100 Unit Property Under Contract - Seeking Input from Fellow Investors

33 Replies

All,

My team and I @Matt Wood @Mike O'Connor  @Kiran K  have recently got a 100 Unit Multi-Family under contract in Albany, GA. As always, I would love to get your inputs on the deal. 

Here are some of the key stats:

Purchase Price: $2.8M

Units: 100

Unit Mix:

50 3bed/2bath's @ $580/month

50 2bed/2's @ $425/month

Financing Approach:

80% Bank

20% 

  • 10% down payment
  • 10% seller financing @5% with a 5 year balloon


Conservative Annual Financials Financials:

-15% vacancy

-Rent potential: $618,000

-Property Taxes: $30,000

-Insurance: $21,000

-Maintenance / Repairs: $60,000

-Water / Utilities: $68,000

-Advertising: $4,500

-Property Management: $52,530 (management fee and employee salaries)

-Garbage and Recycling: $15,000

-Landscaping / Pest Control: $18,000

-Security: $5,000

In summary:

-$525,300 gross income

-$273,030 total expenses

-$177,396 (5%) annual mortgage

oFirst 5 years: Seller financing repayment on 10% of purchase price @ 5% interest rate

Opportunities:

-Sub metered, but water is covered by current owner (~$55k)

-Increase rent on 2/2's to $485

We would love to hear your thoughts on the good, the bad, and the things we haven't considered or simply answer any questions that you have. Tagging @Joel Owens and @Ben Leybovich

1. So - the 15% vacancy you refer to is economic + physical? If so, it's not enough for this class of property in my opinion.

2. Property management is grossly under-priced it seems. The management contract will cost no less than 3.5% of gross, likely 4% - about $25,000+. Then you need at least 2 full time people, likely more - unless you plan to post eviction notices yourself :). Very aggressive pay roll (which is on top of management) would be $900/door. Realistic pay roll a few hundred more. Sorry...:(

3. Where's the bad debt? Unless you think that $500/door tenants always behave properly...

4. There;s much more, but the big thing is this: What is your exit?

Here's some perspective, @Azeez K. I don't buy 4-plexes with $485 rents. Why - because I can't manage that class of tenant and keep my sanity at the same time. I sure as hell wouldn't try that with 100 doors...

Thoughts?

It's usually telling if the seller will not hold a second that they want to cut the chord completely.

The second if you wanted to reduce the payment get it interest only for maximum cash flow while you are dealing with unknowns on the property.

I would want to know about the water and sewer rates per gallon. Check with city or county depending on where it is and see if any special assessments coming or water rates have not been raised in awhile. You could get crushed by rising water bills and the tenants will not pay past a certain point especially low income. 

Out of town investors sometimes these more rural areas require hefty deposits for utilities for the complex if you are not local.

Out of the 100 units how many tenants have been there a long time (stability factor). If the tenants constantly change over it's a bad sign for the complex. Look at the crime ring around the area in a 2 miles radius. Albany is way down in GA for you guys owning in Marietta as your other project.

What vintage year is this complex??

There are a lot of gotcha's with this type of product. If it was class B it would be different from afar.

If upon checking the rent rolls the units turn a lot then having a fast maintenance person will be even more critical to get rent-ready again. I see sometimes where an older owner has had a maintenance person for decades and stays loyal to them even though they have slowed down a lot which has affected the performance of the property. Some of these complexes are not brought up to the digital times yet.

You say water is 55k. At 100 doors that is about 46 a month for water and sewer. If you had vacancies and it averaged higher it still sounds low. I would call the water department and speak to the engineer and ask for the area what the average is with no leaks for a 2 unit,3 unit etc.

I think the costs will be more than projected. How motivated is this seller on price??  

@Azeez K. congratulations on getting a big fish on the hook!  Now is when you have to decide to reel it in or throw it back.  The decision is yours but I'll provide some insight to help you in your analysis. 

First, @Ben Leybovich is right.

Second, I don't see anything for general and administrative costs. This would be things like the telephone line, office supplies, tenant screening, corporate fees, tax return, property tax consultant, software contracts, uniforms, and so on.  This will typically run $200 to $275/unit per year.

