Meeting about a 24-plex, 100% owner financed. thoughts?

Multi-Family and Apartment Investing
10yFollow

Meeting about a 24-plex, 100% owner financed. thoughts?

DJ Cummins
Rental Property Investor · Bethalto, IL · Member since 2014 · 319 posts · 103 votes

Hello friends,

So I took a chance and mailed out 2(yes, only 2) letters to two different apartment complex owners. I had some free time and used the google machine to find their home addresses. Three days after mailing the letter, I got a text first thing today from one of the apartment owners who wants to meet on Saturday. I am beyond excited. I clearly stated in the letter that we(my wife and i) are interested in the property, but would need owner financing for a couple of years before we could afford to refi and pay him off in full. It was a total shot in the dark, but he is interested.

So, we bought a 4 plex last year, with conventional, 20% down financing. That is the only deal we have done. I know that we can handle a 24 unit, especially with the right PM company. Since we haven’t ever bought such a large building, what would you recommend asking for? Rent roll, last few years of tax returns/ expense reports. What questions would you ask. I have already written down quite a few things that I want to talk about, but I am trying to make sure I have all by bases covered.

I would appreciate any recommendations on what to ask during this meeting. I am not a big “salesman” type of guy, so I am not really sure how to approach the seller financing conversation. I am just a good ole boy. Hopefully the seller is the same!

thank you!

DJ

7Reply
105 views

Most Popular Reply

Brandon TurnerPro Member
Investor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
10y

Looks like you've got some good advice already, @DJ Cummins - but I'll jsut add this: this first meeting is JUST that... a first meeting. Use this as an opportunity to get to know the seller, find out about the property, ask them how they got into real estate and what they love and don't love about it. Really just try to build a relationship here - I personally wouldn't push the "buy" angle too much unless they ask. The relationship part is KEY if you plan to do any seller financing. They have to like, and trust, you. Hope that helps! Good luck and let us know how it goes!

Podcast Guest on Show #92
7Reply
See this reply in the discussion

28 Replies

Jump to latestLatest
  • Manuel Savorelli
    South Jersey, NJ · Member since 2014 · 104 posts · 9 votes
    10y

    Hey DJ,

    I'm very interested in your situation as it is very similar to my own.   Also ,when you say using Google machine to find home addresses, where did you exactly search?

    I look forward to reading your progress

    TIA and best of luck.

    1Reply
  • DJ Cummins
    OP
    Rental Property Investor · Bethalto, IL · Member since 2014 · 319 posts · 103 votes
    10y

    @Manuel Savorelli I went online to the county website, searched the parcel numbers of the property, and then found the owner of record. Took some work to find all the info, but hopefully it pays off.

    1Reply
  • Manuel Savorelli
    South Jersey, NJ · Member since 2014 · 104 posts · 9 votes
    10y

    Hopefully sir, keep us posted  

    0Reply
  • Peter MacKercherBusiness Member
    Residential Real Estate Broker · Saint Louis, MO · Member since 2014 · 1k+ posts · 567 votes
    10y

    @DJ Cummins You're on the right track with rent rolls, expenses, tax statements. My suggestions are:

    • 2 years of bank statements for the property so you can verify deposits and expenses tied to cash
    • 2 years of tax returns (2013, 2014)
    • 2014 and 2015 Profit and Loss reports
    • Rent roll for 2014 and 2015

    Ideally all of the last two are certified financial statements (meaning they've been reviewed and signed off on by an independent auditor), but chances are they won't be. Since we're just starting 2016 the reports you'll get for this year will be slim, so if you see oddities on 2015's reports you might ask for 2013 rent roll as well.

    As far as questions, I generally ask about how old the roof is, how old the systems are, etc. See what they'll say about deferred maintenance and try to get a picture of what possible capital expenditures you'll have to put out on the property. If you decide to move forward with the deal then inspections will reveal a lot of this anyway but it's of course cheaper to ask and see what they'll volunteer.

    Hope this helps! Good job on the fishing and best of luck at your meeting.

