Buying my first Apartment Complex

Investor · Tampa, FL · Member since 2010 · 377 posts · 56 votes

Hey guys,

I'm a currently a rehabber that wants to buy and hold (and reposition) my first apartment complex. I've read about it ever since I was just in my teens and fell in love with the idea of economies of scale. I want to ask anyone that current owns or owned apartments HOW DID YOU BUY YOUR FIRST APARTMENT? I've crunched numbers for too long now and want to take the leap to Just Do It but want to hear what some of the more experienced ones have to say.

ANY advice would be appreciated. I look forward to hearing from you all!

0 Reply

38 views

Most Popular Reply

Bryan Hancock

Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes

15y

You can read and study forever, but nothing beats getting your hands dirty. Here are some pieces of advice that I wish I had when I bought my first apartment complex:

1. Don't rely too much of pro formas and fancy models. Nothing beats actual data. Repositioning is great, but don't fall in love with your ability to increase things too much. Be conservative!

2. Don't buy in the ghetto...it isn't worth it

3. The financing is KEY. Don't finance something you intend to hold long-term with money that balloons, adjusts, bubbles, etc. in a few years

4. Work with someone you KNOW can close the loan. There are a lot of pretenders in the CRE finance market that will promise you a lot, but can't deliver

5. Interview competent property managers in the area to make sure the owner is distressed and the property isn't distressed due to the market. You can't really do much with the market!

8 Reply

See this reply in the discussion

41 Replies

Jump to latestLatest

Sort by

Dale Osborn
Mobile Home Investor · Spanaway, WA · Member since 2008 · 1k+ posts · 578 votes
15y
Sold 2 free and clear rental homes for a down payment and assumed the loan on a 27-unit apartment (all 2-bedrooms).
1 Reply
Jeffrey K.
Real Estate Investor · Milwaukee, WI · Member since 2008 · 1k+ posts · 671 votes
15y
I bought my first just over a year ago. Before that I stuck to mostly fours and smaller. I picked up a 13 unit complex in a package deal that I paid cash for. All units needed rehab.

It makes things easier for service calls. It cuts down on drive time when you have guys working T&M.

I am still trying to buy my first big building, but they arnt priced right in my market. I hope I get lucky soon and find one that you dont have to feed.
1 Reply
Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
You can read and study forever, but nothing beats getting your hands dirty. Here are some pieces of advice that I wish I had when I bought my first apartment complex:

1. Don't rely too much of pro formas and fancy models. Nothing beats actual data. Repositioning is great, but don't fall in love with your ability to increase things too much. Be conservative!

2. Don't buy in the ghetto...it isn't worth it

3. The financing is KEY. Don't finance something you intend to hold long-term with money that balloons, adjusts, bubbles, etc. in a few years

4. Work with someone you KNOW can close the loan. There are a lot of pretenders in the CRE finance market that will promise you a lot, but can't deliver

5. Interview competent property managers in the area to make sure the owner is distressed and the property isn't distressed due to the market. You can't really do much with the market!
8 Reply
Jeffrey K.
Real Estate Investor · Milwaukee, WI · Member since 2008 · 1k+ posts · 671 votes
15y
Brian,

Besides Fanny and FHA how are you going to get new commercial money at a decent rate for any length of time?

The local lenders who do FHA loans want 1% for loans under 20mm and 2% for loans under 10mm.
0 Reply
Ben Kevan
Investor · CA · Member since 2010 · 150 posts · 40 votes
15y
Man, I can't wait until I'm at this level.. I really really can't wait.. Looking at my first property (duplex) in the rust belt for the time being.

Hope my first isn't a flop. I'm envious of you veterans. I have the drive, the know how, and the want. Just have to have the time, funding and the balls.
0 Reply
Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
@Jeffrey

I have a great broker in Houston that finds money all over the place I could never find on my own. Financing is definitely tight right now so long-term financing may not be available with lender yields so low.

