Investor · Wethersfield, CT · Member since 2013 · 371 posts · 191 votes
I'm reading How to Make Big Money in Small Apartments by Lance Edwards. Informative or not, it has definitely got the "written by a real estate guru" vibe. Please level with me, folks. Who realistically gets 10-30 unit apartment complexes with "no money down"? I have definite interest in the small apartment space in that unit range. I'm skeptical.
I get that "no money down" nearly always means other people's money (OPM) and only very rarely means seller financing with no actual down payment on the part of the buyer. Also, any real deal will surely require incidental expenditures such as paying for inspections, some form of marketing budget, etc.
For those of you who have actually done this, how did you get the deal? How was it structured at closure? How was the income distributed going forward?
Lastly, what am I not likely to read from a book that I really should know going into a deal like this?
@Jeff G. I don't know the book you're reading, but here's how I look at it - you need money to make 99.9% of deals happen. The key in may opinion is not leaving your money in it. The people who do it best are the ones who have figured out the ins and outs of financing and refinancing and take their capital from one deal to another in order to scale. SO in a way that is investing with no money, but not no money down.
A broker just brought me a deal that I am looking into. 55 unit complex only 20% occupied due to bad management. The owner lives in California and his management (a relative) is doing a terrible job running the complex. The bank note is $680k and is in default. The bank is interested in letting me assume the loan. I'm also talking to the bank about financing some CAPEX expenditures and doing some interest only payments until we get the complex stabilized. I also have a friend that negotiated a 100% owner financed deal on an 80 unit complex...so yes, while they aren't the norm, they are out there.
@Jeff G. I don't know the book you're reading, but here's how I look at it - you need money to make 99.9% of deals happen. The key in may opinion is not leaving your money in it. The people who do it best are the ones who have figured out the ins and outs of financing and refinancing and take their capital from one deal to another in order to scale. SO in a way that is investing with no money, but not no money down.
Damn, @Rodney Miller 20% occupancy is bad. If you hadn't told me it was in California, I would have assumed it was Detroit. If I'm following you correctly, the money is coming from the bank. They'll let you assume the loan and make interest only payments for a fixed period of time and (possibly) get a rehab loan to fix the place up. For credibility purposes, do you have a portfolio of apartments already to point to and say, "I know what I'm doing"? How did you come to know the broker?
Damn, @Rodney Miller 20% occupancy is bad. If you hadn't told me it was in California, I would have assumed it was Detroit. If I'm following you correctly, the money is coming from the bank. They'll let you assume the loan and make interest only payments for a fixed period of time and (possibly) get a rehab loan to fix the place up. For credibility purposes, do you have a portfolio of apartments already to point to and say, "I know what I'm doing"? How did you come to know the broker?
He said the owner lives in California and implies the owner is not local. I'm guessing the apartment complex is in OK.
Right, @Jason Hirko I either need a down-payment to grow as I move it serially from one deal to another OR I would need a money partner of some sort. If the deal is good, I don't anticipate finding the money to be a problem.
Hypothetically..
Lets say I find a 40 unit complex. Lets say it's under performing and only has 60% occupancy because PM sucks and rents are under market because the owner is old and hasn't kept up with inflation. Lets say the owner wants 100k down payment and it's owner financed. Lets say I get a cash partner who supplies the entire down payment and we agree to some terms and a time period... okay, now we've created an owner financed note and the property is positioned for an obvious value-play.
This isn't like wholesaling, which I'm much more familiar with, so it isn't clear to me how much money the cash partner and myself would get. Though, obviously the original owner would get his distribution from the rent rolls. Can someone clear that up for me?
Damn, @Rodney Miller 20% occupancy is bad. If you hadn't told me it was in California, I would have assumed it was Detroit. If I'm following you correctly, the money is coming from the bank. They'll let you assume the loan and make interest only payments for a fixed period of time and (possibly) get a rehab loan to fix the place up. For credibility purposes, do you have a portfolio of apartments already to point to and say, "I know what I'm doing"? How did you come to know the broker?
He said the owner lives in California and implies the owner is not local. I'm guessing the apartment complex is in OK.
Right, @Jason Hirko I either need a down-payment to grow as I move it serially from one deal to another OR I would need a money partner of some sort. If the deal is good, I don't anticipate finding the money to be a problem.
Hypothetically..
Lets say I find a 40 unit complex. Lets say it's under performing and only has 60% occupancy because PM sucks and rents are under market because the owner is old and hasn't kept up with inflation. Lets say the owner wants 100k down payment and it's owner financed. Lets say I get a cash partner who supplies the entire down payment and we agree to some terms and a time period... okay, now we've created an owner financed note and the property is positioned for an obvious value-play.
This isn't like wholesaling, which I'm much more familiar with, so it isn't clear to me how much money the cash partner and myself would get. Though, obviously the original owner would get his distribution from the rent rolls. Can someone clear that up for me?
