Just bought a 78 unit disaster...

Multi-Family and Apartment Investing
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Just bought a 78 unit disaster...

Tom Lafferty
Plano, TX · Member since 2013 · 226 posts · 156 votes

We just purchased a 78 unit property in the DFW area that had horrible management, tons of deferred maintenance, and 25 vacant units..... hope I don't regret it!  Thought it might be interesting to those looking at multifamily??

Here are a few details:

-20 investors w/$25k-$100k each

-Purchase price: xxxxxxx (removed in case appraisal district starts snooping around!) Taxable value right now is about $2,300,000

-Loan: Full recourse 75% LTV (including 75% of $450,000 rehab budget), 5 yr term, 25 year amortization, 4.5% interest with interest only year 1

-Age: 1968

-Individual HVAC and Hot water heaters

-9 down units have been "down" since 2007!!

-Professional management w/1 full time manager and 1 full time maintenance tech

-Plan:  Full exterior rehab, renovate all down/vacant units, move office from TWO units that are currently being used to the abandoned dedicated office that is down to the studs.  After a year to 18 months, we'll look at a sale if the market is still crazy, or also consider a refi into fannie/freddie debt.   

Most challenging deal I've encountered due to having virtually NO records from seller; so please don't ask what the cap rate was!  Just know that it would be horrendously low based on actual numbers.

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Brian Adams
Syndicator of Large Apartment Buildings · Glen Mills, PA · Member since 2009 · 1k+ posts · 1k+ votes
10y

@Tom Lafferty, after speaking with you and learning more about your strategy on this asset, I strongly believe you will be very successful with this opportunity.

8Reply
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  • Penny ClarkPro Member
    Sacramento, CA · Member since 2014 · 513 posts · 319 votes
    10y

    @Tom Lafferty, thanks for sharing. Please keep us posted on your progress too!

    0Reply
  • Rick Wang
    Investor · New York, NY · Member since 2016 · 91 posts · 46 votes
    10y

    How much is rent there? Are these one bedroom units?

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Tom Lafferty:

    Most challenging deal I've encountered due to having virtually NO records from seller; so please don't ask what the cap rate was!  Just know that it would be horrendously low based on actual numbers.

    The seller had NO cap rate.  You created a cap rate when you purchased the building.  What was it?

    2Reply
  • Jassem A.
    Investor · PA · Member since 2013 · 1k+ posts · 602 votes
    10y

    Interest only for the first year should help

    0Reply
  • Brian Adams
    Syndicator of Large Apartment Buildings · Glen Mills, PA · Member since 2009 · 1k+ posts · 1k+ votes
    10y

    @Tom Lafferty, I know we haven't yet connected on the phone, but I am an experienced operator and repositioned a 200+ unit deal in Dallas.

    if you want to talk strategy let's schedule a call.

    2Reply
  • Jeff F.
    Rental Property Investor · WY · Member since 2016 · 243 posts · 221 votes
    10y

    Kudos! Best way for forced appreciation! 

    0Reply
  • Tom Lafferty
    OP
    Plano, TX · Member since 2013 · 226 posts · 156 votes
    10y

    rents are currently about $700 for a 1/1, and $810 for a 2/2, all bills paid.  Pro forma rents are likely to be around $825 & $935, including utilities, although they'll be billed back to tenants going forward.

    As far as the cap rate, I said not to ask!! Just kidding. I never got financials that I trust, so I have no idea what their expenses were. I would normally put their T12 income over our yr 1 expenses, but that would likely be a negative cap rate. I don't even know if they were making money by the time we took over. Our pro forma cap rate after stabilization is projected around 10.5?

    1Reply
  • Tom Lafferty
    OP
    Plano, TX · Member since 2013 · 226 posts · 156 votes
    10y

    Hi @Brian Adams, I answered a text, FB post, or email recently from you.  Can't remember which and can't find it now?  Send me a message...

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Tom Lafferty:

    rents are currently about $700 for a 1/1, and $810 for a 2/2, all bills paid.  Pro forma rents are likely to be around $825 & $935, including utilities, although they'll be billed back to tenants going forward.

    As far as the cap rate, I said not to ask!! Just kidding. I never got financials that I trust, so I have no idea what their expenses were. I would normally put their T12 income over our yr 1 expenses, but that would likely be a negative cap rate. I don't even know if they were making money by the time we took over. Our pro forma cap rate after stabilization is projected around 10.5?