You have $45/unit for advertising. Unless the property is located on a major thoroughfare with great signage you'll probably be closer to $75-$150/unit to do it right.

Finally, have you checked with your lender to see if they will allow the subordinate seller financing?  Some may, most won't, so if your strategy depends on this you'd better flush it out sooner rather than later.

Good luck!

@Brandon Turner - I've made it in the world. @Brian Burke has indeed spoken the words "Ben Leybovich is right"...this is a coup!

@Azeez K. - I think that there's somewhat of a consensus that you may find that you have underestimated operating costs for this thing. And if so, is it really worth owning? It's a lot of work to run these, and unless it's really building your wealth, why bother...?!

I know a guy who owns 100 units in the city. He is there every single day - it's his job, and has been for years. He is OK with that. His father ran it lean, and now he's been running it lean for at least 2 decades. If that's the way you see yourself doing it, then your numbers will work. If you want to own it, but let employees run it and report to you, then your pay roll needs to reflect having capable people on site...

Thoughts?

I do not play at this level yet, but are lenders typically OK with the owner financing aspect outlined in this deal?

Hey guys, some good thoughts here.  i'm new to BP but I dabble a bit in real estate and am involved with the deal so a couple of notes that may help your analysis.

Smart move made by sellers is a 300 security deposit; helps keep the units in at least reasonable condition as that is a decent amount of money for some of these tenants.

First off I'd classify this property as C+ maybe even B-.  Don't let the rent rates fool you; its crazy cheap in this town in south Georgia.  

Occupancy is currently 86% and the current owners literally have no marketing, not the brightest strategy but nonetheless they have gone from 53% from a year and a half ago to 86% with this strategy... its pretty much just word of mouth although it does have very good proximity to the highway system.

The management company we will hire is charging 4% to oversee everything; this includes bookkeeping, etc.  The onsite manager gets 1/2 off rent and 22k/yr as salary and in that area its not a bad deal.  The rest of the admin costs shouldn't exceed budgeted amount.  Tenant screening is covered by app fees and the additional profits from that should cover office supplies, etc. in my opinion.

They have had one eviction since they purchased and decided to maintain a clean environment to have 2 cops live for free and thus have not had one bit of crime.  smart move imo.

Complex was built in the late 90's; seller is replacing 10hvac, water heaters at our request.

as to lender questions... the sellers are up and comers and the local bank has stated they will allow the seller 2nd because they want to earn more of their business.

re: water.. I actually think the water is high; we noticed some billing issues and seller is resolving them now.  

To me, bad debt is in the vacancy #.. Once this baby gets cooking I think 8% and 3% will be the vacancy/credit loss #'s.  You can't find another complex this nice with rents this low.

I like the thought provoking questions though, they're much appreciated.

Based on your last post, it appears you don't have a maintenance tech budgeted.  I know lots of owners (and PM's) that feel 100 is about the max for a single manager, so I think you're fine with that.  I know others disagree.  Our manager runs 106 units by herself, and its a C class with low income tenants.  It works fine.  One maintenance guy should work with a 90's complex, but again, having options for help when needed would be critical.   We have one, but also contract out a lot of make ready work.  But you WILL need at least 1 full time maintenance person, and it doesn't look like thats in there.  Some of your $60,000 R&M is probably part of it, but not sure it would cover a full salary.  

I know Brian and Ben disagree, but I think economic vacancy really depends on the area.  They have far more experience than I do, and I ONLY have knowledge of my own area, so keep that in mind.  Our c class property runs about 7% economic loss to include bad debt, loss to lease, physical vacancy, etc.  There's just such high demand that even if someone skips or gets evicted, there are people waiting to get in.  I don't project that number going forward, as things will likely change with new construction, jobs, wages, etc.  We projected 12% after stabilization, and its running 5-7%.  

On the other hand, if its currently only 86% phys occupancy, then assuming 15% is risky.  If there are other properties in the area, find out how they are doing.  If you find out that they stay full all the time, then its probably a management issue with yours and 15% may be safe.  If they only stay 86% full, then 15% is not safe.  

