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.

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  • Bhekizwe M.
    Bulawayo, Zimbabwe · Member since 2015 · 1k+ posts · 253 votes
    10y

    Thanks for sharing.will be great to see how it turns out after the rehab

    0Reply
  • Thomas Leonard
    Real Estate Investor · Andover, MA · Member since 2014 · 30 posts · 19 votes
    10y

    I enjoyed reading this post.  This is a good project for you and your investors.  Stabilize it, take a short break, repeat.  

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

    That's exactly what I did.  We sold the previous deal in February of this year.  I'd been looking for a LONG time, but this one worked out that we were under contract just a few months after selling the last one.  I'm hoping it doesn't take that long to get the next one.  I'll probably start looking in a month or so.

    0Reply
  • Dan Bee
    Los Angeles, CA · Member since 2014 · 19 posts · 1 vote
    10y

    You mentioned 20+ investors. Where did you find these investors? Are they family/friends or are they professional/full time investors, etc?

    0Reply
  • Simcha Davidman
    Rental Property Investor · Baltimore, MD · Member since 2014 · 408 posts · 209 votes
    10y

    Good luck! It's going to be really exciting!

    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    10y

    I just listened to your podcast...great stuff.  BP members, the link is below.

    http://www.oldcapitalpodcast.com/podcasts/episode-...

    Tom, how could your first property afford on-site management and maintenance? It did not seem large enough to support that model. Management of tweener complexes without on-site staff is the largest inefficiency of that model (tweener = between the SFR and MF management model).

    0Reply
  • Andrew Beaver
    Malden, MA · Member since 2016 · 112 posts · 63 votes
    10y
    Mike Dymski Random unrelated question after looking at your profile... Do you feel that you're in a position to retire with your 34 rental units? I noticed that was your goal which is a similar goal of mine (and probably the rest of the RE world). Just trying to figure out if you've hit that comfort number but you are continuing for the fun/love if real estate. Or 34 sounds like a lot but once you're deep in the game you realize you need way more than that to retire My expectation is (outside of obvious road blocks) approximately 30-40 units at hopefully 2-300 cashflow per unit would get me to a comfortable position in covering expenses (assuming that number is different for all people).
    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    10y

    @Andrew Beaver maybe after four kids are out of college.  I'm at the office right now on mint.com tracking our family burn rate.  As you mentioned, the other part of the equation is more individual in nature...our intended lifestyles and what each of us gives up on the W-2 side.  After the kids are out of school in five years, one certainty is that the existing portfolio provides security, flexibility and freedom and that is a powerful piece of mind.

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

    @Mike Dymski, on the 32 unit, I had an agreement with the management company of the property next door to ours.  I was not paying them for full third party management, just a fee to share their leasing person.  She was running two properties that were on either side of ours, totaling 72 units.  With our 32 she was at 104, which is perfect for a single full time person.  I was still the asset manager and was very hands on, but at least had people on site to deal with everything.  I did have bids from a few 3rd party companies for full management that were very appealing (5% fee which is great for a 32), but it hurt the returns enough that I wasn't going to be able to get my investors the returns I wanted.  There is a whole discussion on this exact topic at the following:

    https://www.biggerpockets.com/forums/432/topics/112360-management-options-for-32-unit-apartment

    Its funny to look at it now, as I can't believe its been over two years.  I was REALLY worried about how it was going to go at that point.  We've since sold the property, and I now have an enormous appreciation for 3rd party management companies.  I found an incredible one for this 78 unit, and they have been SO helpful I cannot even tell you.  They're also managing the rehab entirely, which was not expected initially. 

    I completely agree with you though, management for anything up to about 60 units, or really even 80, is very difficult.  You can hire a part time person, but everyone I know who is doing that has challenges finding good people that will stay in a part time job very long.  A manager living on site could be a great option, but obviously has its own challenges. 

