BiggerPockets

Im a young investor - relatively new to the game. I have built up to acquire a 16 unit apt complex worth roughly a million. Here are the numbers

Gross rents - 13200/month 158,400 /yr
Operating costs avg range-82-88k /yr
Net - roughly 67-75k factoring in 2% -5% vacancy range

The mortgage is at 200k at 2% over 10 years so about 24k a year bringing my net down to 43-51k

The building is in MA and I'm currently living in Texas- I'm managing remotely using people for books, repairs and rentals (my net factors in their pay). I have about 80k in stocks and 50k in cash on hand and am renting in Texas.

My question is this: what are my best options in my position to parlay what I have into something more. Should I trade up to a bigger property? Should I leverage it to buy a few smaller fixer uppers in Texas to rent? (Austin area) I feel that with my situation (800k roughly equity- 50k passive cash flow-130k cash) I could be doing much more and generating higher returns. Aggressive ideas, medium risk ideas? Thanks!

I'm not familiar with your market at all, but from the outside looking in if your NOI is 67-75k then wouldn't your building is nearer to $670,000-$750,000 not $1,000,000? That aside, that is still a large chunk of equity!

Hi Ryan,
I also would be curious where in MA. Looking at those rents real quick, you're around 800-1000 per unit? So the location would determine what I'd look to do with the property. What is zoning, public transportation access? Commuter location or a central location? Springfield, Worcester, Boston? I know, lots of questions, but I think with 16 units in MA at those rents, the location could really factor in. Especially when considering what different areas of the state that would support a property like this could offer.
I agree with Carl in this could be a good partnering situation with someone familiar with it's location and the local market.
Kris

With those numbers wouldn't my cap rate still be about 7.5%? For that metro west area is that possible? What is considered standard for a complex of that size?

Ashland...so I'd stay residential with the property. I had been thinking depending on location you could do a mixed use. It seems like one of those areas where, not knowing the condition etc, it's performing about as to be expected, maybe a little under. I have seen listings for multis there (2-3 fams) for the 300-500k range. I'd be inclined to agree with Carl and access some of the equity.

I see I guess I misspoke on the 1031 my basis is higher or about equal to what I might hope to get now- I guess I meant should I look to buy something larger?

Money is unbelievably cheap right now. That equity is doing nothing for you right now so I would definitely suggest you pull some of it out and get it working for you.

Assuming your numbers are correct and discounting the 200k less you think it actually would appraise out, it would be worth 800k (roughly). You should be able to refi it for 560k and pay off your existing note plus leave yourself with 360k to play with.

Not sure what the best options in Texas are so I can't really help you there. But no matter what you did, it would have to have better cash on cash returns than what you'd pay in interest on the loan (5% maybe??) if you put it all back into real estate.

If you used that as your down payment, you could buy a million dollar complex there in dallas. Assuming a 10% cap rate, you'd be looking at 100k NOI, plus another mortgage payment on the new property of $4,600 mo, leaving you with a net of $5,400 a month.
And now you'll have to complexes that will continue paying down mortgages and continuing to appreciate.

Here's what you have today:
1 property:
Value: 1mil
NOI minus mortg payment (2k): 4k per month
Principal Paydown: 18k/yr
Appreciation (assumes 2%): 20k/yr

Here's what you could have if you pull out 360k in equity and can get a 10cap complex worth 1mil with 30% down (300k).
2 properties:
Value: 2 mil
BLD 1: NOI minus 2 mortg payments (2k + 2,300 equity loan): 2,500
BLD 1: Principal Paydown (2 mortgs): 18k/yr + 10k/yr = 28k/yr
BLD 1 Appreciation: 20k/yr
BLD 2: NOI (100k) minus mortg payment on 700k loan (4,600) : 5,400.
BLD2: Principal Paydown: 20k/yr
BLD2: Appreciation: 20k/yr

TOTAL Monthly income (both properties): 8k/mo
Total principal paydown: 48k/yr
Total Appreciation: 40k/yr

Again, I'm not sure if 1mil complexes in texas can be had at 10cap. But I have to believe that you're getting to get far more in return on your money than the 5% you'd be able to pull it out for.

If you could find a 10 cap in that price range, you would double your monthly income in your pocket. Double your appreciation and more than double your principal paydown every year.

I would definitely get that equity out of there.......

Chris- I currently pay heat and hot water but not electricity. I don't find in ma I see tenants paying for heat or hot water much, in any case if I separated those how well would tenants transition? Should I expect some people to leave? What about people with leases (I have a few maybe 4) can I not change it on them? My largest expense is water and sewer through the town, I never seem to see tenants paying for that in Ma. Here in Texas renters typically pay for everything - all utilities- water, heat, hot water ect. If I do go that route who do you contact to change it and how much will it cost? This is for heat and hot water or also the water sewer (am I even allowed to make tetanus pay the town direct for that?)

As far as pulling money out won't it be hard to find a rate at 5 for a commercial loan? Also if I buy in Texas and I leave eventually I'll have to hire a management company to handle everything because of lack of connections down here-won't I lose a ton of NOI being "hands off" ? Mass seems to have much lower cap rates on multiplexes then Texas - I see 10-13% down here possible but only 8-9% in mass.

Hi Ryan,

Here is the guide I go by on utilities. You need to check if it is common for the area for the tenant to pay utilities. If it is not then you will be wasting your money and will lose tenants.

There is a difference between a building in an area where the tenants pay that is old and just hasn't been converted over time to an area where almost every building has the utility included. Those tenants are conditioned for that tenant base to get the unit with landlord paid utility.

Many parts of Mass. have cap rate compression so you can get premium pricing. By selling and moving your equity into a different market or area you can create more value for yourself again with your cash.

You need to take your comparable sales and then deduct your selling costs minus loan payoff and 1031 costs to see what kind of cash you would have to put into one or more other properties.

$25K per year for water sewer? that's $1562 per unit per year, or about $400 per quarter or $130 per month per 1BR unit? Seriously?

I don't have property in the Ashland area, so don't have first hand experience in Ashland with water/sewer, but there is something seriously wrong here. It's hard to believe rates are that high.

First I'd contact the utility and find out what would be average usage per unit for other buildings. Have them go back and look at the historical useage for that building and see if the usage has been gradually or abruptly increasing.

I'd say you either have one or more leaks, or someone is running a car wash and laundromat out of your building. If each unit has a washer/dryer connection, they could be doing laundry for their entire extended family and friends.

You then need to have someone perform an audit of the fixtures. Replacing toilets with 1.6 gal (not the cheapest ones, you can get good ones for about $180 that also save you money and still flush properly) low flow shower heads, etc. Whoever checks should look for dripping faucets and showers, etc.

Your property manager should be able to help you out with this. But I wouldn't accept 25K in water usage without doing some more digging. If your property manager can't help you, I can put out an email to my network to see if there is someone I know who can either help you, and give you a name of someone to help you. Send me a colleague request with your direct email.