First Multifamily Deal: 60 Unit Apartment Complex
Hi all,
I am working on my first multifamily deal and would appreciate any advice you can offer. I have experience owning and operating other forms of RE (SFH, Industrial) but have decided I'd like to go the multifamily route long-term. My strategy (which I'm still working on) is to buy and hold large multifamily's that can be or are professionally managed (so that I'd be managing the manager, rather than tenants) and have a value-add component. Return on time is very important to me, but I know the first few years several improvements/adjustments will need to be made to make this a good deal.
Here are the details:
60 unit apartment complex (2 buildings, 48 2BR, 10 1BR, 2 Studio apartments) in Central Massachusetts (Gardner, MA - Worcester County) built in 1974
Asking Price: $3.8mn, the owners want to sell and would take $3.4-$3.5mn
Rent Roll: ~$490k/yr
Vacancy: Will be 100% occupied as of January. Seems they have 2-3 vacancies (~5%) on average, will assume 10% of Gross to be conservative ($49k/yr)
Property Management: Currently professionally managed at ~$22k/yr
RE Taxes: $44k/yr
Insurance: $22k/yr
Water/Sewer: $32k/yr
Heat (Gas): $46k/yr
Common Electricity: $5k/yr
Snow and Trash Removal: $12k/yr
Repairs & Maintenance: $25k/yr
Reserves: $20k/yr
Total OPEX: $277k/yr (~57% of Gross Rent)
NOI: $213k (going-in cap rate 6.2% @ $3.4mn purchase price)
Financing: Have an LOI @ 4.5% rate, 10 year term, 30 year amort with first 3 years at interest-only (loan constant is 6.1%), 80% LTV. So Years 1-3 ~$120k interest/only per year, then ~$166k thereafter.
Other notes: Heat and Water are landlord responsibilities and it is typical for the area for those utilities to be included in rent. Electric is separately metered. The apartment complex is a short walk from a grocery store and other retail amenities (restaurants, etc.). The current owners are/have been absentee and are not real estate professionals, they seem to have been cutting a lot of corners in managing/investing in the building but have kept it filled (albeit barely raising rents) for the past few years.
My strategy:
1. Reduce vacancy/keep it at 5% (this would lead to ~$25k improvement in NOI). I plan to do this by improving the cosmetics and functionality of the building (new windows, repairing fence outside, providing locked entrance door with intercom system, etc.)
2. Reduce operating expenses, particularly heat and water (new windows and insulating the building better should help with energy costs, it seems the previous owners have invested $0 in this). Any other suggestions on how I can do this?
3. Raising rents to be in-line with market. On average, rents should be able to be raise ~$35/unit, which I plan to do over the first 3 years during the interest only period. Thereafter, I plan to continue raising rent $10-$15/year based on utility costs, improvements, etc.
4. Potentially rent the on-site management office (which is in 1 of the 2 studio apartments), which would add ~$7k/year to the rent roll.
5. Add vending machine. There is already on-site coin-op laundry machines (which are through a 3rd party operator, unsure what the income from these are). Any other creative ways to add income streams?
Questions/Concerns:
1. Do increases in rent typically 100% fall to NOI/cash flow? It seems a large % of incremental rent would but I'm not sure if I'm missing something.
2. The tenant base is largely blue collar and/or low wage earning individuals. The tenant screening process is pretty strict based on the what the property management company told me (5 year landlord history, high credit score, etc.), but I am concerned as utility costs rise that I will be unable to keep passing on the 2-3% yearly increases to tenants once we hit the ~$800/unit rent mark. This concern is mitigated somewhat by the fact that the competition also includes utilities and that I'm in Massachusetts, which is progressive (and aggressive) on raising min wages.
3. Regarding the on-site management office, the property manager seems to think it helps get the rent on time and keep the place operating well. I would like to rent the studio and move management off-site, does anyone have experience in doing this? I would think management would still make visits a few times per week and they could set up a rent slot box attached the boiler room door or something of the like. Perhaps could install cameras (dummy cameras?) in common areas to make people think big brother is still watching
I know this is a bold first step but I am confident I can handle it, I just want to make sure the deal makes sense. Thanks!