    [email protected]
    1Reply
  • Joel Florek
    Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes
    10y

    @DJ Cummins I am in the same boat as you right now. I bought a 4 unit last year using a commercial loan with 20% down. I am going to be signing a purchase agreement for a 16 unit tomorrow and my down payment is largely owner financed. Here are some pointers from my situation.

    Financing structure. I am going to be doing a land contract wrap. I will be receiving a bank loan for 80% of the purchase value. 15% will be financed by the owners under a land contract and 5% will be my contribution. My owner financed portion is 10 years at 2% with a 3 year balloon. The bank terms are 5% for 20 years with a  5 year balloon. The bank has agreed to pull in the remaining principle into their loan after the 3 years is up. At year 4 I will hold over 20% in equity and after year 5 I will own nearly 25% setting myself up for a comfortable refinancing situation.

    What I needed to know to make this decision given it is 4X larger then my current property is I needed to have a very confident understanding of what my NOI would be. If I know, under conservative estimating what my NOI will be I can calculate my depreciation and look at my bank terms to understand what my income tax liability will be. Then I determined what the absolute highest financing terms I could afford. Rather then focus only on purchase price in my negotiation I focused on my financing costs. The overall financing cost is based off of the purchase price and the terms so you can have movement in both to get a situation that works for you and the buyer. This seemed to make the negotiations very simple in my experience. Feel free to PM me if you would like to talk through this further as I would be happy to do so.

    2Reply
  • Brandon TurnerPro Member
    Investor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
    10y

    Looks like you've got some good advice already, @DJ Cummins - but I'll jsut add this: this first meeting is JUST that... a first meeting. Use this as an opportunity to get to know the seller, find out about the property, ask them how they got into real estate and what they love and don't love about it. Really just try to build a relationship here - I personally wouldn't push the "buy" angle too much unless they ask. The relationship part is KEY if you plan to do any seller financing. They have to like, and trust, you. Hope that helps! Good luck and let us know how it goes!

    Podcast Guest on Show #92
    7Reply
  • DJ Cummins
    OP
    Rental Property Investor · Bethalto, IL · Member since 2014 · 319 posts · 103 votes
    10y

    Thank you everyone.  @Brandon Turner , great advice.  i am not a pushy car salesman kind of guy, so my original thought was just be myself and by the guy some brunch.  You have helped to confirm that.  I am excited and nervous at the same time.  I will keep everyone posted as to what happens this weekend.  

    Any other advice is still much appreciated!

    DJ

    1Reply
  • DJ Cummins
    OP
    Rental Property Investor · Bethalto, IL · Member since 2014 · 319 posts · 103 votes
    10y

    @Joel Florek thank you, and I will probably take you up on that after my meeting Saturday, as long as it goes well!  I appreciate it!

    0Reply
  • Simon Shih
    Investor · Houston, TX · Member since 2012 · 354 posts · 186 votes
    10y

    Great first step @DJ Cummins. What did your letter say? 

    0Reply
  • DJ Cummins
    OP
    Rental Property Investor · Bethalto, IL · Member since 2014 · 319 posts · 103 votes
    10y

    Thank you @Peter MacKercher.  I wrote down all of your suggestions.  Appreciate you taking the time to post a reply!

    1Reply
  • DJ Cummins
    OP
    Rental Property Investor · Bethalto, IL · Member since 2014 · 319 posts · 103 votes
    10y

    my letter just basically said i knew he owned a couple of apartment buildings, and i asked if he would be willing to seller finance one of them.  It was barely 1/2 a page long.  I know it has been on and off the market in the last year or two.

    I was really just practicing...didnt think i would get a response.  I was honestly killing time while my wife made me watch some HGTV show. haha

    1Reply
  • Cary P.
    Rental Property Investor · Westminster, CO · Member since 2015 · 82 posts · 30 votes
    10y

    I'm at my kiddo's piano practice on my phone, so this will be brief.  I've posted several times in the past about concerns with PM companies.  Do you already have a PM company in mind that handles this size and class of property?  Have you seen their properties and talked to owners and tenants about how happy they are?  Our biggest problem jumping into 20+ unit properties is the PM company.  If you message me, I'll expand on this more when I'm home.

