I just purchased a 52 Unit complex-is this a good idea?

Multi-Family and Apartment Investing
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I just purchased a 52 Unit complex-is this a good idea?

Todd Kruger
Flipper/Rehabber · Albuquerque, NM · Member since 2019 · 61 posts · 64 votes

I just purchased a 52 Unit apartment complex for $1,975,000. I put 20% cash down and got a 7 year fixed rate of 4.55% amortized over 25 years from my bank with .25 origination and receive approx. net cash flow of $6,500/monthly. This complex is about 3.5 hours away from my home and has (2) employees: On site Property Manager & and on site Maintenance person. The complex is a B type property in a smaller town (40K) with an Air Force bace. There is a very strong rental history and always fully occupied with a waiting list. The property generates approx 19% cash on cash ROI and 9.23% CAP rate. The Monthly gross income is $26k and expenses just under $19k. Rents are about 10% under market and have room form increases as units turn.

My question:  Does anyone do a sort of reverse syndication?  Selling off a portion of my existing deal to get back my $400k cash and repeating the same model over & over?  Should I even be considering this if I don't necessarily need the cash back to move forward on my next purchase?  Should I just own & operate as was my original plan or is there another more lucrative avenue syndicating to get my $400k back and having $0 cash in the deal?  THANKS BP!

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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
6y

Hey Todd.  Congrats on the purchase.  Couple of comments.

$500/month rents are typically not B class

At $10k per month ($19k - $9k mortgage), your expenses look lean, particularly with 2 employees.

Need to include a vacancy factor and cap ex reserves in your figures.

Another way to get your cash out is to raise the rents (which raises the property value) and refinance.

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  • Bryan MitchellPro Member
    Rental Property Investor · Columbus, GA · Member since 2016 · 623 posts · 337 votes
    6y

    If an LLC owned the property, you could issue shares of the business for a set amount, and modify the articles, and file articles back into the state. I'm assuming you don't want to give up ownership in the LLC?

    5Reply
  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    6y

    I can't comment on the securities side of this, but from the investment side what would it look like for investors? Value add over a 5 year span is the most common plan right now, do you have a plan like that?

    The essence of my question is, what would your exit strategy be?

    Congratulations on the deal, it sounds like a great one.

    3Reply
  • Greg Dickerson
    Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
    6y

    @Todd Kruger sounds like you found a pretty good deal. I have not heard many people finding true stabilized 9 CAP properties especially Class B.

    Yes you can sell off shares of the deal. This would not be a reverse syndication. Just a syndicated offering of shares.

    There are a couple of ways to handle this depending on your goals and how much cash you want to raise. You could sell the property to a new venture at a higher price or just replace your equity with investor equity. 

    1Reply
  • Alina Trigub
    Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
    6y

    @Todd Kruger

    Technically if you bought your property under LLC, you could potentially sell out some shares after reviewing the deal with securities attorney. The important points/options to consider:

    1) what are the tax implications of such transaction?

    2) is it better to just bring a partner or two on?

    3) are you willing to give a portion of ownership/decision making power?

    4) how fast can you get some equity back in this current property without giving up anything?

    5) perhaps it makes sense to bring investors for the next deal and ask owner for owner-financing.

    1Reply
  • Ivan BarrattBusiness Member
    Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    6y

    @Todd Kruger bringing in an equity partner is probably a good idea vs full blown syndication. Another approach would be to run this thing for a year and see if what you got is really what you think you've got...

    First deal right? How long have you owned it?

    4Reply
  • Todd Kruger
    OP
    Flipper/Rehabber · Albuquerque, NM · Member since 2019 · 61 posts · 64 votes
    6y

    @Alina Trigub

    Correct, I own this property in a LLC specific for this investment. A reverse syndication was probably misstated. I guess it is more like a syndication after the fact.

    1Reply
  • Todd Kruger
    OP
    Flipper/Rehabber · Albuquerque, NM · Member since 2019 · 61 posts · 64 votes
    6y

    @Ivan Barratt

    No, not my first deal. I have been an investor for 19+ years and have flipped nearly 1,100 homes. I have other long term holds such as this but all in smaller deals-mostly single family homes.

    3Reply
  • Phillip Falk
    Member since 2019 · 1 post · 0 votes
    6y

    @Todd Kruger. Hold onto 30% and turn it into a DST is what I am involved with for 1031 investors.

    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    6y

    Hey Todd.  Congrats on the purchase.  Couple of comments.

    $500/month rents are typically not B class

    At $10k per month ($19k - $9k mortgage), your expenses look lean, particularly with 2 employees.