I like to look at total risk in a deal and refinance risk is BIG in commercial deals. I can't imagine a scenario where I would take a 5-year bullet on a loan when I have no control over interest rates. Non-recourse financing is the way to go IMO too and that is why I am focusing on syndicating larger deals instead of doing smaller commercial loans where this product isn't really available in quantity. Personally guaranteeing a million dollar note is too scary for me. Anything that can sink me financially needs to be hedged altogether and not just partially.
0 Reply
Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
15y
On these 2 points:

2. Don't buy in the ghetto...it isn't worth it

Sometimes it makes sense if you know what you are doing. For example in Atlanta they are doing the belt line project and also have assistance from the feds for the neighborhood stabilization program.

In Atlanta one block can be a war zone and 1/4 mile down can be the Coke museum and the Fish Aquarium. We also just landed the football hall of fame museum opening in 2013 which will be a newly built 55 million dollar project on an old parking lot.

The belt line will rehabilitate large areas of Atlanta.So you can pick up gut apartments for 4k a door and put 3k a door in.

40 doors for 160k,120k rehab.

280k going in.450 X 40 = 18,000 X 12 = 216,000

by 2 = 108,000 NOI at 10 cap stabilized
sell price 1,080,000

As the area gets revitalized rents will improve but I didn't count on that for this basic calculation. So the ghetto makes sense if you know what you are doing and if the area will turn around.

There are some buildings and locations that at any price do not make sense.

5. Interview competent property managers in the area to make sure the owner is distressed and the property isn't distressed due to the market. You can't really do much with the market!

This also depends on what you can buy it for.

If a property is struggling and needs rehab and is a 60 unit say at 50% occupancy with rents at 460 a month.Then if you buy at such a low price you can reduce the rents below market to fill up fast and stabilize.So reduced rents could be 360 a month.

You have bought at such a low cost that now you can undercut the other landlords that are strapped with heavy debt service and make a huge profit.

You aren't charging top market rents so you have much less eviction and turnover costs.

So as we all know there are general guidelines but every property is on a case by case basis.

Every listing I take a learn a lot from each seller.Not really about the transaction side but how each of them 10,20,30 years in the business have run their properties and why.

It's pretty interesting stuff.
Podcast Guest on Show #47
NNN Invest53 Reviews
Website View Page
3 Reply
Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Anything makes sense at some price Joel.

People generally drastically underestimate the PITA factor for buying in the ghetto though. I have a property in the ghetto that is CONSTANTLY a problem even though we bought it for a song in '07.

To each his own. There is money to be made in the D buildings, but I think you need a BIG discount to justify the heartburn.
0 Reply
Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
15y
I agree that it is not for new investors or the faint of heart and definitely has big risks.

In my area probably as is yours there is B or C value add that you can leverage into great returns in better areas before buying D stuff.

Some investors love those areas but not me personally.
Podcast Guest on Show #47
NNN Invest53 Reviews
Website View Page
0 Reply
Jeffrey K.
Real Estate Investor · Milwaukee, WI · Member since 2008 · 1k+ posts · 671 votes
15y
Bryan,

I am not seeing non recourse loans in that range. The only ones I see are FHA and Fanny and they take at least 6 months to close. You can get long-term money on NNN commercial stuff based on the quality of your lease, but on multi-family, they are interested in the borrower and not as much the building.

If rates are going to go up that much, then your investment will likely gain value.
0 Reply
Darryl Dahlen
Commercial Loan Officer · Southern Maine, ME · Member since 2009 · 782 posts · 415 votes
15y
I agree, there is barely any non-recourse financing to be had these days. As mentioned, outside of Fannie/HUD, you really need to expect to sign a personal guarantee.

I just received a quote from a bank for someone looking to buy a multi-family that is 5.5% fixed on a 5/30 loan. That offer comes with very little in the way of closing costs, BUT it is recourse.
0 Reply
Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Originally posted by Jeffrey Koenig:
If rates are going to go up that much, then your investment will likely gain value.

Not really...At least in real terms. If rates go up building VALUES go DOWN because the same amount of debt service costs more and fewer buyers can afford it. Building PRICE increases may be a result of inflation, which makes the dollars cheaper. The same dollars will buy less in real terms though so all this really affects is the true VALUE of the debt on the property.

