Commercial apartment building

3 Replies

I had recently met with a older gentleman in regards to 6, 5 unit buildings we spoke of in the past. He informed me they were recently sold for 1.8m.

After building some rapport, he offered a 23 unit brick complex in a solid location on the New Britain /Kensington line for 300k down then eventually lowered it to 250k down for a length of 10yrs @ 6% and wants 55k per unit.

He’s currently receiving $750 each unit w/ utilities included (rents vary from $850-1000 w/ utilities based on location in town). He stated his asking price is based on current market. After some small due diligence I noticed the units are spread between 4 buildings in which 2 of each share a common hallway/entrance. Some units are sold individually as condos and he owns the rest.

Besides bringing rents to market prices & refinancing, another exit could be selling each unit individually as condos within time. I needed some advice in regards to financing.

I can come up with about 100k of my own money and because my mom showed interest in the past thought of reaching out and seeing if she would put a loan against her 401k for the rest of the down payment. Even though I’ve heard of such a thing, not sure how it’s done? I would have her come in as a lien holder with interest or lump sum after a possible refinance. Another option is 50/50 partnership where I would handle all work. This is just one option before outsourcing to other investors for a cash on cash return on their money with this investment opportunity.

Im working on this opportunity as we speak so Any advice would be greatly appreciated, thanks for taking the time to read.

Sam

@Brandon Turner

@Sam Ojo this sounds like a broken condo deal—which is a situation where an apartment complex has a condo map and some units were sold but not the rest. This adds an additional layer of risk and you really have to be careful here. 

It's likely that he's willing to sell with seller financing because it's harder to find financing on broken condo deals. When you do find financing it will typically be at a lower leverage point and a higher interest rate. Both of those factors reduce cash on cash return and IRR. To balance that, most buyers would offer a lower price to raise the returns back up so that this investment's return is competitive with other investments that don't have this constraint.

But the seller doesn’t want to discount the price so he’s offering financing. That’s the good news. 

The bad news is that it will be harder for you to execute your plan to raise rents and refinance, taking out the seller and recovering part or all of your down payment because the lower LTV that lenders will constrain you to will pigeonhole you.

Another challenge to be aware of is that there are likely HOA dues—typically if only one unit is owned by a third party the HOA is formed and collects dues even from the developer-owned units. Make sure this is in your cash flow projections. Finally, when you want to sell you will have the same difficulty as the current seller has: discount the price or offer seller financing (which if you have debt on the property already you might not be able to do).

So if you can live with all of that you might have an opportunity to take down a lot of units with a small down and seller financing—and it might be a good cash flow play—but be cautious about how you get this down payment. Don’t do it by borrowing it with the promise that it will come back any time soon.

And finally, don’t overestimate your ability to exit by selling individual units. These low-value condos can be tough to sell and the reason these deals get broken like this is because the developer tries a sales strategy and fails, opting to just keep the rest. 

Now, something to consider:  if you can gain control of this property and then re-purchase the units owned by third parties you could turn this into a grand slam because you would be able to make the property whole again and all of these problems go away. Trouble is, I’d bet that the seller has already tried and some or all don’t want to sell.  And you need every single one—if ONE of them refuses, this strategy fails. And the last guy will always be the holdout and will want $1 million for his unit because he knows how valuable it is to you. So the key is to make your offer on the complex contingent on negotiating purchases on the third-party units. If you can’t get them all you back out of all of the deals. If you get contracts on all you could have a real winner if the prices are right. 

@Brian Burke Thanks for taking the time to reach out. I appreciate the insight and wisdom. I’ll be taking a tour of building soon and requesting rent rolls, expenses and tax returns. As I’m working on a  deeper due diligence I will make sure that would be an option before moving forward. I enjoy the long haul so I’m more focused on holding than selling individual units. 

From our conversations the seller seems to be comfortable with his buildings producing. He’s 91 walking and still self managing with help. Owns a large variety of assets in this area and looking to sell because his kids are older and have there careers spread across the country. So leaving them real estate doesn’t seem to be an option. 

Thanks again,

Sam

@Sam Ojo

Sam, Assuming there is an HOA, be sure to consider the health of the balance sheet. You'll want to consider this in your underwriting, especially if there is a material risk of a capital call in the future.