First apartments under contract

[Ken Nyczaj]

Hello all,

Wanted to write a little bit about having my first apartment under contract. It was only one apartment and then recently another deal came through the funnel and now two apartments are under contract. Both on the eastern shore of Maryland, one in Kent County and the other in Queen Anne's County. A 7 unit residential in Kent County and 10 unit mixed use in Queen Anne's County. Sometimes it seems to be how it works, the deals just start compounding on each other after enough marketing and word of mouth, might be pushing our team to the limit on this especially with two flips going on simultaneously, but it seems like it will be worth it in the long run getting through these challenges.

Some of the challenges have really been the construction and permitting processing that are going on. Both of these apartments require significant work and are more like an apartment complex (large houses divided up into apartments) than an apartment building that are both over 100 years old. Definitely frightening due to the age of the structures and certainly wouldn't be getting into them if the GC on our team didn't have 30 years of experience in extensive renovations and new home construction. Both will essentially be complete gut jobs, and replacement of exterior structures as well- roofs, windows, siding, etc. Any vacant units we will go in and completely redo, and then cycle the current tenants to these newly renovated units if they'd like to move and upgrade. With how competitive it is here in Maryland, and it seems how most markets are, our niche seems to be highly  distressed, damaged, dilapidated buildings which most people pass up.

Wanted to emphasize to anyone else out there getting into these that it's all about having the right people around you- contractors, inspectors, lenders, local legislators, property managers, attorneys, title companies, and for Maryland having someone that is a lead inspector is huge and make sure they are experienced! Maryland lead laws are very strict as they should be.

On the mixed use we are running into some questions in getting the appropriate sewer and water allocations because the one unit in the ten unit complex will be a laundromat for the apartment complex and the volume of water is of concern for the town. It's the only commercial unit in the complex and is required to be so because of the town laws of having the frontage be commercial to keep a historic feel to the main streets. The laundromat seems to be a decent idea on paper, and we found a local company in Baltimore to split the revenue with us 50/50 and supply all the equipment and do the required maintenance that may come up. This will be self service as well as full service, we will likely staff two people, one in the morning shift and one in the afternoon, to do laundry, fold, hang, iron etc.

We are working with a local lender who is asking for 25% down on the purchase price and 20% down on the renovation budgets, which for the 7 unit is around $160,000 renovation budget and the 10 unit is around $550,000 renovation budget. With a year of interest only period which is fantastic to help with cash flow. For each property we are buying at a lower cap rate with knowing they are value add, I don't see an issue buying at a 6 or 7 cap if after a year or two you can increase the cap to an 11 or 12. Especially when the first year is interest only as it greatly helps with cash flow when there's some vacancy due to renovations occurring. Depreciation will help with taxable income and we are likely doing a cost segregation on both of these apartments because there are so many assets to retire, as well as, starting to depreciate the new assets we are putting into the property making our taxable income minimal.... hopefully!

Currently, we are set to close on one late January and the other late February. We are working on getting state grants and local county/town grants for these properties to help with the renovation costs. Both state and local grant agencies seem very receptive to the rejuvenation of these properties and their towns, and we are hopeful we'll find a grant that will partner with us.

Thank you for reading and if you have any suggestions please post!