    2Reply
  • Nate Wightman
    Investor · Denver, CO · Member since 2016 · 213 posts · 57 votes
    10y

    @Cary P. I know life is busy but just curious if you had some time if you could expand on your PM issues....  thanks...  Also have to say that @Brandon Turner comments about 1st visit being just to test the mutual comfort level was fascinating... didn't even enter my head.   fun to learn. smiles

    0Reply
  • Cary P.
    Rental Property Investor · Westminster, CO · Member since 2015 · 82 posts · 30 votes
    10y

    @Nate Wightman, the short story is that DJ said he thought he could manage this 24-plex with a PM company. I'm just trying to find out if he already has a PM company in mind because a multi-plex is a significantly more hands on prospect than SFH. I have worked with two different PM companies in the last year. I was extremely naive about what questions to ask with the first company. With the second company, I was in a crunch and they were saying the right things, but they couldn't delivery on their promises and I'm fighting to break the contract. I've been burned twice. Before buying the multi-unit, I wa managing 6 SFH by myself and doing just fine. My hope with the multi-units was to be completely passive, but it has been anything but that. I'm just hoping DJ and anyone else who reads this post are making sure they understand the implications of jumping up to this size property and expecting that a PM can solve their problems. Just hoping a LOT of research is put into the PM company as the property itself. That is what is "killing" me right now.

    0Reply
  • Vanessa Vandervalk
    Investor · Madison, WI · Member since 2015 · 44 posts · 31 votes
    10y

    This is exciting! No matter what happens, you will learn a lot. Not that I know from experience, but if you do get to the point of checking out the property, the book called ABCs of Real Estate has a detailed outline of what to investigate throughout the entire property, so you don't forget to tally up key details. Good luck!

    0Reply
  • Vanessa Vandervalk
    Investor · Madison, WI · Member since 2015 · 44 posts · 31 votes
    10y

    One more thing - you mentioned how to bring up seller financing. Everything I've learned from Brandon Turner and all the other experts points to building a win-win situation. So, in your first meeting, you will get the chance to understand where he is coming from and what problem he is trying to solve. If you can help him with that, and if seller financing helps him with his problem, you'll both win!

    1Reply
  • Kay Kay Singh
    Rental Property Investor · Fort Wayne, IN · Member since 2016 · 258 posts · 177 votes
    10y
    Do not forget to use the BP calculators to analyze your deal once you get the numbers .
    1Reply
  • DJ Cummins
    OP
    Rental Property Investor · Bethalto, IL · Member since 2014 · 319 posts · 103 votes
    10y

    hi @cary.  We have self managed a 4 unit for the past year without any issues...but this is 6 times that amount!   I do not currently have any pm set up.  If the meeting goes well on saturday, I will be doing a ton of research, and probably leaning on my BP family as well.

    0Reply
  • Cary P.
    Rental Property Investor · Westminster, CO · Member since 2015 · 82 posts · 30 votes
    10y

    Make sure whatever PM companies you talk to already manage multiple properties in this size range and class. Do not be the first! Make sure you can benefit from economy of scale.  Check out properties they manage, talk to owners and tenants.  Check in on all fees, verify there are not mark ups for maintenance, etc.  We jumped ten fold in a year and did not really know what we were getting into. I'm just trying to save others ready to make the jump the heartache we've been going through. Management is the most important piece.

    1Reply
  • Brad Bartlett
    Property Manager · Palmetto, FL · Member since 2015 · 15 posts · 11 votes
    10y

    @DJ Cummins

    Way to go with the mailers. You’ve inspired me to send out mailers too. What made you decide on those two apartment complexes?

