44 unit value add apartment complex with owner financing

[Marlon Messer]

Investment Info:

Large multi-family (5+ units) buy & hold investment in Orange.

Purchase price: $1,500,000
Cash invested: $400,000

44 unit apartment complex built in late 70's and early 80's with (24) 1 bedroom and (20) 2 bedroom units purchased as a value add opportunity. Upon meeting the seller I was quoted a price per unit and at this point I knew the property could be a great deal thru my experience of owning several other apartment complexes nearby. The 2 bedroom units are very large and include 2 full baths. As a result of owner other 2/1 units nearby I knew rents were $200-$300 below market. Almost all the units needed updating with the exception a 4-5 units, and even those rents were under market. I began due diligence which had a few interesting issues to deal with as a result of a water well system and sewer treatment plant which services the property and requires a state licensed operator. I am currently trying to have the city provide water/sewer so I do not have to continue dealing with the state and the additional costs associated with operating the systems. This will be a major costs to get city water/sewer but could be a great capex investment and avoid the costly expense of operating the systems. After completing due diligence the seller, a bank executive, was willing to owner finance the deal. I could have received traditional bank financing but decided the terms offered were good even though a bank would have offered a lower interest rate. The owner financing is only for 5 years at which point I will refi with a bank, unless the seller decides to extend the terms. Owner financing was also the better route for both parties as a result of dealing with the state in transferring permits and operating rights on the water well and sewer system, which is a slow and arduous process. We began meeting with the seller during March 2020, the beginning of Covid, and were set to close the end of August 2020 but that was further delayed 5 months as a result of hurricane damage to the property. We did get new roofs on all the buildings through the seller's insurance. The property cash flow from day one, but bringing all rents to market and continuing with improvements this will be a great long term investment.

What made you interested in investing in this type of deal?

From experience I know the numbers for this type of property and could see the opportunity for immediate cash flow. Also, I already have full time maintenance and property managers on staff so scaling makes sense.

How did you find this deal and how did you negotiate it?

My bank informed me the seller, an executive at another bank, may be interested in selling the apartment complex after 20 years of ownership. The seller's wife was more interested in flipping homes than managing apartments. Both parties are long time established residents with solid reputations so negotiating was short and sweet. I knew exactly what the numbers could be, and the price/unit was great so I did not need to negotiate a lower price, although I did try to lower the down payment.

How did you finance this deal?

$400k with owner financing for 5 years on 20 year amortization schedule at 6% interest at which time I will need to get bank financing. But I have a feeling the seller may seriously consider extending the terms beyond 5 years considering I have been paying more than the note requires. Or I may decide to get bank financing anyway with lower interest after I have all the units upgraded and at market rent. Down payment came from cash on hand and cash out refi of a free and clear rental home.

How did you add value to the deal?

We are updating/upgrading all outdated units as the leases are turned over. Upon transfer of ownership we inherited 6 vacancies which we immediately updated or rented for market rate.

What was the outcome?

I am a long term buy and hold investor and rarely sell, even though I should with a few properties. This property will be no different and will continue to provide excellent cash flow for years to come, especially with the strong economic activity and construction projects in the area.

Lessons learned? Challenges?

It never hurts to ask. Even though I was dealing a Bank executive, and was not sure he would be interested in owner financing, he saw the value in it as well. The main challenge has been dealing with the state and other governing bodies in regards to the water well and sewer treatment plant.