The MOST important thing is going to be your management company.  Make sure they have experience with the demographic you're buying, and that you're going to get the amount of attention you need being in a smaller town.  

Make sure you're budgeting for property taxes to go up based on your purchase price.

Hey @Azeez K. best of luck on the deal. I was just wondering how did you go about and locate a bank to finance for 80/20? Is that common in your area? Are you using a regional bank or local?

Here in Jersey I can only find lenders that finance with 30% down for commercial or mixed use.

I know nothing about purchasing a 100-unit property. The most I can offer here is personal experience with the city of Albany. I'm down here in south Georgia also. Not too far from it.

At those rates for rent, it's probably a C/C-. Albany is one of those places where there's not much to do, so people just go get into trouble, especially when low income is a factor. Be sure to budget more for maintenance and vacancy, since you plan to raise rents on half the units.

As for advertising, a little goes a long way in a small city like Albany. People talk more than anything, which is why WOM has been decent enough for filling vacancies. I think classifieds and signs on the property itself are enough to attract tenants.

I think you may be underestimating insurance.  You don't say whether you already have a blanket policy you can just add to with this property, but if you don't you may be surprised at your insurance cost.  1990s product is not too old, so that will help, but if you are basing your assumptions off the seller's numbers and the seller has other properties, chances are that this is just the cost represented by this property as part of a larger insurance program.  If this is your first property, or your first in the area, it could be more.  (We found that out the hard way on an early deal.)  Be sure you get the insurance docs from the seller during due diligence and then take them to your insurance broker and see if what you can get is going to be similar -- assuming that you are not one step ahead of me and have already done this.

18 months ago it was at 53% according to someone involved in the deal.

A property this large I would want to "kick the tires" for a few months. So have an option on it where you run it for a few months and if everything the seller says is true with the property THEN look at closing it. You can give some small non-refundable option money.

This way if it turns out to be a dog then you get out of it with little side effects.

I stopped buying myself a job years ago with investments. Been there and done that. The investment was taking all my time for a potential 30k NOI annually. I make way more than that doing one commercial transaction with my business.

The problem with a property like this is you can't push rent increases hard. Rents at this level have little discretionary income and live hard in the units. So the goal is to the keep the unit rents cheap way below market so they never leave.

I know owners that have these types of properties and they raise rent 2 to 3% a year but they are always in the lowest bottom 40% of asking rents for the market. Tenants complain but will not leave because it's the cheapest game in town.

You need to look at possible foreclosures and pre-foreclosures for the area for multifamily. If investors buy at a lower basis then what they will do is go under market rents to steal your best tenants from your complex and leave you with the marginal to bad tenants. I have seen this happen before. Once the competition gets filled up your occupancy levels might start to recover if the market is doing well in about 6 to 12 months. If more foreclosures or short sales on the horizon it can put the performance of your property in  a funk for years treading water.

I would feel better about this property if it was an older owner that had occupancy for 85% or better the last 5 to 10 years and wanted to retire. I do not like wild swings in occupancy levels in this type of property. Lot's of new tenants that are not highly seasoned over time.

Everyone has an opinion but it's YOUR money at risk. Hope it does well for ya....... : )  

   

Your projections are running expenses at $2,700 a door. That seams a little low but the one thing you have not mentioned is what the last few years of expenses have been. Your lender is going to want to see that and if you get a PCNA done, my guess is that low expenses are due to a lot of deferred maintenance. Additionally, multifamily properties are a hot commodity these days and most sellers do not need to provide seller financing to sell. Not saying that you got a bad deal just I would do a lease audit and walk every unit.

Good luck and many happy returns.

Nicolas Paez

This post has been removed.

I may have a buyer if you're looking to sell the property.

Hey all, thanks for the continued thoughts.

Regarding the occupancy, this one was in foreclosure so its been a steady increase in occupancy so we feel good about the nice steady increase without any marketing whatsoever (not what we're going to do but nice to see).

We've already gotten the insurance quote and added additional liability coverage there otherwise I'd agree that its low.  The quote range was incredible.  19k-60k... crazy.  If someone is buying higher then I believe the rate would go up but we feel comfortable with the coverage especially given its 13 different buildings and outside of a tornado they aren't going to burn down at once.

