Opportunity to inherit two apartment buildings

Blake Morgan · 2017-02-18T14:47:40-08:00

Hi everyone I'll try to be brief and give the pertinent details. I'm being given the option to take over two apartment buildings from my dad. He is thinking about selling the buildings for around 1.6 mil but will give them to me if I want them. The buildings contain around 30 one bedroom units and bring in $180,000 per year in rents. They are located in Birmingham, AL and were built in 1962. My dad has run these apartments, managing and maintenance, for decades but is now looking to scale back his work load. I'm 24, have recently graduated, and am almost a year into my first job in Atlanta which I like and would like to try a career in. Right now I see this as a lot of potential money, but also a lot of risk. The apartments are pretty cheap and basic so it's generally lower quality tenants, the buildings are old but pretty well maintained, one has a nice view of downtown. Does anyone have knowledge of the Birmingham market? Is there a way to hire a company to manage and maintain the buildings while I retain ownership and part of the profits? What about hiring people for those tasks in the existing structure of the holding company? Is this too big or risky of a situation where I should just let him sell and be done with it? Since I'm not putting any money in, is this a good investment of time and energy?I know this is my personal decision but I feel like this is a very generous offer and I want to explore the options and hear some opinions. Thanks

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

9y

Wow- quite an opportunity! Does your dad have other bldgs as well? $1.6m is a lot!

I would probably ask him to 1031 into triple net commercial and wait to inherit. Gift taxes run about 55%. Not a DIY situation. Get an estate and tax pro involved to do it properly. Congrats and good luck!

2 Reply

Joseph Gozlan

Real Estate Agent · Plano, TX · Member since 2015 · 734 posts · 511 votes

9y

@Blake Morgan First, tell your dad thank you and how much you love him :-)

Second, welcome to BP!

Personally I'm a big believer in buying real estate but failed to find a good enough reason to sell it just yet :-D

Does your dad expect you to pay him for that? Will you need to give him some or all of the $180K/year?

if the answer is yes then you need to run the numbers as if you'd be buying this with owner financing so you can pay your dad back.

To answer your specific questions, if you'd like to keep your job skip the "hiring people for those tasks" option and go straight to hiring a professional property management company that specializes in multi family properties (the last part is very important). They will take 5%-8% of your gross income but should handle all the day-to-day operational side of things.

This does NOT mean you can just "set and forget" this, you still have to be involved enough to make sure your properties are well cared for. I've seen way too many apartment buildings spiral very fast when there is poor management and the owner doesn't check on the property. This is YOUR property, no one will care about it more than you will.

As @Steve Vaughan said above, make sure to talk with an estate planning lawyer and your CPA so you won't be surprised with a very large bill handed to you by the IRS at the end of the year.

Good Luck!

2 Reply

Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

9y

If it is not your dream to be a investor or landlord, if you are starting a new career that you want to experience thank your father very much but suggest he simply sell the properties. Let him experience the enjoyment of benefiting from the money he has spent a life time earning before he is too old to do so.

There will still be plenty left to inherit when he passes.

0 Reply

Blake Morgan

OP

Atlanta, GA · Member since 2017 · 6 posts · 2 votes

9y

Thanks for the responses guys.

@Steve Vaughan I'll bring up the 1031 to triple net commercial as something for him to ask his accountant about.

@Joseph Gozlan at this point he is not asking me buy this. He only takes $600/month from these properties. I would be more than willing to pay him much more than that to run the properties but he really wants to step back, and his body is breaking down from so many years of physical labor. Do you know of any management companies in Birmingham? Would once a month be enough of a check in frequency?

0 Reply

Blake Morgan

OP

Atlanta, GA · Member since 2017 · 6 posts · 2 votes

9y

@Thomas S. Thanks, at this point, that is the direction I'm leaning. His businesses have afforded me many comforts that I am so grateful for. I just want to make the best decision I can so I appreciate the inputs.

0 Reply

Joseph Gozlan

Real Estate Agent · Plano, TX · Member since 2015 · 734 posts · 511 votes

9y

Originally posted by @Blake Morgan:

Thanks for the responses guys.

@Steve Vaughan I'll bring up the 1031 to triple net commercial as something for him to ask his accountant about.

@Joseph Gozlan at this point he is not asking me buy this. He only takes $600/month from these properties. I would be more than willing to pay him much more than that to run the properties but he really wants to step back, and his body is breaking down from so many years of physical labor. Do you know of any management companies in Birmingham? Would once a month be enough of a check in frequency?

I'll start with a disclaimer: I am not a CPA/Lawyer/Financial adviser. The following is just MY opinion and should be taken as just that.