    For maintenance we found a tenant living at our property that was very skilled and we paid him hourly on a contract basis for maintenance at our 32 unit.  We budgeted $15k for a PT manager in the beginning, and $15k for part time maintenance, and we beat both.  The leasing agent we were sharing cost us $14k/yr, and maintenance ran about $10-$12k/yr. 

    2Reply
  • Tom Lafferty
    OP
    Plano, TX · Member since 2013 · 226 posts · 156 votes
    10y

    @Mindy Jensen I wouldn't be jealous just yet!  I'll try to post some updates as we get units back online, but I'll be plenty worried until we can prove out our projections....

    1Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    10y

    Thanks Tom, both the post here and the prior post are helpful and directly answer my question.

    Turns and maintenance are less of an issue than management for me.  I am using MF painting/cleaning, flooring and supply vendors on turns and they are very efficient, affordable and nothing like dealing with subcontractors.  I knew 3rd party management would be tough going in but am using this size complex as a stepping stone like you as well.

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

    Unit turns were by far my biggest challenge on the first one.  We used our maintenance guy for most, but he had a full time job so it was mostly nights and weekends, so downtime was a huge issue.  We were paying $13/hr though, so it really did offset the lost rent.  He also had the issue of taking great pride in his work, which is awesome, but not terribly congruent with a C class unit turn.  I had the same issue but gradually came to the realization that there had to be some compromises when you're talking about an $800/mo apartment!

    1Reply
  • Bruce Fraser
    Investor · Dallas, TX · Member since 2015 · 2 posts · 0 votes
    10y

    Tom, I focus on 100 unit+ sized properties in TX and other targeted regions.  I have a good deal of experience in various other real estate investments in the DFW area (hard money lending, etc).  I office in Dallas near Preston Center & would love to meet / grab breakfast or coffee one morning to talk shop.  I find that it is always good to network with other highly experienced and active investors in the area.

    0Reply
  • Paul B.
    Rental Property Investor · Dallas, TX · Member since 2015 · 501 posts · 504 votes
    10y
    Originally posted by @Dan Bee:

    You mentioned 20+ investors. Where did you find these investors? Are they family/friends or are they professional/full time investors, etc?

    There are several networking groups here in Dallas/Fort Worth where people who put these deals together meet people who are interested in investing in these deals, and vice versa. Some of the groups cost money to join, because they include a training component, for those with no prior experience. Some of the groups are free or very low cost. But presumably there are similar groups in your city. Look on Meetup.com or attend some local REIA meetings.

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

    Thanks Paul.  I missed the question from @Dan Bee.  Our investors are mostly from a mentoring and networking group I joined.  I also have a few friends and family.

    0Reply
  • David Chapman
    Boulder, CO · Member since 2016 · 9 posts · 3 votes
    9y
    Originally posted by @Paul B.:
    Originally posted by @Dan Bee:

    You mentioned 20+ investors. Where did you find these investors? Are they family/friends or are they professional/full time investors, etc?

    There are several networking groups here in Dallas/Fort Worth where people who put these deals together meet people who are interested in investing in these deals, and vice versa. Some of the groups cost money to join, because they include a training component, for those with no prior experience. Some of the groups are free or very low cost. But presumably there are similar groups in your city. Look on Meetup.com or attend some local REIA meetings.

    @Paul B. - I'd like to get access to to some of these deal streams and join a few REIA groups in the Dallas area to build up my network. My Google search has turned up quite a few in the DFW area.... any you would recommend?

    0Reply
  • Paul B.
    Rental Property Investor · Dallas, TX · Member since 2015 · 501 posts · 504 votes
    9y

    @David Chapman 

    Below is one of the first groups I found when I began this REI journey. They have a program where you can passively invest in single family homes for as little as $5,000. It might be a good way to start out without spending a lot of money or doing any work.

    https://www.meetup.com/dallasreig/

    I have since decided to focus on multi-family, where the typical passive investment starts around $50,000. Most of the REIAs in DFW are primarily single family. You might still check them out if you consider yourself a beginner. I think you can learn so much by reading this site, but it's good to get some local knowledge too. Aside from the group above, search for NTAREI, DFW REIA and DFW Investors.