I think financing with bumps, adjustments, etc. is pretty scary for such large loans. With caps and such it may make sense, but I wouldn't sign anything with no ceiling absent non-recourse financing.
0 Reply
Jesse Ramirez
Specialist · Las Cruces, NM · Member since 2009 · 557 posts · 71 votes
15y
Originally posted by Bryan Hancock:
With caps and such it may make sense, but I wouldn't sign anything with no ceiling absent non-recourse financing.

Please excuse me if I come off as a bit ignorant, but what exactly do you mean by this? I'm still a bit green when it comes to commercial terms and strategies and could use the schooling on this.

0 Reply
Darryl Dahlen
Commercial Loan Officer · Southern Maine, ME · Member since 2009 · 782 posts · 415 votes
15y
He means that he doesn't think it is a good idea to take a commercial loan that has an adjustable rate with no limit on how high it can adjust.

While I agree that it would be scary to sign for a loan with an adjustable rate, sometimes that is the difference between a loan or no loan.

For instance, SBA's 7a loan, which has tremendous loan volume, has adjustable rates. Those loans adjust quarterly, not monthly, but most lenders don't have have a cap. I know that those loans aren't related to multi-family deals, but the point is it is a viable product with 100's of millions in loans closing.

However, multi-family properties can usually secure fixed rates. I haven't been offered an ARM in a LONG time from a lender, but as it has been mentioned several times in this thread, outside of HUD/Fannie/Freddie loan products, it can be very hard to secure anything longer than a 5 year loan from lenders now.
2 Reply
Jeffrey K.
Real Estate Investor · Milwaukee, WI · Member since 2008 · 1k+ posts · 671 votes
15y
He will not sign personally without a limit on where the rate can go.
2 Reply
Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Originally posted by Jesse R:
Please excuse me if I come off as a bit ignorant, but what exactly do you mean by this? I'm still a bit green when it comes to commercial terms and strategies and could use the schooling on this.

No worries Jesse. Darryl already stole my thunder, but I tend to disagree with him a bit on this point. Investors are trying to hedge risk and get the best product possible. Brokers are trying to close deals and make both sides happy (lender and borrower) so this is completely natural and demonstrates competing motivations. People are rational self-maximizers!

The issue with signing for recourse debt with unlimited adjustment north is that the financing can blow through ALL of your cash flow, make the deal worthless to you, and force you to sell. If you sign for personal recourse this means that you could get deficiency judgments and a whole lot of personal liability for something you have NO CONTROL OVER unless you hedge the risk properly by financing the product the right way to begin with.

I am always in favor of paying more for financing and getting fixed product. This is difficult right now and that is why we are buying for cash via private equity and refinancing. The recourse adjustable financing is too high of a risk on such expensive product IMO. Everyone has different risk tolerances and return thresholds though!
0 Reply
Darryl Dahlen
Commercial Loan Officer · Southern Maine, ME · Member since 2009 · 782 posts · 415 votes
15y
Sorry Bryan, I saw his question and didn't want it to go unanswered.
Are any of you beeing offered ARMs? I can clients loans with one, two, or three year terms, but even those have fixed rates. I just don't see adjustable rates outside the SBA.
0 Reply
Jesse Ramirez
Specialist · Las Cruces, NM · Member since 2009 · 557 posts · 71 votes
15y
Thanks for clearing that up guys. The in-depth analysis and opinion's you guys constantly offer on this forum is better than anything I've found at Barnes & Noble. By Far!
1 Reply
Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
@Jesse...You're welcome buddy.

@Darryl...Our current private equity fund buys to reposition so we are only using asset-based financing at around hard money rates for a short time. This money is cheaper for the principals than the equity is though!

Our operating agreement would be too complicated given the nature of our fund if personal guarantees or carve-outs were required. I also think it is a bad business decision to sign for a recourse loan for several million dollars too...others disagree and that is fine.