This is a rural area so expenses are lower than we're used to but this is based on the past 12 months and based on our research.  We're doing a lease audit, etc soon to verify accuracy.

The lender is local and wants a relationship with the seller as they are successful so that is how we worked that out but we've talked to other lenders we've used in the past and they seemed to think it'd be no problem.

aaaaaand I don't know how to link names quite yet soooo.. forgive me. 

Originally posted by @Donnell Beverly Jr:

I may have a buyer if you're looking to sell the property.

 Well, we need to finish purchasing the property but for the right price I'd be happy to discuss a sale.  Feel free to reach out to me or Azeez.

Background:

@Ben Leybovich

Hi Ben sorry for the delayed response..In regards to your question about Vacancy below is my response:

Vacancy: Economic Vacancy

Property Class C+/B-

  • Property was foreclosed in 2013
  • Current owners updated the units, roofs and re-positioned the property from a low ~50% vacancy to current vacancy around 15%
  • Property occupancy has been steadily increasing and the occupancy is around 86%
  • Vacancy rates in Albany, GA hover around 13%

Property Management:

  • Property management rate 4%
  • 1 on-site manager who pays half rent/~22K/yr salary
  • 1 on-site staff
  • 2 Cops who live on-site as well for free rent
  • You bring up a good point and we will certainly add some buffer to property management and account
  • Ben I don’t plan on going door-to-door posting eviction notices ;-). I will let professionals take care of the same.

Bad Debts:

  • You are right we did not account for Bad Debts so we will certainly include that as well. This is why I love the power of BP Community

Exit Strategy:

  • Initially, our goal is to hold the property long term for cash flow
  • However, we plan on using HUD FHA 223(f) to refinance the property..if we cannot refinance the property before the balloon we will start marketing the property for sale around year 3
  • Ben you bring up good points on the tenant factor. I feel one thing we have not accounted for is the hassle factor when dealing with the tenant profile. This is certainly something we will consider. A big thank your for your guidance, support and time to respond to this thread.

@Joel Owens

  • Thanks as always for providing guidance and support Joel. 
  • To your point for our second mortgage we are getting an interest only to maximize the cashflow
  • In regards to Water:
  • Our first to-do is figure out the water and sewer rater per gallon
  • Water is always the biggest variable cost and this is something we will certainly try to find everything about water/sewer charges. Our goal is to transfer the cost of the water over to the tenants. The apartment complex is separately metered so one of our first order of business is to assign the cost of water over to the tenants. We know typical water deposits are usually $50/unit. As part of our DD we will certainly speak to the water authority and get additional input
  • Stability Factor – is something we have started to look at recently
  • Vintage year – Don’t have this information at this point in time
  • Seller Motivation – Seller is firm on the price especially since they are doing 10% seller financing. However, there may be some room. We are waiting on an appraisal for the property.
  • Thanks again for your response Joel btw did Brandon Turner ever message you for meeting up here in Atlanta 

@Brian Burke I agree with you and I am sure the rest of the BP Community would agree that @Ben Leybovich is always right :-)

  • Administrative Cost – Will certainly include this as well. Thanks for pointing out the same.
  • Subordinate Financing – We have checked with our lender and they allow subordinate financing and don’t see that as a deal breaker.
  • Thanks again for your time and response on this thread

@Ben – I agree we want to make smart decisions and build our wealth. Instead of doing ten deals we would rather do one good deal a year. However, we want to make sure each deal has been thoroughly vetted through no matter how big or small. We would be happy to walk away from any deal as long as we know we did our thorough due diligence..to me it’s not about making a quick buck it’s about building long-term wealth.

@Michael Noto

Yes we have found a lender who is Ok with the financing outlined in our post. However, I feet It has a lot to do with existing relationship..in this case.. It’s Not What You Know; It’s Who You Know..Thanks for responding to the post.

@Tom Lafferty

Thanks for providing your valuable insight. It seems we can benchmark against your property and you bring up some great points. You are spot on with the taxes we strongly believe that our property taxes will go up once we close on the property. Thanks again for your time and valued input it is much appreciated.

