All Forum Posts by: Leonid Sapronov

I'm trying to analyze a 31-unit in a small midwest town. Right nearby, there's a larger apartment complex, maybe 100 units. The two are essentially on adjacent plots of land.

Would you try to contact the owner/manager of the neighboring complex prior to putting in an offer and what questions would you ask them? Would you tell them you are looking to buy the property next door or would you not mention it?

I really think the bigger complex people could be a source of invaluable information. The trick is extracting it from them. Ideally, if I could get them to answer my questions, I would ask (granted, I may be pushing my luck with some of these):

1) what are your rents and vacancy rates?

2) what is your typical tenant profile?

3) what is the demand for rentals in this area?

4) what do you know about the apartment complex next door?

5) what is your average yearly rent increase?

What else would you ask?

@Joel Owens could you go into a little more detail about how the option period works? Does this apply only in case the seller is financing the deal entirely (i.e. no bank involved)? What are the typical terms of such an agreement?

Thanks!

@Gilbert Dominguez Interesting, this puts a slightly different spin on doing the analysis. A LOT of blog posts and articles talk about allocating such and such % to capex, but few actually talk about estimating the lifetime of existing systems. Does that mean that if the building is close to the end of lifetimes of major capex items, I should subtract the prorated cost of replacing those items from my offer? I.e. if the roof is 30 years old and has an estimated lifetime of 40 years, do I subtract 3/4 of the cost of a new roof from my offer? More importantly, do I do that in addition to allocating whatever fixed percentage I decided to allocated for capex (e.g. 5%) when calculating my NOI?

@Tyler Flagg thanks! Will definitely check it out.

@Randy Landman Yep, estimating high is pretty much the only option the seller leaves me. All in all, this lack of records definitely raises my alert level a couple of notches, especially if it comes to doing an inspection.

@Gilbert Dominguez

Fortunately, I have the current rent roll and should have access to existing leases, although I haven't asked. Evaluation of mechanicals would have to be done by a professional.

@Account Closed

Thanks for the great tips, will have to do a little more detective work.

@Philip Bashaw

Problem with talking to commercial brokers is that there aren't that many of them - it's a small town. Good to know about the appraisals - do you have any idea if they base it on more or less the same analysis (cap rates, NOI, etc.)?

P.S. Just to emphasize - I realize that even if I had the historical data, it's not a substitute for doing due diligence. Yes, I'm trying to do everything "by the book" (The Great Book of BP Wisdom). :-)

If you were doing analysis on a 30-unit apartment complex and, in response to your request to see the last 2-3 years of income/expense statements, the owner said "well, I didn't do a very good job of keeping track of them", what would you do?

I'm practicing doing due diligence on a multifamily and that's what the seller told me after we spoke on the phone. There were no other major red flags and preliminary research shows the property to be in good condition and cashflowing, but it's kind of hard to verify the seller's claims without some historical data.

Should I just do my analysis using known expenses, plugging in reasonable values for maintenance, capex, etc. and not worry about the actual income/expense history? If anything, this will work to my advantage, since I already know that the calculated NOI is lower than what the seller's pro forma claims.

Just now sure how big of a red flag this lack of recordkeeping is on its own and what else it could imply about how the place was managed.

Appreciate any advice!

@Joe Ramirez

One place where you might loose out to the traditional PM companies is cost of repairs. A lot of PMs, especially bigger ones, have in-house repair crews (or receive discounts from outside contractors) that allow them to cut down on the cost of supplies and labor, which translates to lower maintenance expenses for the owner.

That and finding quality trades people to work with is a big challenge.

@Joe Ramirez

Damn MIT kids :-) When something seems impossible (like PM without boots on the ground), you can count on MIT (or Google) to come up with a solution that will silence all naysayers. If nothing else works, they'll build a robot that will knock on doors, collect rents, and knock sense into deadbeat tenants.

Seriously - good luck. Just be prepared for a lot skepticism - what you are proposing is challenging and a quite a deviation from the status quo, but I really hope you succeed. That would be a disruption alright.

Do you see yourself managing multifamily properties and, if so, up to what size?

The boots on the ground comments got me thinking... maybe you could somehow partner with existing local property management companies to provide specific per event services. If you could offer them an incentive to work with you, they might be less hostile to the new competition; plus, it would be cool if you could leverage all of their local connections and knowledge of the local market.

@Jay Hinrichs

That's really interesting. The trade-off between volume and the personal touch seems natural - hard to be personally involved when you have hundreds or even just tens of clients. 

Curious how the returns for the clients compare - do you have any idea if the boutiques tend to be more profitable? Also, I wonder if they are more open to a strategy where a client would finance the purchase and rehab, thus capturing a little more equity for themselves.

@Chris Clothier thanks for the wealth of info!

@Kyle Scholnick

No life lessons here, just sayin there's a better way to talk to people. Back on topic.

Given what everyone has said about the turnkey industry as a whole, I don't expect to hear from many people who hold a lot of turn keys. Many of them may not be on BP at all. As someone else mentioned, your best is to try to get some numbers from the bigger turnkey providers, although I understand you wanting to hear from the investors themselves. Also, I suspect few providers are willing to be as open about their numbers as Chris Clothier has - most of them probably don't have those numbers at all. So maybe a friendly challenge?

If you are a turnkey provider, can you share the following:

1) How many of your clients hold > 1, 5, 10, 20 properties?

2) Are most of your houses sold at full retail based on appraisals?

3) What are your vacancy/turn over rates?

4) What is YOUR definition of turnkey? Specifically, do you go the extra mile to ensure that the roof, HVAC, appliances and all the major mechanicals will not have to be replaced in the next 15-20 years?