1st time out - found 2 apartment buildings.... advice? (long) - Posted by AmyS

Posted by PBoone on May 11, 1999 at 11:52:16:

I agree with you on the expenses on the first deal 21% is fantasy or the seller is wanting to pull a fast one. Any how My main question is “What reasoning are you using for paying retail”? If the guy really as motivated as it sounds he will accept less.
One of the biggest mistakes we have made is feeling like the seller is doing us a favor offering us no money down so we short changed ourselves and lost money in the process. Please do not make the same mistakes.
A brief note last deal we made the seller asked 400K we offered 260K and they accepted. Boy what a lesson.

1st time out - found 2 apartment buildings… advice? (long) - Posted by AmyS

Posted by AmyS on May 11, 1999 at 10:18:57:

Hi all,

My husband and I have been getting into CRE the last couple of weeks. (We actually managed to do two 0 down deals in the past year without really being interested in CRE… go figure).
Anyway, this week we’ve found 2 apartment buildings with very flexible sellers. We were originally going to focus on Single family, but since these came up we thought we’d give them a try.

Deal #1:
24 unit apartment building. Owner needs to sell because his family has a medical emergency. He doesn’t speak much English and he has tenant problems.
Asking ~600K (they claim based on income, but judging from the expenses they gave us, we think this may be flawed… advice on getting a FMV on a 24 unit apartment bldg?)

Gross Income is 98,500
The expenses the seller is giving only come to 21% which strikes me as VERY low. Adjusting so they come up to 35% I get a net operating of 64,022.
There is an assumable 1st of ~350k at 9% - pmts 40,5k/yr
The seller will consider a 2nd, we are thinking of offering at 8% - pmts would be 21.3k /yr.
This would leave 2.2k cash flow/year.

Downsides: This is in a questionable neighborhood. What guidelines do some of you use in determining if an area is too dangerous to invest in? The other downside is the expenses given. They seem far too low. We will ask to see the tax return, but I doubt we will get a peek until after we’ve structured our offer.

Deal #2:
12 unit apartment bldg. Seller is investor trying to get out of the business.
Price : 295k
Asking that the underlying 1st is cashed out (~105k)
Wants 15k down and will finance the rest at 8%.
After running the numbers we get a NOI of ~30k
We think we’ve found a lender who will do 100% 70/30.
We’re thinking of getting a 70% new loan, then asking for a 30% 2nd at 8%. Also, there seems to be a large possibility on this one of getting cash out at close. For example, taking a 70% loan, and a 45% 2nd.
After debt service (at 70/30) there is a cash flow of 5k/year.

Comments??? This seems pretty good to us. However, never having purchased multi-unit buildings before we have some reservations in general.

Sorry this is so long… What do you all think???

Re: 1st time out - found 2 apartment buildings… advice? (long) - Posted by Patrick

Posted by Patrick on May 12, 1999 at 22:48:16:

I specialize in one area of teaching real estate investments. That one
question come up over and over again. With the financial data of income
and expenses that the seller or real estate agent is providing - " Will
this deal be worth it? "

I used to be an ex-real estate agent. At that time it was hard for me to
figure out why a large number of our clients were not approved for many
of our investments properties. We had a sells staff of over 20 agents
and not one including myself (and I was investing in real estate at that
time) knew how to analyze an investment property, prepare a loan package
for the bank or mortgage company or clearly tell the buyer the
1) exactly what the investment will cost
2) exactly what the monthly cash flow will be
3) exactly what the expenses will be, and
4) exactly what his return on investment will be in 1, 2 or even
3 years from now.

The staff in our office had no idea what a goo

Re: 1st time out - found 2 apartment buildings… advice? (long) - Posted by Jessica

Posted by Jessica on May 12, 1999 at 22:47:27:

1st rule: Don’t get involved in multi-units in run down area unless you are so confidence you can solve and handle tenants and eviction problems.

Second, I want to point out that getting a commercial loan is different than obtaining a residential loan. The lender would not allow you to go in these apartments without any cash out of your pocket. Usually, they want to see at least 10-15% of your own investment.

Stay off those until you are really sure you want to handle these tenant problems!


Re: 1st time out - found 2 apartment buildings… advice? (long) - Posted by Irwin

Posted by Irwin on May 12, 1999 at 08:55:17:

You and your husband must have had this conversation: “Honey, it seem like we’ve done okay so far in real estate with very little effort, and in a short time too. Why don’t we do something to screw it all up now, and maybe even ruin our lives financially? I’ve got it!! Lets buy some apartment buildings in rundown neighborhoods. :-))”

Just a word of general advice. Unless you know something about multi-unit management, (or you have masochistic inclinations) stay away from low rent apartment buildings, a business which is euphemistically known as “slumlording.” It’s not a business that is kind to you, and on the job training is very costly.
Deal #1 is a joke. The seller’s “medical emergency” is probably a collosal headache - this property. Expenses are probably closer to 50%. Adjusted out with vacancy and defaulted rents, I doubt this one is worth the mortgage balance.

On deal #2 there are no income or expense figures given, just NOI. Is this the sellers figure? Highly suspect if it is. Whatever you do, be careful about getting overloaned, especially with personal liability on the notes. If one of these deals goes bad on you, it usually results in a trip to the bankruptcy court.
Do yourselves a huge favor, don’t buy either of these, but follow up on what happes with them. Try to find out what they actually sell for and keep your eye on them for a year or three. Then figure out what would have happened to you had you bought them.

Re: 1st time out - found 2 apartment buildings… advice? (long) - Posted by Gary_OK

Posted by Gary_OK on May 11, 1999 at 18:54:29:


I don’t own a Multi-unit property but have tried to learn something about evaluating them because my goal is to get into that business. I am in the process of closing on my first duplex so I will share a bit of my own valuation methods.

2K and 5K pocket money, in my opinion, is not worth getting off the couch for on a 24 and 12 unit property. Maybe you have built in management fees as an expense to offset this??? My duplex will immediately put ~$125.00/month in my pocket and within 12 months, with a few management changes, I expect it to put ~$300.00/month in my pocket. This is the result of a $2000.00 cash investment on my part. A 75% cash on cash return the first year. It isn’t a “pretty property”, however, it is a cash cow.

I determine how much $$$ I want to make on each unit ($50/unit, $100/unit, etc.) and work backwards. Take the gross-expenses-your paycheck = amount left for debt service (NOI-your $$$). Based on the length of time you want to finance and the interest rate, this will give you a maximum offering price. Cut x% off of that and make your first offer. If the seller balks, you have the cold hard facts to justify your offering price. Don’t factor, into the offering price, any rent increases, better management, or any other “pie in the sky” factors. These should be considered, but should be YOUR reward for doing a good job. If the seller disagrees, let them keep the property and turn it around himself. If they want the $$$, then they should do the work.

This leads me to a fair asking price, and it is normally not even close to the sellers asking price. I am not against sharing this info. with the seller to help him understand how unreasonable his price is. Cut a deal that works for you. Income property should produce income. From what I understand about your numbers, I wouldn’t give it a second look at that price.

Once again, I don’t have as much experience as others on this board, but this works well for me. I am interested in comments from the more experienced.