My knowledge of the loan market for long-term, buy-and-holds is dated from '06 so this money likely is no longer available. My CRE mentor has pretty much told me that these loans are a waste of time so he has been dormant for most of the year. Cash is truly king right now! If you buy for cash you can goof around for 6 months to take out the debt tranche. I don't see how people get deals done with a 6-month financing contingency. What buyer wants the earnest money hard waiting around for some lender to decide if they are going to do the loan?...nuts!
0 Reply
Jay Orlauski
Realtor · Fresno, CA · Member since 2013 · 471 posts · 225 votes
15y
One thing that threw me off recently was that a lender required for me to get "Rental Loss Insurance" . Though it was already covered in my homeowners insurance - they were asking for a separate policy that covered it explicitly - well, I fought with them on it and made them talk to my insurer, who confirmed that it was indeed already covered. They wanted to see proof of it at the very last minute and when that was finished and we thought it was behind us, with only 4 hours till the deadline for escrow to close , they came back and said we need flood insurance now( cause there is more than 1% chance of flooding over a 100 year period). ohh boy here we go again.. unfortunately for us, we lost this one and we had no choice but to get it .. and it wasn't cheap.

So be sure to be properly funded because any issues can come up even up to the last hour. They told us they were making us jump though hoops cause they had to be sure they could sell the paper.
0 Reply
John Depew
Private Money Lender · Dallas, TX · Member since 2010 · 8 posts · 3 votes
15y
Great discussion here. I like Tony, am wanting to buy my first apartment complex. Learning a lot from all your posts! Still in the research stage right now but as I begin moving forward I will post my actions, questions etc.
0 Reply
Tony Nguyen
OP
Investor · Tampa, FL · Member since 2010 · 377 posts · 56 votes
15y
WOW!

This post is amazing. I'm learning so much here. The guy is right, this site is better than most of the stuff you see at Barnes!

Anyways, so my next question to you guys is HOW DO I PROCEED WITH FINANCING? For example, which banks are you guys using in todays world and how much down payment are the banks expecting?

Again, thanks for any advice you guys can provide!
0 Reply
Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
I use a broker to find financing. BMC Capital in Houston is excellent and KC Capital in Austin is a close 2nd. Brokers can find money that I can't or don't have time to find on my own. Given that I think financing is one of the most important components in a CRE transaction a broker is well worth the cost. This is especially true for bigger projects.

The down payment required really depends on the project type, but you should expect to put down 20% in today's market. If your down payment is thinner (and you can find it) you should expect to pay more for the money you are borrowing. For short-term projects this doesn't really matter much, but for long-term projects the cost is really high. Paying more for financing at 90% CLTV is likely going to cost you more in the long run than paying less for financing at 80% CLTV.
0 Reply
Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
15y
Tony,

There are many landlords sitting on big chunks of equity and with enough down they would privately finance the first position note for you.

You have to be clear with them upfront that you still want a DEAL.In other words for financing they WILL NOT expect to stick it to you on above market rates and loan terms.

A better solution is maybe to put 10% down and have the seller hold a short term 15% second.

You just have to find the right seller at the right time.For some it's not all about the money as they have a ton already.Instead it's about selling for an okay price and getting rid of the landlord headache so they can do the things they want in life.

The balance of time and money is hard.Many have a bunch of time but no money and then many have a bunch of money but no time.

Hitting that sweet spot is the hard thing to do.
Podcast Guest on Show #47
NNN Invest53 Reviews
Website View Page
3 Reply
Darryl Dahlen
Commercial Loan Officer · Southern Maine, ME · Member since 2009 · 782 posts · 415 votes
15y
That is a great point, and something that should be explored further.

If you could secure seller financing with only 10-20% down, and the terms are reasonable, you would be hard pressed to find anything better in the conventional market.

For larger loans (2M and up), even if you can secure a low interest loan that is 20+ years, there are a LOT of costs associate with those loans.

For smaller deals, you often need to put down 30-35%, which obviously mean more money out of your pocket.

A seller who will accept say 10% down allows you to stay capitalized.

Ideally, you find a property with decent equity, finance the property with the seller, make payments for a year, and then do a conventional rate and term refinance to obtain the best terms.
1 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.