Too big for a starter?

Question

Hi everyone! I am 24 years old and have a interest in real estate investing! I currently live in a small one building apartment with 18 units. The couple that own the apartment are in there late 70s early 80s. I feel like right now would be a perfect time to throw them an offer. But, i have no idea what the value of the apartment would be. If I was to guess it would be at lest 1.5m Occupancy is about 90% Definitely can use some TLC so there is potential to add value and bump rent. I would say the average rent is 600 a month. Am I trying to go way to big? Also, how should I approach the owner with a deal? Small side note, I don't have any means of putting a 25% down payment. How would I best go about financing something this big? Any advice would be much appreciated!! Thanks!

Andrew Kemp · Answer

Sam Amir I really appreciate the time you put into your reply. You really presented a sort of foundation I can look back on during this whole process. I will definitely be referring back to the steps you laid out for me. I am very excited about this deal although they may not be willing to part with there investment. It will be a great learning experience regardless! Thanks for your help!

Sam Amir · Answer

Woah, woah. You "guess" the valuation is $1.5m? If you really want to buy this building, you'll have to come to the owners after you've prepared. Like you know what you're talking about so they know you're serious. Like others have said, building rapport is pretty important, but if you haven't done this, it might be too late. If you try now, it may appear you have ulterior motives which would be a turn-off. Hopefully you've been building rapport with them since day 1. If not, don't fret. As long as you've been a tenant that's caused no problems, you might be able to get in this deal if you present yourself professionally. Also, since you have no money, I believe your best bet would be to find an experienced investor and partner up with them. Take the cut in equity, it'll be worth it.First, come up with a plan:1. Contact a realtor. Get access to MLS. Look up valuations of buildings around the area. You can use sites like Zillow, Realtor.com, Trulia, RedFin, etc. as well just to get familiar, but MLS is king. 2. Pick up the multitudes of books on how to analyze properties. My recommendation is this one by Frank Gallinelli. Pretty much all you need.3. Start doing calcs on this building. Use the BP calculator here or make your own spreadsheet (we did this and it helps a ton understanding where numbers come from). Find out the rents in the building. Find out if the these rents are under market. Find out if utilities are sub-metered. Ask your real estate agent for typical closing costs, expenses for various utilities.4. Reach out to the owners at this point to see if they would be willing to sell now that you know it's worth it.5. Now that you have a deal AKA the goods, it's time to execute. Make a pro-forma. Learn how here or here. Make a presentation on the property. Include pics of the property, location, why you think this is a good deal, the returns a potential investor would make. Tailor it to appeal to the person you're pitching to.5a. Go to REIA clubs in your area, make contacts. Ask older investors for the connections they use, lawyers especially. Pitch the deal to the club. You're looking for an experienced investor who has connections and a crew for rehab but needs a deal. You, presumably, have a great deal. You both offer value. If the deals not sweet enough, maybe you offer higher equity to your partner or offer to be the property manager. Remember, you're going to have to be willing to work hard and show that you want this. 5b. Pitch the deal on BP. You can see my post here for an example (not the same as your deal, but an idea).6. After finding a partner make sure to vet anyone you partner up with. Get the addresses of projects they've done and do a quick search on public records to see owners. Google their name. Grab a drink or dinner with them if possible. Look for signs of sketchiness.7. Find financing by asking your partner if he has connections with a bank or HML. Make sure your numbers work if you decide to go with a HML.8. Once financing looks like it won't be a problem, draft an agreement with a lawyer to protect you with ownership with your new partner.9. Sign the contract --> profit???There's a bunch of other intermediary steps I left out, but this is it in a nutshell. It's not easy, but if you got the drive, you can make it happen. Also, this is VERY risky, so be cautious. Educate yourself like mad. You seem to be in a good position, don't squander this opportunity.Good luck!

Jay Dewberry · Answer

Hi Andrew. Welcome to BP.I would have to agree with @Zachary C. with building rapport. This could go a long way when you let on to the owners about an interest in buying the property. If you build enough, they may even consider a reduced price or even perhaps owner financing which could solve your financing concerns.Secondly, if it were me, I would analyze the property based on current and potential performance in conjunction with the market. Then you can make an informed offer that you can justify based on physical numbers. That would involve analyzing to obtain the following:NOI(Net Operating income) CAP RateIncome and Expenses (This does NOT include debt cost)CashflowCoC Return (Cash-on-Cash) returnIn my opinion having these numbers goes a long way to determining valuation and being able to present an offer based on you return goals.I’ll try to add on to this later…gotta make a run…but hope this helps.

Rob Milliken · Answer

With all these remarks considered, they are all, good. once you have done all your due diligence, if they do or don't live in one the apartments if you were to owner finance from them you could sweeten the deal for them by offering them one of the apartments with a life time estate, that will cut out an apartment, but you can take the burden of expense off of them, especially if there are single level apartments on the first floor. It may cut in but at the same time it is amazing how nicely that sort of deal can work out. Be sure to fix up the one they would be living in 1st, if you were to try this strategy

Jon Mason · Answer

I would value the property based on per month rent and based on what you said I wouldn't offer more than 1,000,000.

Sam Shueh · Answer

If by now they have not let go the property, there will unlikely to part it in their life time. Ask them how much they want and you have rich relatives.

Andrew Kemp · Answer

Thank you everyone for the input! I will definitely be planning on having some sort of meeting with the owners in the near future. I will try to keep everyone updated on the progress!

Danny F. · Answer

I would have to agree too. Connecting w/ owner is important. Getting to know their wants and desire to give you insight to who they are may also help. I knew of a complex owner (10 units) who ended up selling their place because they establish a relationship with their neighbors who was into real estate. But the catch was that they showed these owners that they also loved the property and would care for the property as much as the owners loved it! Also, as neighbors they had also were social and cordial with tenants over the years.What can also help with you on estimating cost is seeing how much each unit is worth per each unit sq. ft. (i.e. 1000 sq ft @ $50 a ft = $50k * 18 = $900k) then you call look at adding land value. Again, knowing the other numbers to see if it is worth the purchase, doing the due diligence in showing the positive cash flow, noi, coc etc. will help in making a decision and action plan. much aloha, Danny

Isaac Young · Answer

@Andrew Kemp,I am currently looking into financing a 11 unit that is $400k. The numbers look solid, especially with me living in a unit. This would be my first building, and I'm 20 years old right now. My advice would be go for it. But you must understand what you are doing. Michael Blank is an excellent person to learn from. He is here on BiggerPockets.. I have been studying his posts and thoughts intensively over the last week. He explains that his investing in SFH did not prepare him as much as he thought when investing in large multifamily. And that investing in large multifamily is a different animal on its own. He explains that as you find ways to finance the deal, the more comfortable you will get, and you may actually want to get larger buildings! Keep me posted on your progress!

Zachary C. · Answer

@Andrew Kemp, Do you already have a relationship with the owners? Just talking to them and seeing what their plans are, if they have any, might be a good start. You never know what might come of that, you may find an opportunity to help them manage as a part owner and hash out some kind of agreement that they can be completely passive at some point and they keep collecting a share without working at it anymore. If you need financing it might be hard but doable, it may take some creativity.