What I would do (again, just MY opinion) is put some leverage on the property (mortgage) and put that money into another investment (something safer, maybe triple net lease property) and have that income go to your dad. I wouldn't exceed the 60% leverage to stay on the safe side.

The rest of the income should be used to pay the PM company and to maintain the property. Make sure you run your number to confirm the property can carry the debt service costs.

Once a month is more than enough to be on site, make sure the management company doesn't let things go and that can be a nice trip to take with your dad to go see the property (unless you were involved all these years, you'll need his experience to identify things that might need attention and are not taken care of).

On top of the on-site visit, schedule a weekly meeting (can be a web session like Zoom or GoToMeeting) with the PM to go over the property status and the finances.

Lastly, I'd install security cameras on the properties so you can check in remotely at random times and see what's going on at the property.

Once again, this is just what I would do and as I said in my previous post, I'd start all that with a meeting with an estate lawyer and a CPA.

1 Reply

Wade Fisher

Investor · Dade City, FL · Member since 2016 · 18 posts · 7 votes

9y

Wait!

>> He only takes $600/month from these properties.<<

>>$180,000 per year in rents.<<

Sorry I am not sure how to quote on this site.

He is a saint? or a depression child.

for property worth >>selling the buildings for around 1.6 mil<<

He could make more in a standard (money losing) savings account.

This may sound harsh, I am sorry.

But this does not seem to add up.

Maybe you should step in. By one capacity or another.

0 Reply

Blake Morgan

OP

Atlanta, GA · Member since 2017 · 6 posts · 2 votes

9y

@Wade Fisher

These are not his only properties. He and his brother (some jointly some separately) own a couple shopping centers, other apartments, a few houses, etc. Landlording is his life. He only pays himself $600/month from the company that owns these two buildings, sometimes he will draw more when it is needed. I did a double take when I heard this as well haha. I didn't go to school for business so I don't know too much about it, but there is a web of companies that manage the various properties, we are talking about one of those companies.

@Joseph Gozlan Thanks so much. I will mull this over and see about setting something up with a CPA/attorney.

1 Reply

Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

9y

Hey Blake, managing the manager is not a once a month activity. I recommend looking at it as if he is giving you a small business rather than a property and you are managing the net income of that business. Incidentally, the net income of the property is what determines the property's value.

It also can be challenging to find 3rd party management that services this space in the market. There are many single family home management companies and many apartment complex management companies (with on site management) but the pocket of say 10-70 or so units is under-served and can be challenging. You are the type of owner that many BP investors target for potential acquisition...inexperienced, out of state and not involved. Maybe your dad knows of a good management solution or maybe he or others can mentor you. I am reading between the lines but maybe he wants you to have it so that you gain some experience or may take an interest in real estate...not sure. That usually happens more naturally though and won't work if it is not a good fit or if it is forced.

Good luck. The membership is here to help you learn how to manage and run the property if you choose to do so.

0 Reply

Blake Morgan

OP

Atlanta, GA · Member since 2017 · 6 posts · 2 votes

9y

My dad is generally against the idea of hiring a management company. It doesn't sound so bad to me, but I am inexperienced. I wonder if it is a generational thing, the amount of work he has personally put in, or a real knowledge of managed properties in the area.

I grew up working in the apartments and helping him with repairs, and upgrades so I have some familiarity with the buildings and general maintenance requirements. I think he would mentor me if I choose to go this route but I don't think I want to sacrifice my career and degree so soon after starting. At the same time I would like to find a way to allow these apartments to continue to create long term income. I am interested in real estate but at this point it's feeling like these apartments would be a whole job to themselves, and not something supplemental.

0 Reply

Jessica Duckett

Property Manager · Birmingham, AL · Member since 2016 · 8 posts · 2 votes

9y

Southern Property Management Group is excellent. https://www.southernpmg.com

I have worked with them personally, and they currently manage about 24-25 of the multifamily properties in Birmingham, AL. Hope this helps!

0 Reply

Tiffani Baggett

Rental Property Investor · Birmingham, AL · Member since 2016 · 97 posts · 51 votes

9y

Hi Blake, Baggett Property Solutions is a Property Maintenance company here in Georgia, however the owner is from Birmingham, AL and frequents there very often to do work. He asked me to send you his contact info. He has over 10 years of Apartment Maintenance experience and is currently Maintenance Supervisor at a large Apartment complex in Georgia. He would love to discuss further with you. I could PM you his info.

0 Reply

Jarrod Cook

Real Estate Broker · Southeast · Member since 2014 · 175 posts · 63 votes

9y

@Blake Morgan you have an amazing opportunity in front of you! I think you'll find that most everyone on this site would do about anything to be in your position.