If it's at 60% occupancy you're going to be coming out of pocket every month to make your mortgage and other overhead until you increase occupancy. It'll also most likely be neglected property that will require a large cash infusion for CapEx and updating and making the vacant units rent ready. If it's at 60% occupancy it's either because the property is in disrepair or there are market issues keeping tenants away (war zone, poor local economy, lack of local demand for property type, etc). On a distressed property a down payment is only a small portion of the cash outlay, the repairs and reserves will probably exceed that amount.
Right, @Jason Hirko I either need a down-payment to grow as I move it serially from one deal to another OR I would need a money partner of some sort. If the deal is good, I don't anticipate finding the money to be a problem.
Hypothetically..
Lets say I find a 40 unit complex. Lets say it's under performing and only has 60% occupancy because PM sucks and rents are under market because the owner is old and hasn't kept up with inflation. Lets say the owner wants 100k down payment and it's owner financed. Lets say I get a cash partner who supplies the entire down payment and we agree to some terms and a time period... okay, now we've created an owner financed note and the property is positioned for an obvious value-play.
This isn't like wholesaling, which I'm much more familiar with, so it isn't clear to me how much money the cash partner and myself would get. Though, obviously the original owner would get his distribution from the rent rolls. Can someone clear that up for me?
OK so when you buy it from the seller with seller financing, the 'original owner' is now just the bank holding the note. You and your partner get all the rent, and you can (hopefully) make the 'mortgage' payment to the seller through the rental income. You and your partner would split the ownership 50/50, presumably.
Okay, @Patrick L., what's a more realistic example?
Well in that example you might also need to budget another $300k+ to repair and stabilize the property. That would need to come from you or your partner, in cash. Once stabilized for a year or so you could refinance it and cash that money back out or sell the property now that you've added value.
check out Chris McClatchey. He has a video about 1.5 hours long (i believe its called the power of zero) on buying apartments with 100% owner financing. Ton of gold nuggets in that video on finding and putting these types of deals together.
@Jeff G. back in 2003 I purchased a small apartment building with 20% down. Then I got a loan for more than my down payment for rural development. I then did rehab and got a federal tax credit for much of the rehab costs. By the end I only had a couple thousand of my own money into it. Around the same time, I knew of investors who 100% financed and walked away with checks at closing. They would make an offer over asking price, then ask for the difference back at closing for "improvements". Back in the old days you could just pocket the money. Now they have put restrictions in place for rental properties that requires the money to go directly to the party doing the improvements.
It seems now I am stuck putting 25% down. I miss the golden era of rental property investing...
I have a buddy that buys smaller apartments (10-20 units). He told me that on both deals he got the owner to carry back 100% of the loan for 60 days with the understanding that he would refinance and pay them off. According to him, it's easier to refinance a property than to get a new loan. He got at or near 100% refinancing on both deals. Has anyone employed this strategy?
@Rodney Miller, seller carry back isn't a strategy I've used. Can you explain what that means in this context? What was happening between the buyer and the seller financially for that 60 day window?
That sucks. I read somewhere that it's a Trump administration goal to repeal Dodd Frank in whole or in very large part. Lets hope this is one of those parts, @Joe Splitrock.
@Jeff G. Just like buying a house on terms. The buyer negotiates a purchase price with the seller. He also negotiates with the seller that instead of cash, the seller will create a note and mortgage and accept payments. In this case, the seller is aware of the buyer's intentions to take this deal to the bank and refinance the balance. The buyer refinances within 60 days and pays off the seller with cash. My buddy, the buyer, has a great track record and solid relationships with his local banks. He tells me that for whatever reason, that the banks would rather do a refinance than a new acquisition loan. He also states that he can usually do this without coming out of pocket. He specializes in non-stabilized assets like the one I was mentioning earlier.
I'm reading How to Make Big Money in Small Apartments by Lance Edwards. Informative or not, it has definitely got the "written by a real estate guru" vibe. Please level with me, folks. Who realistically gets 10-30 unit apartment complexes with "no money down"? I have definite interest in the small apartment space in that unit range. I'm skeptical.
I get that "no money down" nearly always means other people's money (OPM) and only very rarely means seller financing with no actual down payment on the part of the buyer. Also, any real deal will surely require incidental expenditures such as paying for inspections, some form of marketing budget, etc.
For those of you who have actually done this, how did you get the deal? How was it structured at closure? How was the income distributed going forward?
Lastly, what am I not likely to read from a book that I really should know going into a deal like this?
I've not read the book. But as for the no money down, it happens all the time with 1031 exchange money. I guess it depends how you look at the world. My company did a 1031 exchange of our part of a 100 unit for an 18 unit and a bunch of land for development. The 18 unit was acquired with 1031 money and seller financing (first position) at very low LTV and not a penny from us.
Not sure if that is what you are looing for, but I know of other people who have done what we did for multifamily (10+ units) this year alone. Happens all the time...
@Chris Martin I did not know that you could do a 1031 on partial ownership. That's also very good to know. Yes, once I get my first big property that's definitely in my toolbox. It's just getting over that initial hump that's the problem. But, you're right, once it's an option I can scale upwards rather quickly no problem. Thanks for the tip.