Cheyenne, WY 7 Unit Apartment Complex

[Jeff F.]

On December 2, I closed on a 7 unit apartment building. When I made the offer, I saw a lot of things, but the two most common were disaster and potential. Due to the size of the place, the insane income numbers, and the way that the first 6 days of ownership have gone, I figure i'd do a deal diary. I'm hoping to update this every 3 months or so.

This was an on-market deal that I found, owned by a guy who had inherited it from his father in law. He was absolutely done, and did not want anything else to do with the property. It is in rough shape, and comes with the types of tenants that will put up with the extremely poor condition that the  property was in. However, the income numbers were good, the location was good, and it's got a huge upside. I decided to go for it. Time will tell if I'm a fool or a genius.

Deal Stats

Purchase  Price: 160,000

Down Payment: 40,000

Gross rents (when full) 3,040

I closed late in the afternoon friday, dec 2 and decided to pick up the serious work of finding a property manager and dealing with the utilities on Monday.

Monday began with calls to the utilities, informing me that the seller was paying ALL utilities (they told me that I'd be paying water/sewer/trash and electric only for all units). In addition, the kind folks at the water department told me the building used 60,000 gallons of water last month, which was exceptionally high compared to its average use of 40,000 gallons. I grew up here in the Western US, and not only is that devouring my margins, there's not a lot of water here to waste and that's practically criminal. I dont know how many gallons per month an efficient 7 unit would use, but I can assure you I'll come close to finding out during this turn. After getting all the utilities in order, I started calling property managers. I called between 15 and 20, and many took a day or two to call me back (tossed, unresponsive) a few said they'd go drive by, and called back after and said they were not interested due to the condition. There was one willing to work on it, and this group has a broker with a background in house flipping. I set up a meeting for thursday morning for a walk through and tour of the 2 vacant units.

I met the property mangement broker, assistant and both maintenance guys, and went to let them in the first vacant unit. I knocked (I dont know why) and someone said "one minute". The tenant I believe was pretty shocked to see me, as I was him. I was under the impression that the unit was vacant. We chatted with him a bit, and he produced a lease, as well as receipt for payment for rent in december (Which I was told was not collected). He also informed me that the stove in his units (as well as 5 others in the building) were not functioning. We thanked him for his time, and went into the crows nest (the studio apartment at the very top) and looked around. They agreed to provide a bid for me for the work, and we went downstairs to check the mechanicals.

We spent a bit of time downstairs with the mechanicals, and discussed the strategy that I had laid out to widen the spread between income and expenses on this property, as well as a "Please do this asap" list I had prepared. Here's what was on it:

1. Collect December rents
2. New leases for all tenants - month to month - (except the new one, who is on a 3 month lease), that has the tenants paying the Gas portion of the utility bill for their unit.
3. Replace a few broken windows and siding as required by the insurance company
4. Efficiency upgrades
   1. Water: Things like new toilets, faucet aerators and showerheads
   2. Lights: LEDs are about the only think I can directly impact here.
5. Implement a RUBS for the water/sewer portion of the bill at some point in 2017

They were on board with the plan, and were happy to help and excited for the project. I went over and signed the agreement (3 years, 10% PM fee) at around 1130, dropped my daughter off at school and went to work.

Then all hell broke loose. 

I get a call from the seller - apparently he's got the rent check from the new tenant, and he'll drop it by tomorrow, but none of the other rents have been collected. The person who was living in the crows nest (seriously, so gross) who they had to have civilly committed to get out was living in one of the other units with some guy, and I should under no circumstances let her move back into the crows nest, and she will ask. I was also informed that unit 7 was now empty (this is currently pending verification) . I thank him for the time, and start working again.

A few minutes later, the gas company calls. Someone is in the mechanical room in the basement, says there's a gas leak and I need to get over there right away. I ask if he's serious as I was in there less than 3 hours prior and didnt notice anything. He says he is. I call up the property manager, tell them the situation and they send someone over to get the keys to the building and head over. I dont hear from them for a while, then an hour or so later I get a call saying I got red-tagged by the city. The property manager has an HVAC Guy already on site, and they are dealing with some sort of backdraft issue that is filling the area with carbon monoxide, and there's a gas leak somewhere. Still unsure as to how it happened and who told the utility, but that is an issue for another day. 

So, an interesting first 6 days of ownership on the 7 unit building. I did get some good news from the property manager that my estimated rents after the units were turned were low by a fair bit, which is awesome. 

Stay tuned for update 2.

[Jeff F.]

It has been a LONG While, but I've finally (I think) got this building under control. 

I was able to find a new contractor and get some small problems taken care of at the large apartment & get it rented. Tenants who were looking to move out for more space ended up moving into it, so it worked out well for everyone.  I gave it to them a bit below market, and further discounted it because he's going to take care of the shoveling & lawn at this property. Having a tenant do it for a bit of money has been something that has been pretty successful for me in the past, so I'm happy to not have to worry about it. He's also been doing some light maintenance for me, which has been a huge help. 

I had a tenant move out, as well as the above tenants move into a vacant one, so I had a pretty tight feb/march (there was an empty at another one of my units as well). I ended up getting some significant work done on all of them so while they were not producing the were costing me money, but I really am happy with how they turned out in the end. I was able to raise rent on each of the units that ended up coming empty and got some good tenants in there, so im going to be +1000 or so per month in may vs feb, which will be nice.

Unfortunately, im still carrying a bunch of debt on the property, and have not yet found a solution for it. I'm going to keep working at it and try to refi in the coming months, but who can say at this point. Right now, it's going alright, but things are far tighter than I'd prefer them to be. This hasn't been a super quick & rosy deal like I had imagined with with me wandering off with a 6 figure cash out check after all debt but it's still going to be alright (I hope). I've been able to significantly increase the rent on the building, and hopefully that'll increase the value. Here are some final numbers

Gross rev: 4270

expenses: 2577

That's where we're at for now, and there's still a few ways to make this better. The studio is currently empty and i'm leaving it that way for a while to build up some cash/pay down some debt. It's awkward and would be hard to rent, and after the last tenant took apart the plumbing it's been unrentable anyway. 

Once that happens, the next step is to get the electrical worked on, which im currently paying because the building isnt separated out. it's costing me $300 of that 2577 per month, but up until now it has been small potatoes. It's probably the biggest expense at the property I that I can reasonably pass off. 

I had taken to calling it a dumpster fire for a while....funny thing about that is that I ended up getting an early morning call from a tenant about.....a fire in the dumpster next to the property. Some of the siding was melted, but other than that I was pretty lucky.