Here's my 2 cents based on 17 years of property management experience and buying, selling and owning investment properties:

- You are correct - lots of potential money, but also a lot of risk... Welcome to life :) the greater the risk, the greater the return. Not always the case, but more often than not.

- When describing your building, I would use inexpensive or affordable instead of cheap and basic. Regarding your tenants, I'm guessing they are low income, not low quality.

- I have much knowledge of the Birmingham market, especially when it comes to apartment buildings, and am very willing to help you or answer any questions you may have.

- What you have in mind as far as using a management company is VERY doable and is how most investors are set up... especially with larger buildings.

- You are correct that this is your decision but you are doing the right thing by asking questions and exploring all of your options.

Let's connect and speak more about the opportunity in front of you and how you can make it work while maintaining your career in Atlanta.

1 Reply

Natalie Schanne

Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes

9y

Blake Morgan - Do you want your dad to transfer you his stake of ownership of other properties in the future, after you have learned and proven your ability to manage, or would you prefer he sells everything and you inherit only cash? He may be trying to groom you for greater things in his mind. You've received some great advice. Since you've just graduated, it's fair for you to want to pursue your career in Atlanta where you can mingle with other young people and find your life partner, if you haven't already. If I were you, I would: 1. Ask Dad to let me take over the properties (after I've done all the below processes and decide you want to manage it.) 2. Review all his processes, systems and books (annual rent roles, expenses) to determine if you can increase occupancy (90->98%), improve the property rents (below market?), or reduce expenses (paying staff / contractors too much for shoddy work? Install LED lights?) 3. Fly and visit the properties and tour a selection of units. Visit competitors' properties. How do you compare? 4. Meet with people providing services for your property. Schedule on site with 3-5 property managers who would be interested in providing full servicing on your buildings and listen to their pitches. Decide whether you need / want them or an employee, a part-time or on-site leasing manager and maintenance coordinator (however it's being run now). 5. If you can improve the properties in a way to increase NOI and hence the value, do it. If you visit and don't have the desire to interact, then I say tell him to sell it / 1031. NOTE: Multifamily in many markets is being purchased by new buyers at historically low cap rates (5-7% = net income / price) so it may be a perfect time to sell if you can't imagine owning it for 10 more years. Meaning, people are spending 20 x NOI to buy instead of 10 x NOI or less as in the past.

0 Reply

Blake Morgan

OP

Atlanta, GA · Member since 2017 · 6 posts · 2 votes

9y

@jessica

@Jessica Duckett and @Tiffani Baggett, thanks for the recommendations. I am willing to talk to anyone who may have advice or services to offer, so if you could send me info for Bagget Prorety Solutions that would be great.

@Jarrod Cook I will contact you directly. Thanks for the comments.

@Natalie Schanne I would like to have some other properties given to me in the future. There is s trust set up for me and my brother that contains a couple houses and... honestly I'm sure the extent of it. My brother, who is still in college, has passed on these apartments so the offer has come to me. I think my dad is just offering the buildings as a way to pass down a piece of the family business that was passed down to him. A recent offer, mentioned in the first post, is what has triggered him offering it to me.

I will see about getting the information on processes, systems, books, etc. The simplicity of the way the business has beeen run for so many years may actually complicate my getting of the information. My Dad literally does everything. Plumbing, electrical, hvac, roofing, turnover, screening tenants, showing the apartments, collecting rent, etc. there are very few times when a contractor is called to fix something. Due to his do it all nature, there may not be a good accounting of everything, though I do know that he keeps very detailed paper records it may be a pain to go through and organize... at this point I just don't know.

Thanks for the input. I'm very impressed with this community, it looks like I came to the right place for help.

0 Reply

Derrick Lu

Suwanee, GA · Member since 2016 · 48 posts · 4 votes

9y

@Blake Morgan That's a great opportunity to learn. Would you consider a partner?

0 Reply

Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

9y

If you go ahead with this I would very strongly advise you work out something with your dad so that he is 100% out of the picture. Your approach to the business and his will be in serious conflict if you plan to manage the properties from away. Everything about the way he did business will be out the window.

He may be expecting you to quit your job and move back home to manage the properties.

0 Reply

Rolanda Eldridge

Investor/Realtor · Hoover, AL · Member since 2010 · 1k+ posts · 459 votes

9y

Wow! That's my market. If you decide to sell, Call Me!!! @Blake Morgan

0 Reply

Rolanda Eldridge

Investor/Realtor · Hoover, AL · Member since 2010 · 1k+ posts · 459 votes

9y

@Jarrod Cook...Hey! Hope to make it to Meetup in March....2017 Rocks!!!

1 Reply

Opportunity to inherit two apartment buildings

Opportunity to inherit two apartment buildings

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