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. The 2 bedroom units are very large and include 2 full baths. 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. The property cash flows from day one, but bringing all rents to market and continuing with improvements will make this a great long term investment.

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

From experience as an owner of other apartment complexes in the area I know the numbers for this type of property and could see the opportunity. 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We are updating/upgrading all outdated units as the leases are turned over.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.