Questions about apartment investing

[Nick B.]

Hello all!

I am looking for information related to several aspects of multifamily investing and I'd like someone with actual experience to answer these questions:

• What are the typical closing and other transaction costs in apartment purchases? Is 3% of the sales price enough to cover them?
• How much money should be left in reserves after the close? E.g., is the sales price is $1M, down payment 20% and closing costs 3%, what amount should I have on hand in addition to $230K?
• What is a minimum number of units that warrants hiring a property management company instead of self-managing?
• If two properties are similarly priced and have similar income but one has more units than another, which one is preferable? E.g. 24 units vs. 16 units.
  
• At what age does an apartment building become functionally obsolete? E.g., should I rule  out properties over 30 years?
• I heard conflicting statements about non-recourse loans: some people say that lead or sole investors always have recourse loans, some say that commercial loans are always non-recourse, and yet some say that it depends on the loan size. Which is the correct statement?

Thank you
Nick

[Shane Pearlman]

Hi Nick!

• What are the typical closing and other transaction costs in apartment purchases? Is 3% of the sales price enough to cover them?

A big piece of the pie depends on points and the size of your load in you have one. I have 1.5% in my spreadsheets and that seems to be pretty accurate for the 1M+ acquisitions we have done.

1. How much money should be left in reserves after the close? E.g., is the sales price is $1M, down payment 20% and closing costs 3%, what amount should I have on hand in addition to $230K?

I personally keep 3 months of expenses (fixed + variable + mortgage payments) in cash + whatever my reserve study requires for capital expenses at this point int the life cycle of the property.

• What is a minimum number of units that warrants hiring a property management company instead of self-managing?

That is a lifestyle question as much as a spreadsheet question. I used to enjoy the management. Now I have 2 kids and would rather go surfing, so my answer is 1 unit and I factor that cost into my deal analysis.

• If two properties are similarly priced and have similar income but one has more units than another, which one is preferable? E.g. 24 units vs. 16 units.
  

I have less experience to answer this, but here is my personal opinion as an equity investor (less about cashflow). I would say that it isn't so much about unit count but the right mix of unit types for the demographics of your market. I personally prefer 2 & 3br units as I like the tenant type, more established. That said one of my property managers is pushing me to acquire more 1br / 2br combos as he sees the demand.

• At what age does an apartment building become functionally obsolete? E.g., should I rule  out properties over 30 years?

Entirely a question of maintenance and remodeling.

• I heard conflicting statements about non-recourse loans: some people say that lead or sole investors always have recourse loans, some say that commercial loans are always non-recourse, and yet some say that it depends on the loan size. Which is the correct statement?

I do not know but look forward to seeing other people's answers.

Thank you
Nick