Sold! 18 unit purchased on land contract. None of my own money!

[Kyle Mack]

Hey Biggerpockets! I wanted to share a recent deal and how the numbers worked out from start to finish on an 18 unit apartment building.

Towards the end of 2015, I was on the hunt for a multifamily building. At the time, I was only earning ~$30,000/yr in an "entry-level" commercial real estate research job (first job out of college). At the time, I thought my only option would be to purchase an apartment building on flexible terms (land contract).

My eyes set on an apartment building that had been on the market 150+ days. After doing some research, I realized that the seller had owned the property since the mid 1970s. The property consists of 18 units (two 5 unit buildings & two 4 unit buildings) - 4 buildings on 2 taxkeys. The property sits in West Allis, WI, a suburb of Milwaukee, a predominantly blue-collar area (B-/C+ neighborhood).

I approached the listing agent with the idea of a land contract. Turns out, the seller was open to creative ideas. In his 60s, he had managed the property for decades and there was no mortgage on the property. The asking price was $689,900. After some discussion, we were able to get the property under contract for $625,000. 

Listing Broker Pro-forma Analysis:

Effective Gross Income: $115,980

Gross Operating Income: $111,661 (5% vacancy, laundry & parking income added)

Expenses:

2014 Taxes: $16,005

Gas/Electric: $23,000

Water/Sewer: $5,130

Insurance: $2,800

Property Management: $4,800

Repairs and Maintenance: $6,725

Trash Removal: $2,200

Total Expenses: $60,665

Net Operating Income (NOI): $50,996 (8.16% CAP)

With the seller, we had negotiated on the price. Since its a land contract, we needed to further discuss the rest of the terms, which ended up being 30 year amortization, 5 year term, and 5% interest rate. The seller would NOT financed the entire purchase and required $35,000 down. I ended up using a business line of credit for the down-payment.

Here's what I learned from the purchase:

1. Verify every single pro-forma number. While the listing broker means well, not every number in the pro-forma proved to be accurate. For example, the insurance number was based on the seller's old policy, which was grandfathered in over the years. The insurance ended up costing my $4,300/year.

2. In the future, it would be smart to call the municipality and check if there are any code deficiencies. Luckily, there were none! In future larger purchases, I will make sure that I check this.

The property was under 3rd party property management. They did an "okay" job. With property management, it is important to "stay on top of things", and not assume that everything is going right. I found out that there were multiple tenants without current leases. Additionally, it is difficult for property management to care for a property as much as an owner will. I concluded that money was being spent on the property that didn't necessarily NEED to be spent. I ended up firing the property management and self-managing the property. 

Considering how HOT the market is, I later decided that now would be the correct time to sell the property. Also being a commercial real estate broker, I decided to market the property myself and save a commission. I marketed the property with the following numbers:

Asking Price: $659,000

2016 Gross Operating Income: $111,607 (one unit is vacant and requiring renovation & most other units had a $10-25 increase in rent since purchase)

Expenses:

2014 Taxes: $16,264

Gas/Electric: $15,563 (with tweaking the boilers, this number dropped $7,500 since the purchase)

Water/Sewer: $4,333

Insurance: $4,300

Repairs and Maintenance: $9,032

Trash Removal: $1,450

Total Expenses: $56,007

Net Operating Income (NOI): $55,600 (8.44% CAP)

There was significant interest in the property, and I could have pushed the price higher. However, I considered the price to be fair and simply wanted to get out of the contract. Within a short time, the property was under contract "as-is". The due diligence period lasted just over 2 months. This transaction was somewhat complicated in that it was technically an assumption of the land contract to the new buyer. In a way, there were two sellers who needed to execute the "offer to purchase" contract: the land contract holder (original seller) and myself. 

At last, the property sold on August 28, 2017. I was able to walk away with roughly $43,000, not counting the cash-flow earned since the acquisition. Currently, I am looking forward to the future. I am seeking new opportunities in multi-family and raising capital for another purchase. This deal was a fantastic learning experience and I think I can leverage this experience to invest smarter in the future. PM me with any other questions!