A Deal From Zillow! Just added 10 Units to my Portfolio!

[Curtis Bidwell]

I found a 10 Unit apartment (6 2-bed, 4 1-bed) that had been sitting on Zillow for more than 6 months!  I added it to my portfolio December 1st. I knew the area and market, drove by and did some basic numbers. The following week my broker called to tell me about it. I showed her my discovery info and we put in an offer. Though I ended up competing with an all cash offer, I won with 100% financing!

I’ll offer some detail in hopes of giving perspective for young investors, as well as for those wanting to move into smaller apartments. Feel free to ask questions and I’ll respond as I’m able.

• Asking price: $399k.
• Purchase Price: $389k (concessions came off the price rather than as a closing credit that would have reduced my closing costs but saved the seller almost $1,000 in commission, excise tax and capital gains).
• Appraised Value $450k (appraiser verbally said $500k but limited his exposure on paper!)

RENTS:

• Scheduled Rent at time of closing: $5655.
• Actual First Month: $6460 (listing agent didn’t include utility charge in proforma! We discovered the discrepancy while going through Income/Expense reports).
• Market Value Target $8370 (anticipate 12-18 mo to fully transition due to upgrades required).
• Rent after 1st round of increases (effective 3/16) $7335. Some tenants had not received an increase in 8 years (paying $525 for a $900 unit!) I had one unit empty at possession that the property management had listed at $625. We had it occupied in 4 days at $895!

Combined EXPENSES have run just under $2k month (taxes, Ins, maint, cap ex, management, utilities, etc). I will cut expenses on insurance ($100/mo less than previous owner), better mortgage terms, care for running water issues, and create other efficiencies (saving $300/mo). I will increase Cap Ex and Maintenance budgets for a net increase of about $500/mo.

FINANCING:
Due to the strength of the deal I was offered 80% commercial financing at 4.25% 10 year note, 5 year adjustment, 25 year amortization. (Payment $1697).

I had previously built a relationship with the Chief Credit Officer of the bank who gave me a signature LOC at 5.25%. I used a portion of this as my down payment (monthly pmt of $350).

UPGRADES NEEDED:

• The property was negligently maintained by both the owner and “professional” management company. Rents were $200-300/unit under market. Maintenance requests were routinely ignored.
• Water was flowing in the laundry room, toilets and faucets leaked continually.
• 2 Ranges had elements missing because they ‘sparked’.
• Phone cable between pole and building was hanging …at neck level!
• Zinsco electric panels had never been updated.
• Siding needs some minor repairs and full exterior paint job.
• Original 1942 Single pain metal windows need replacing throughout!
• Laundry room has no ceiling, insulation falling down.

SOLUTIONS:

• Working with weatherization programs from utilities and local agencies to change out windows and insulation at minimal cost.
• Commercially certified electrician has been installed a new panel and 2 GFI outlets for $300/unit on weekends.
• New Pex piping for water supply bid at $600/unit.
• Increase rents incrementally to existing tenants, and full market at turnover. 1 bed = $750; 2 bed $895.
• Sheet rocked laundry room ceiling.
• Repair siding and repaint in Spring. (Roof is solid)
• New paint, flooring, counter tops in each unit at turnover (aprox $2500/unit).

This was a cash flowing property from the beginning at about $1400/mo. With proper oversight it will increase to over $3600/mo. The value should increase from the $389k purchase price to over $600k given the same cap rate (11.5%). With interior and exterior improvements the cap rate should come down to about 9% giving it a value over $750k! (Anticipated time frame, 18 months).