answer

I like the concept.  You are filling the value chain for people for many years.  You might also want to look into "lease to own" for your SFH as well.  If you've got solid, non RE, investments, their down payment money could be making you even more cash over the lease term.

Aaron Montague · Answer

@Doug B. are you saying you'd like to buy some SFH as the next step for your tenants when they outgrow your 78 unit apartment complex?

Bill Gulley · Answer

Agreed Doug, I understand what you're saying. As to the future sale, I don't know your local market or the players, you may have someone interested in taking both types. Understand that self managed is a job too, just that many in apartments don't take SFDs. Either way, you won't get hurt, buy'em! :)

Doug B. · Answer

Speaking from my experience in my market 78 units is more of an individual owner managing the property.  I feel I need 100 door / units to make and get top dollar as in all likely hood would be ran by a management company by new owner.

My area the complex's that are 20-60 units that might be for sale next few years are class C-. Would not be interested in re positioning them when plan is to sale in 3-5 years.

This area does have duplex / tri / 6 plex's that could be pick and get to the 100 door threshold I feel is needed.

Correcting the radius if was either residential or multi to pick up would be 1/4 to 2 miles from complex.  On site could easily handle.

I just did not know how residential rental's would fit in a sale with a multi -family  complex.  Plan will be getting to the 100 door count and will try to pick smaller multi. properties. Still proceed in buying residential and renting as my area is a buyers market.

I follow you Bill.  Will keep multi together and residential will keep in a different ball game.

Bill Gulley · Answer

Welcome to BP, Doug!

Rather hard to follow, so you're asking if the complex would be more marketable with SFDs included as a package on 3 to 5 years?

I'd say that having a combination could influence the asking price, as the SFDs can carry more of a margin than the complex. Saying you can buy a 100k home, put lipstick on it, get a premium rent and justify a future price of 120/125K. You complex will pencil out to rents, it's likely what it is, topped out in good condition, in line with the market.

You might find a buyer interested in taking it all, but bulk SFDs are sold at a discount too often, rarely will 10 sell together for what they bring individually.

Not really enough information to say not knowing what you're willing to do. Like getting some good deals and throwing them in on a deal breaking even to pad the higher price required for the complex.

78 units sounds like a nice number/project. But I see the issue, which is why I never tried to go there in may area, is that you are at the top, or a little above, of the economic propensity for the market of larger projects, meaning smaller would be more marketable to a larger group of potential buyers, or as you see it, a larger project is required to attract larger investors.

I'd consider the properties adjacent to your complex first, can you buy those? Is there anyway to expand what you have rather than having dispersed units in a 5 mile radius? Larger investors like on-site management.

Your situation is much like one we had in consideration of selling off high-rise and multi units here with the PHA. Selling off a complex of 50 to 100 units had more interested buyers than 300, but at 300 the price dropped per unit, neither option was attractive. So, we bit the bullet so to speak keeping the 1,200+ units in inventory.

Saying your numbers are tight when you put it on the market seems to be saying the price you require is to high. If the loan is assumable you'll probably find more buyers by seller financing at a more marketable price with interest income wrapping the debt, this would allow more to work into ownership. :)

Would diversifying to SFR make sense

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