Do or Don't (64 unit complex)

19 Replies

I recently discovered an apartment complex for sale in my area that looks to be a pretty good deal, and would like some thoughts and opinions on it. Also am not sure of the best way to go about financing it. The property is 8 buildings for a total of 64 units. There are 6 units per building. Each of these units are 2 bed/1bath and rent for $500 per month. The current asking price is $2,125,000. Looks to me like about a 9 cap with an ROI of about 18%. The property is in surprisingly good condition but there is some room for value add. I'd love to get some thoughts from investors who have experience with larger multi family properties, as I have none. Thus far in my investing career I only have experience in buy and hold single families and flips. However I would love to jump into the multi family market. Any advice is very much appreciated!

Following this. I think it’s a big leap from single family so would recommend maybe pairing up with someone with experience and the type of volume you are looking at.    Me personally, I’d be nervous about the “what I don’t know” situations with a 64 unit complex. There has to be so much that I wouldn’t even know to think about or ask about.

On one of the recent podcasts they referenced leapfrogging… Like buying a two unit, then buying a four unit, then buying an eight unit etc… That’s the strategy I plan to take to work my way up to bigger entities. Good luck! Curious to hear the advice you get from others.

Do you have the 25% down for this? If so and you are sure you can handle the management of this property then I say go for it.  You might need to do some extra due diligence in making sure the money is as good as you say.  Run the numbers, run them again, and again make sure you are covered.  Find out about taxes on the property are they under a special tax cut?  Are the rents controlled or are they the right price.  How many of the units are full? What is the average turnover costs for them and the turnover rate.  I mean that if you have 10% turnover twice a year that is why they are selling.  You would spend more money in getting new renters.

Will your lender permit you to buy this without multifamily experience? I have recently learned from my banker that I can join partnerships strictly with "experience equity". Pretty exciting stuff and it may be a conversation you want to have with your commercial lender to see if you need to bring an "experience" partner into the mix.

@Jacob Tracy I would be weary of the deal simply because it is not common to come across that large of a property for a 9 cap in this market. What does the seller know that you do not? Is it a C or D class property? For $500/month per 2/1, I suspect this may be the case. Is there a large vacancy rate? With C or D properties, you WILL have a higher vacancy rate than average so plan ahead. Does the property need extensive rehab? This may require a large upfront capital investment which will close the gap on your cap rate. 

@Jacob Tracy I would be weary of the deal simply because it is not common to come across that large of a property for a 9 cap in this market. What does the seller know that you do not? Is it a C or D class property? For $500/month per 2/1, I suspect this may be the case. Is there a large vacancy rate? With C or D properties, you WILL have a higher vacancy rate than average so plan ahead. Does the property need extensive rehab? This may require a large upfront capital investment which will close the gap on your cap rate. 

Affordability? Preapproved amount vs down payment

property manager identification

vacancy rate

cash flow

maintenance cost

Many people start looking or identifying a property until they realize they have NOT start the process sequence properly.

Good luck

@Dulce Beltran

Manage 64 units likely to need at least 1 FT manager and maintenance crew. Often they want to live on site for free. Ideally husband and wife. But that is often not the case.

If the owner/investor wants to manage them that is more a FT job.

@Jacob Tracy My advice is to put it under contract in a way that will help you and the seller. That takes a conversation with seller or seller's broker. Pull all the pieces together during your due diligence. Just go ahead and tie it up. You may decide to bring in partner with experience. You may find out the property has hidden defered maintenance. Your lender may require more down than you think. Take the first step. Make the offer. If you are new, make an offer with a long inspection period. Just find out what seller is attempting to accomplish and write it up. It may be a lower all cash offer. You may need to assume a mortgage to help seller. Get an offer presented. We have never bought one that we didn't make an offer on. It's free to learn on the ones we have under contract that didn't pass our due diligence. The risk only begins at end of due diligence. So, go for it.
Originally posted by @Jacob Tracy :
I recently discovered an apartment complex for sale in my area that looks to be a pretty good deal, and would like some thoughts and opinions on it. Also am not sure of the best way to go about financing it. The property is 8 buildings for a total of 64 units. There are 6 units per building. Each of these units are 2 bed/1bath and rent for $500 per month. The current asking price is $2,125,000. Looks to me like about a 9 cap with an ROI of about 18%. The property is in surprisingly good condition but there is some room for value add. I'd love to get some thoughts from investors who have experience with larger multi family properties, as I have none. Thus far in my investing career I only have experience in buy and hold single families and flips. However I would love to jump into the multi family market. Any advice is very much appreciated!

the deal not withstanding but I would look at it like if houses are renting for 650 to say 800 and now you have 500 dollar apartments I suspect your rental pool will probably be pretty tough and transient so vacancy and turn over will be higher than normal. 

my apologies, each building has 8 units not 6. I fat fingered that one and hit the wrong number. but thank you to everyone who pointed that out. I do think that this complex is in a C- class and it does need some work but not alot. this has been on the market before with no buyers, so I think I will just keep an eye on this for a while. thank you to everyone who gave their thoughts.
@Jacob Tracy If this is in your backyard and in at least a C neighborhood, I would jump on it. $500 rent for $$33K per door look good as long as water and utilities are paid by the tenant.

64 units X 500 a month = 32,000 X 12 months = 384,000 gross

(Take away 60% of expected revenue for vacancy, property management, evictions, expenses, etc.)

384,000 X .60 = 230,400

384,000 -230,400 = 153,600 expected NOI

153,600/2,125,000 = 7.2 cap rate

This is IF there is not existing deferred issues with the property. That would come off of the sales price or a reserve credit at closing. There is a difference between ongoing repairs and repairs that have stacked up over the years as the seller has sucked out maximum cash flow and put a band aid on everything instead of properly maintaining the asset. I see this frequently where sellers want to have their cake and eat it too.

7.2 cap rate if a C or D asset and C to D area is bad. You need to see if 500 a month is market rent. If market rent is much higher you might have a play to blend returns upwards. You need to check loyalty factor with the books and see how long the tenants have been there and if they pay on time. If this property has been sitting either the books are a mess or the seller is unrealistic. Sometimes you can catch them at the right time where they will drastically sell for less after sitting awhile and most buyers have forgotten about them.  

@Jacob Tracy it could be a good investment at the rough numbers you give and if it is, you could find investors to help with the funding. 

But a few things would give me pause.

The very first being it's in Ohio. No offense but Ohio is one of the last places I would look for new investments. Make sure it's in an area that is growing in population and jobs otherwise run away. Even if it looks good today make like some areas around Columbus, Cinncy or Cleveland make sure to consider how recession proof it is.

Also, 64 units is a very awkward size. Too small for a good, professional manager and onsite personnel and too big for you or smaller managers to manage. This can work to your advantage because there's not a lot of competition for properties of this size but make sure you have a solid Property Management Strategy and also a backup plan.

Last, be very careful of deferred maintenance, capex and big owner paid utility costs. On a property that size you can easily get killed on those.