    If you decide multi-family is a better fit, there are quite a few groups in town, and usually you can find a meeting nearly every week, but they appear to have slowed down for the holiday season. Go to Meetup.com and search for "Apartment Investor Mastery." There are several groups in the area using that title run by students of Brad Sumrok. Also search Meetup for MINNT (Multifamily Investors Networking of North Texas). Any of those are good places to meet some other investors to get some tips, as well as deal sponsors that you may decide to invest with, after building a relationship. 

    I was in your position only about a year or so ago, so feel free to PM me if I can answer any more questions.

    1Reply
  • Account Closed
    Investor · Princeton, TX · Member since 2014 · 1k+ posts · 1k+ votes
    9y

    @Tom Lafferty  It would be great to hear an update.

    0Reply
  • David Chapman
    Boulder, CO · Member since 2016 · 9 posts · 3 votes
    9y

    @Paul B.  Much appreciated. I'll likely take you up on your offer as well.   Thanks. 

    0Reply
  • Jackson Long
    Investor · Memphis, TN · Member since 2016 · 379 posts · 130 votes
    9y

    This sounds like a great opportunity for you to start a blog!

    0Reply
  • Douglass Benson
    Investor · Mason, MI · Member since 2014 · 151 posts · 152 votes
    9y

    I love these kind of places.  The owner is typically begging to get out, the buildings are so tired and neglected that the minute you start sprucing it up, the entire world notices.  The picture of the studs inspired me.  Well done.  I can't wait to see how it all turns out.  

    0Reply
  • Jeff Chapz
    Rental Property Investor · Austin, TX · Member since 2015 · 43 posts · 8 votes
    9y

    Good luck Tom. Keep us posted... we are learning from sir.


    Regards, 
    Jeff.

    0Reply
  • Tom Lafferty
    OP
    Plano, TX · Member since 2013 · 226 posts · 156 votes
    9y

    Hi @Account Closed, I have been meaning to post a follow up, but just haven't gotten around to it, so thanks for the reminder.  Things are going pretty well, although we still have a long way to go.  There are still a lot of unit interiors to rehab, but our exterior paint, carpentry, metalwork, are finally about done.  

    I suspected we would have a drop in occupancy, and was hoping it didn't go below 50%.  There were over 20 vacant or down units at takeover, and within a few months it had climbed to 33, so about 58% occupancy.  There were a lot of people with huge balances, and many others that just weren't paying.  We've been very lenient for partial payers which we ordinarily would not be, but when you have that many vacant, if they're paying enough to cover their utilities plus a bit more its worth keeping them!  The good thing is that now we can get in and rehab a lot of units right away, but it takes a while to do that.  The units that have been done turned out extremely well, and we're getting significantly more rent than our pro forma.  So far at least $50 higher, but as we get our occupancy up we may push further.  Even at $50, thats $50 x 78 units = $3900/month x 12 months = $46,800 in additional cash flow above the increase we were already shooting for.  The best part though is when you apply a cap rate to that income.  Right now its probably a 7.5% cap, so $46,800/.075 = $624,000 we've added to the value of the property.  Considering that is on top of the first rent increase, I am very happy with the results so far.  Hopefully we can get the occupancy up fairly quickly, as I will definitely be worried about that until we're in the mid 80's or so.   

    I'll try to post a few photos of finished units.  

    Well, that didn't work!  File sizes are too large and i don't know how to shrink them......

    0Reply
  • Michael Le
    Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    Hey @Tom Lafferty, awesome job. Glad to hear it's going well. As for the pictures, if you open them in Microsoft Paint there is a resize option. If it doesn't work you'll have to show me next weekend.

    0Reply
  • Jack B.
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    9y

    Judging by the pics I'm guessing you got the place at one heck of a discount and have a lot of upside. Just WOW though...

    0Reply
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