Apartment Investing Questions

19 Replies

I am looking at an apartment building in Memphis. 20 units. 4 1 bed, 16 2 beds. It's a Class C-/D neighborhood. Low income. I am very familiar with the neighborhood and complex as I grew up around the corner. The crime in the general areas surrounding the apartments is very little. I actually feel safe walking around at night. If you look by the zip code you get a different story. The current owner owes about 30k in back taxes and is several years behind (4+). Since the building is being listed for sale, from what I can see she is making small payments. 

The area is currently going through a redevelopment phase but its slow and property values still quite low. Not enough redevelopment to justify such a high asking price on a building that has severe deferred maintenance. The building would need an entire gut and rehab. At the price she has it listed, it's overpriced by at least 70-80k at best. What could I do from a negotiation perspective to get them to "see the light"?

I have never bought an apartment complex but I have negotiated several deals with sellers and I think it's important to build a rapport with the seller. Only when you feel a connection do you try to help them see the light. They are investors so use the numbers to help them realize value. (Cap rates, ROI, coc) Find out why they are selling and try to be creative in meeting there needs.

Hope that helps! Also let us know what happens!

@Shawn Dandridge I would first build rapport with her because once she sees the light there will be plenty of buyers and you want to be first in line. I see you're in Maryland but if I really wanted the deal then I would offer to visit with her in Memphis. Then learn about what she really wants out of the deal and find a creative way to structure so it hits her objective/s. 

During that conversation I'd tell her about the challenges you outlined in your post but say that you'd like to find a way to make it work for her. There might be a deal there - there might not be but the relationship and her desired outcome are the first two things I'd tackle. 

@Shawn Dandridge

Ask yourself why is the property tax 30K in arrears?  Are the economic vacancy and other operating costs such that the business cannot pay all its bills?

Roy,

I have a pretty good idea why the taxes are 30K in arrears. Like I stated, the property has significant deferred maintenance and no one wants to stay there. The only reason she has tenants now is because the rent is around 200-250 per month compounded with a 40% vacancy rate there is no way she can pay most of the expenses. This is still a great opportunity IMO.

Shawn do not look to a bunch of lenders to take this on. Very high risk with low quality of a project.

Lenders like lending on total turn around's in A to B areas because if the project flops then the dirt has great value to sell off.

In the rougher areas that dirt is simply about worthless. 

A strategy might be ( unless you have huge amounts of cash ) is to look up another local investor who owns a bunch of property there. They might be willing to take the risk on that local area because they understand it.

Outside investors or owners looking in likely will see too much risk. 

@Joel Owens

Thanks for the information. I am looking at a hard money I/O loan to finance this deal.

That hard money will really eat into the properties upside and turn around. If an upside on a property was say 200k but it took you 2 years to get there then that is a 100k a year return average.

If you had to make the project the thing you did day and night then you are buying a job. HML lenders want to turn projects for points. If the HML is using their own money they might make it lend out for longer. If this is a HML lender using investors funds their spread is the points so they will not want the money out for long. They are giving interest spread to their investors and keeping the points so they want to churn that loan fast. Plan on this taking longer to turn around and cost more than expected so negotiate automatic extensions with the HML lender now. Do not wait and have HML tell you they will look at it later. That is a way to get into deep trouble with a project.

Suggest seller financing with monthly payments, and point out that she would make more this way than if she got an all-cash deal which would be subject to a lowering of the asking price, plus having to pay capital gains tax on the proceeds received.

@Shawn Dandridge , I have bought and sold almost 1000 apartment units, so just wanted to give you a level of caution going into this deal as you described and I feel the same way @Joel Owens does.

A gut/rehab in a good area is tough, but in a C-/D area my goodness it is REALLY hard. Make sure you raise more money for working capital as the project will take longer than you think as well as to cover you through the lease-up period.

What is your exit on the deal? If it is buy and flip, using hard money might be okay but if it is to hold, HM will destroy your deal. The reason, and as Joel mentioned, lenders generally don't like lending in tough areas.

@Brian Adams

My exit strategy is to fix and flip. I have been talking with a HML I've done a previous deal with and they're willing to a piece of equity to lower the lending costs over the term of the loan. Based on the prelim discussions we have had this will significantly lower the loan costs without giving up too much equity (5-10% equity for them at most).

@Shawn Dandridge , seems like you have your mind made up to do this deal.

I wish you the best my friend, but make sure you double, triple check all your numbers. Build cushion in for working capital as you may have to hold the asset longer. 

In my crystal ball with interest rates continuing to go up, this will have an impact on cap rates, valuations, risks and a bunch of metrics I follow.

The question you need to answer for your business model is if you can't flip, how are you going to the get the HML out.

@Brian Adams

I am not 100% certain that I will do the deal but it seems promising on the outside. I'm making a trip to Memphis at the end of the month to get a firm grasp on the entire scope of the project. I will know for sure what will happen after that visit. I thank you for your thoughtful and sound advice, this is why I love these forums!

Really know the renter base for that area.

In Fulton county in Atlanta there are certain areas HML's will not lend.

I looked at doing a similar project about 4 years ago. The HML's experience was that they did the loan and the borrowers did the rehab with their own money. Everything was made brand new. Tenants went in at higher rents and then a few months later after paying on time stopped paying and the place was trashed again.

Borrowers went running with the tail between their legs and the HML lender got out but did take a small loss on the loan.

The moral of that story is no matter how nice you make something in a questionable area you will not have the quality tenant base to treat the property right after the rehab has been completed. This is why I like buying the most run down place in the NICEST area possible. Demographics and the tenant base put things in your favor.

In D areas tenants are conditioned to live a certain way. I am sure there are occasional exceptions but to be successful in real estate long term you need to have odds in your favor and to not constantly do long shot type properties where a lot can go wrong. If you get seller financing do favorable terms and get it non-recourse with no personal guarantee where you can just hand it back if it doesn't work out and you are not out that much capital.

You have to plan just as much or more for the things to go wrong as they do right on a deal.  

Originally posted by @Shawn Dandridge :

I am looking at an apartment building in Memphis. 20 units. 4 1 bed, 16 2 beds. It's a Class C-/D neighborhood. Low income. I am very familiar with the neighborhood and complex as I grew up around the corner. The crime in the general areas surrounding the apartments is very little. I actually feel safe walking around at night. If you look by the zip code you get a different story. The current owner owes about 30k in back taxes and is several years behind (4+). Since the building is being listed for sale, from what I can see she is making small payments. 

The area is currently going through a redevelopment phase but its slow and property values still quite low. Not enough redevelopment to justify such a high asking price on a building that has severe deferred maintenance. The building would need an entire gut and rehab. At the price she has it listed, it's overpriced by at least 70-80k at best. What could I do from a negotiation perspective to get them to "see the light"?

I would say keep negotiating let her know how much intrest but not to the point were she feels she has the upper hand also the demand I'm sure is low so you should be able to bring things your way

@Shawn Dandridge How did this turn out for you ?