    1.  Negative cap rate?  How do you figure that?

    2.  If you did not use a cap rate to value the property how did you get your offer price?

    3.  How would 10.5 cap rate compare to the market?  If the market is 12% then you put too much money into it!

    1Reply
  • Darryl Dahlen
    Commercial Loan Officer · Southern Maine, ME · Member since 2009 · 782 posts · 415 votes
    10y

    If you are in need of a professional management company that is based out of Dallas let me know and I'd be happy to refer them to you. They manage thousands of units and some of my clients use them exclusively and they're experienced when it comes to value-add scenarios.

    0Reply
  • Tom Lafferty
    OP
    Plano, TX · Member since 2013 · 226 posts · 156 votes
    10y

    If you're talking about a cap rate based on the sellers actual expenses and their actual income, then we absolutely paid too much.  That is not how properties currently trade though.  Forgive me if I'm misunderstanding your question. 

    At the risk of getting blasted by the many that DO subscribe to that theory, here goes....

    We have a yr one operating budget of about $425,000 and their current income is probably around $500,000. So $75k NOI at lets say a 7.5 cap is $1,000,000. No way is it going to sell for that. If I had an accurate picture of the sellers actual expenses, the NOI would be higher, as I know they weren't spending much on it, but they couldn't have been making much profit, so the cap rate would still be really low. Short answer, we bought at a price somewhere between actual value based on actual numbers and what it would be worth when run by a reasonable operator. I would have loved to pay less, but given our experience in the market, it has enough potential to hit the returns we want.

    1Reply
  • Tom Lafferty
    OP
    Plano, TX · Member since 2013 · 226 posts · 156 votes
    10y

    @Darryl Dahlen, thanks for the offer!  We've got a great PM engaged at this time, but I'm always up for meeting a new one.  I know a lot of the C class PM's, but may not know that one.  Thanks!

    1Reply
  • Jon Q.
    Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes
    10y
    Originally posted by @Tom Lafferty:

    We just purchased a 78 unit property in the DFW area that had horrible management, tons of deferred maintenance, and 25 vacant units..... hope I don't regret it!  Thought it might be interesting to those looking at multifamily??

    Here are a few details:

    -20 investors w/$25k-$100k each

    -Purchase price: xxxxxxx (removed in case appraisal district starts snooping around!) Taxable value right now is about $2,300,000

    -Loan: Full recourse 75% LTV (including 75% of $450,000 rehab budget), 5 yr term, 25 year amortization, 4.5% interest with interest only year 1

    -Age: 1968

    -Individual HVAC and Hot water heaters

    -9 down units have been "down" since 2007!!

    -Professional management w/1 full time manager and 1 full time maintenance tech

    -Plan:  Full exterior rehab, renovate all down/vacant units, move office from TWO units that are currently being used to the abandoned dedicated office that is down to the studs.  After a year to 18 months, we'll look at a sale if the market is still crazy, or also consider a refi into fannie/freddie debt.   

    Most challenging deal I've encountered due to having virtually NO records from seller; so please don't ask what the cap rate was!  Just know that it would be horrendously low based on actual numbers.

    I think your biggest challenge will be attracting decent management with such a small number of units.  The problems don't scare me as long as you negotiated a low enough purchaser price with forecasted upside so you are not working for free.   I hope you got a really good deal on the property, so you'll be able to generate a decent return for your 20 investors... 

    0Reply
  • Tom Lafferty
    OP
    Plano, TX · Member since 2013 · 226 posts · 156 votes
    10y

    Here's a picture of some of our lovely units....This one had a fire in 2007, and has never been repaired.  Even if you figure avg rents over those 10 years at about $700, and only being occupied 90% of the time, they lost around $75,000 in income.  At the current mkt rent of $850, it would add $140,000 in value if up and running.  Unbelievable.  

    4Reply
  • Tom Lafferty
    OP
    Plano, TX · Member since 2013 · 226 posts · 156 votes
    10y

    Heres a kitchen that had a slab leak at some point.  They fixed it and turned the unit into a storage unit.  There were no less than 5 or 6 of these around the property!  

    1Reply
  • Tom Lafferty
    OP
    Plano, TX · Member since 2013 · 226 posts · 156 votes
    10y

    Lovely green pool against the abandoned office.  Just to the left are TWO two bedroom units, each able to bring about $850 in rent, connected to be used as the office.  We'll be rehabbing both units and leasing them (at a premium since next to the pool), and moving the office into the free standing building once renovated.  