    I agree with @Brandon Turner and @Vanessa Vandervalk. Use the first meeting to find out what the seller’s goals are. The seller may want cash up front; maybe they want monthly income without the headaches of collecting rent and fixing toilets. For example, if the seller is stuck to a high sales price, structure the deal where you give the high sales price but get cheap financing in exchange. Find out as much as you can to structure a win-win deal. If you can structure the deal in a way the seller gets what they want and you get what you want, you’ll soon the proud owner of a 24-plx. Please keep us posted. I’m very excited for you.

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    Experience teaches you things.

    Unless you are buying in a premium area and tenants where the cost per unit is likely over 100,000 a door for a fairly new product you will have issues.

    24 units you do not have the proper scale to be passive especially with what most investors are buying which is C class areas and tenants at a lower cost per door. For example a C area at 40k a door for 24 units might be 960,000. A high end 24 unit might be 100k a door or 2,400,000. These older buildings need constant work to maintain and you need a full time repair person for that otherwise you do it yourself to save money or use retail trades that charge double or triple and suck out all of the cash flow. If you do it yourself you are buying yourself a J-O-B. If your property makes for instance 30k NOI after expenses but you work it full time as a job then it is hampering focusing on acquiring more income properties passively. There is only one of you so properties need to be scalable with a system in place to grow.

    Proper scale is generally reached at 80 units or higher where there is enough income to sustain a full time repair person. That is if the rents are decent and not 400  a month etc.  Otherwise they are working for other building owners and yours to try and make a living.

    Also be very careful about owner finance. Sellers think since they are financing the whole thing or close to it that  a buyer should accept an inflated price or crappy loan terms.

    Brandon Turner bought at a very different time in the multifamily cycle years and years ago on his financed deal. Cycle times were much more advantageous then for multifamily. If you owner finance and have a big equity upside for your efforts then the minimal cash flow and large headaches in the short term can be worth it. If however you are buying at a time in the market cycle where multifamily is frothy and almost peaking you are just buying for cash flow and not much cap rate compression for equity growth.

    In that situation it is a lot of risk for a small reward.    

    If you owner finance do not give  a personal guarantee or encumber other properties as collateral. Leave an out for yourself to have gained experience but not have lost a lot of money. To give a guarantee and put up other property as security you better be buying a grand slam deal.

    Have others review your numbers to get multiple perspectives on a potential investment. It may not be the deal you think it is after others have evaluated it with more experience. You have to get out there and keep trying though. Distance to your other properties will be key as well. If these are lower income to middle income type tenants you will need a PM company that specializes in that. It takes a special ability to keep those tenants focused and paying on time.  

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    3Reply
  • Chad Duval
    Rental Property Investor · Boston · Member since 2014 · 103 posts · 21 votes
    10y

    How'd your meeting go, @DJ Cummins?

    0Reply
  • DJ Cummins
    OP
    Rental Property Investor · Bethalto, IL · Member since 2014 · 319 posts · 103 votes
    10y

    hello,  

    The meeting went well.  We had a great, nearly 2 hour conversation.   He is not ready to seller finance just yet, but I think it's a possibility.  I'm not sure why he responded to my letter, since I mentioned owner financing specifically.  Hopefully I will be able to stay in touch with him and get something done in the future.  We had a lot in common, even trout fishing at the same spot.

    0Reply
  • DJ Cummins
    OP
    Rental Property Investor · Bethalto, IL · Member since 2014 · 319 posts · 103 votes
    10y

    Well, i gave the owner of the apartment building about 2 weeks to think about things before i sent him an email with some proposed terms(just a few "what ifs,"

    That was something one of my mentors suggested, just to try and keep him interested.  We really did hit it off great, so hopefully he decides he IS ready to do some owner financing in the future.

    0Reply
  • Jake ThompsonPro Member
    Rental Property Investor · Albany, OR · Member since 2015 · 312 posts · 136 votes
    10y

    DJ, thank you for sharing this. I know you are looking for advice, but you've actually helped me hugely. I live in san diego and have been trying to determine how I'm going to finance my rental properties. This is a great idea I'm going to try! Thank you! 

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free