@Mark Y.

Our team member had an existing relationship with the bank so it was relatively easy in our case. We are using a local bank. In GA depending on the property we can find lenders will lend for 20% down or 25% down.

@Nikki Robinson

Thank you for taking time to respond to this post. Your local knowledge is very valuable. What you point out in your notes resonate with what we have heard from other locals in the area. They really don’t do much advertising as its more WOM. Thanks again for your insight and guidance.

@Jonathan Twombly

We have requested the insurance documents and also requested an insurance quote to see how we compare. Thanks again for pointing this out to us.

@Nicolas Paez

So far the lender has not requested a PCNA. Our property management and our team members will be scheduling time to walk through all the units. Thanks again for your response.

Thanks again for responding! Love the power of BP Platform. Thanks all. We will keep you posted on how things progress and where we end up. 

Hi Azeez,

I have not heard anything from Turner but I have seen him travel to visit more people. Last I saw was Turner meeting J Scott up in Maryland so I do not think he is down this way yet.

We could all meet up. I like getting out of the office every once in awhile and being around people! lol

I have BP but in person is nice every once in awhile......... : ) 

Originally posted by @Michael Noto :

I do not play at this level yet, but are lenders typically OK with the owner financing aspect outlined in this deal?

 Michael:

80/10/10 and {more commonly here} 75/15/10 or 70/15/15 are not uncommon in larger commercial deals.

Originally posted by @Azeez K. :
  • Water is always the biggest variable cost and this is something we will certainly try to find everything about water/sewer charges. Our goal is to transfer the cost of the water over to the tenants. The apartment complex is separately metered so one of our first order of business is to assign the cost of water over to the tenants. We know typical water deposits are usually $50/unit. As part of our DD we will certainly speak to the water authority and get additional input
  • .

 Azeez:

When we migrated our (somewhat smaller) building to sub-metered water, we gave the tenants a 1-year notice that they would be paying for their own water and started providing them with monthly statements showing their usage and what it would cost them when we start billing.  We also gave them materials on usage habits that would reduce their water consumption.

Once the shadow billing was underway, we updated the toilets (1.25 usg UHET), shower heads (1.5usg/min), faucets (new aerators where possible - 1.5usg/min) so the tenants could see the impact of water efficiency measures and know that we were committed to helping them minimise their water consumption.

We also replaced the existing laundry machines with HE units - provided by a 3rd party in a revenue share arrangement.  We created a brochure for our tenants explaining how to use the new front-load HE machines and gave each of them their first half-gallon of HE laundry detergent.   We had started posting the monthly laundry water consumption in the laundry room when we started the shadow billing, so the tenants were able to see the impact of the new machines and benefits of washing full loads vs small loads.  We also explained to the tenants that although we pay the bill for the laundry water consumption, ultimately it comes from their rents and if the resource is used wisely, rents will not need to rise as much ... we think this is working as the water consumption has held steady or dropped a little.

When the tenants started paying for their own water one year out, we indicated there would be moratorium on rent increases for the first year.  This property is a long-term hold and the benefit of putting the water in the tenants' hands had far more benefit than holding rents steady for a year (or even two).

I love these types of post. Great info exchange. I'm trying to go big so I really appreciate vicarious learning.

@Azeez K.   did you know that 70% of construction workers and 50% of manufacturer workers are paid weekly? If that matches your tenant profile, then you should consider pay day rent collections. This will boost your income and your tenants will thank you.

Give it some thought.

@Roy N. Good insight on charging tenants water. I like your strategy on giving them a heads up and working with them to help reduce consumption - we'll certainly keep that in mind as we look to do the same. 

@Al Williamson Good thoughts on rent collections, something to keep in mind as well. 

Thanks to all for your comments and questions - this has been really helpful as we continue our due diligence. 

Such an amazing post here. I'm still brand new but this is where I would like to get to as an intermediate long term goal. I know every market is different but this is why BP works so well. You are always plugged in to all the markets and can see the differences and how things can actually be transposed in multiple markets. Thanks for this post!!!

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