    0Reply
  • Tom Lafferty
    OP
    Plano, TX · Member since 2013 · 226 posts · 156 votes
    10y

    @Jon Q., the management company was on board from the very beginning, and a huge part of the analysis.  The owner personally owns a similar property very nearby so is intimately familiar with the submarket.  We are also working on other deals together, so there are additional benefits to both of us.  

    As far as the investors, I sure hope so too!!  They are all very educated on the investment and know all the risks.  We're projecting around 100-125% to them including annual cash flow and a capital gain at sale in 5 years.  Those are conservative numbers, and I hope to far exceed them, but obviously the economy needs to cooperate to make that happen!  

    1Reply
  • Brian Adams
    Syndicator of Large Apartment Buildings · Glen Mills, PA · Member since 2009 · 1k+ posts · 1k+ votes
    10y

    @Tom Lafferty, after speaking with you and learning more about your strategy on this asset, I strongly believe you will be very successful with this opportunity.

    8Reply
  • Chris V.
    Rental Property Investor · SF Bay Area · Member since 2015 · 154 posts · 179 votes
    10y
    Originally posted by @Tom Lafferty:

    We just purchased a 78 unit property in the DFW area that had horrible management, tons of deferred maintenance, and 25 vacant units..... hope I don't regret it!  Thought it might be interesting to those looking at multifamily??

    Here are a few details:

    -20 investors w/$25k-$100k each

    -Purchase price: xxxxxxx (removed in case appraisal district starts snooping around!) Taxable value right now is about $2,300,000

    -Loan: Full recourse 75% LTV (including 75% of $450,000 rehab budget), 5 yr term, 25 year amortization, 4.5% interest with interest only year 1

    -Age: 1968

    -Individual HVAC and Hot water heaters

    -9 down units have been "down" since 2007!!

    -Professional management w/1 full time manager and 1 full time maintenance tech

    -Plan:  Full exterior rehab, renovate all down/vacant units, move office from TWO units that are currently being used to the abandoned dedicated office that is down to the studs.  After a year to 18 months, we'll look at a sale if the market is still crazy, or also consider a refi into fannie/freddie debt.   

    Most challenging deal I've encountered due to having virtually NO records from seller; so please don't ask what the cap rate was!  Just know that it would be horrendously low based on actual numbers.

     Congratulations! It seems like you have a project on your hands!:) Kidding aside, this looks like a lot of fun, exactly the kind of deal that I'd like to get into, provided the price is right. You start with a bad baseline, which creates a lot of upwards potential and a ton of work to do, which allows you to follow your own vision and do it right! Congrats again and keep us posted!

    0Reply
  • Eddie T.
    Rental Property Investor · NY · Member since 2013 · 844 posts · 350 votes
    10y
    How did you find this property and the seller?
    0Reply
  • Michael Chua
    Martin, TN · Member since 2016 · 7 posts · 0 votes
    10y

    Congratulations on this purchase. I hope someday i can get that kind of deal too. Keep posting updates! 

    0Reply
  • Tom Lafferty
    OP
    Plano, TX · Member since 2013 · 226 posts · 156 votes
    10y

    believe it or not, this deal was listed on loopnet, which ordinarily doesn't have much.  It was listed by one of the owners wife who is a broker.  There was no information other than a property name, a phone number, and a price.  It took four months to get it under contract, and two more to close.

    0Reply
  • Ben Meisel
    Real Estate Professional · Redmond, WA · Member since 2015 · 67 posts · 47 votes
    10y

    I love the green pool!   It reminds me of a very well known pool in Rio right now!   

    Congratulations on getting this deal together, that's likely been a lot of work already! 

    3Reply
  • Catherine German
    Realtor · Sequim WA & Port Angeles, WA · Member since 2016 · 164 posts · 78 votes
    10y

    Looks awesome !! It will be a challenge and a rewarding one when you are done. Good luck to you. These projects are scary and stressful but you can turn this place around with some elbow grease and a good marketing plan. 

    0Reply
  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    10y

    @Tom Lafferty, I am jealous of your awesome find. Nice job. 

    [email protected]Podcast Guest on Show #261
    BiggerPockets
    1Reply
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