    Need to include a vacancy factor and cap ex reserves in your figures.

    Another way to get your cash out is to raise the rents (which raises the property value) and refinance.

    11Reply
  • Ivan BarrattBusiness Member
    Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    6y

    Nice @Todd Kruger! Multi-family tends to be more different than single family than I at least realized when jumping from small mfam up to 30 and 60 units. If your expenses are already 50 to 60% of gross and you have a superb asset management team overseeing the employees on site I'd say your good sell some units for cash.

    Qualified CPA (perhaps a firm) + Sec Attorney should be able to help you set up the units transfer properly.

    All the best! Scaling big is a team sport! Outside equity capital is a necessary ingredient. Steward it wisely, transparently (when things don't go according to plan) and honestly and many issues take care of themselves. :)

    2Reply
  • Todd Kruger
    OP
    Flipper/Rehabber · Albuquerque, NM · Member since 2019 · 61 posts · 64 votes
    6y

    Mike, The town this property is located in has a small population.  The median household income is $46,364 and $35,492 per renter occupied unit.  The reason I liked this investment is because the affordability and demographics.  This is a very nice community for the town and I consider it a B property given the competition more so than our typical class measures.  B or C property is all relative and doesn't matter so much to me.  Although there is not a tremendous value added opportunity, it is a very well maintained, stable complex with a very strong history.  There is additional income of $50/ washer/dryer rental that I have 16 so far and plan on adding more for additional income.

    Vacancy rates are figured at 5% as are my cap x and my employees are paid $15/hr. and are both solid with good 5+ years of experience.  This town just has a very low cost of living.

    0Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    6y

    I would be interested to see where this goes. Specifically, I am not sure if this type of property is syndicatable in the first place...I see red flags for your potential investors all over this thing. But, who knows...looking forward to what transpires.

    3Reply
  • Todd Kruger
    OP
    Flipper/Rehabber · Albuquerque, NM · Member since 2019 · 61 posts · 64 votes
    6y

    @Ben Leybovich

    I agree, selling shares is more realistic if anything. Thanks!

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    6y
    Originally posted by @Ivan Barratt:

    Nice @Todd Kruger! Multi-family tends to be more different than single family than I at least realized when jumping from small mfam up to 30 and 60 units. If your expenses are already 50 to 60% of gross and you have a superb asset management team overseeing the employees on site I'd say your good sell some units for cash.

    Qualified CPA (perhaps a firm) + Sec Attorney should be able to help you set up the units transfer properly.

    All the best! Scaling big is a team sport! Outside equity capital is a necessary ingredient. Steward it wisely, transparently (when things don't go according to plan) and honestly and many issues take care of themselves. :)

    if you dont need partners then why bring them in... that takes you to another level.  And frankly opens you up to some liability.. Ergo Ivan's comment on transparency.. you may not like being micro managed especially given your skill set and history and experience..

    maybe you just bring in one partner that can float the whole amount.. going the smaller 50k investor route is work. 

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    7Reply
  • Todd Kruger
    OP
    Flipper/Rehabber · Albuquerque, NM · Member since 2019 · 61 posts · 64 votes
    6y

    @Jay Hinrichs

    Very valuable advise, i agree 100%. I appreciate that!

    I purchased this with the intention of owning it myself for the 5-7 years and moving on and up in a larger deal via 1031 exchange.

    I am just making sure there is not a smarter option I am not considering.

    Thank you

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    6y
    Originally posted by @Todd Kruger:

    @Jay Hinrichs

    Very valuable advise, i agree 100%. I appreciate that!

    I purchased this with the intention of owning it myself for the 5-7 years and moving on and up in a larger deal via 1031 exchange.

    I am just making sure there is not a smarter option I am not considering.

    Thank you

    In reading your bio sounds like your plenty experienced and smart enough :)  Keep in mind many that go the syndication route at least starting out don't have your experience level and FOR SURE don't have your cash means.. the only way they can do a deal is by raising money from others..    

    But what most MF folks seem to do or want to do these days is raise rents re state value refi and pull cash.. you don't need investors for that just a little patience.  

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    5Reply
  • Todd Kruger
    OP
    Flipper/Rehabber · Albuquerque, NM · Member since 2019 · 61 posts · 64 votes
    6y

    @Jay Hinrichs

    In your opinion is it better to have a lesser return with $0 cash in a deal and bring on maybe 1 or 2 investors and get an intimate return on cash or retain 100% of a deal and getting a 19% cash on cash return?

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    6y
    Originally posted by @Todd Kruger:

    @Jay Hinrichs

    In your opinion is it better to have a lesser return with $0 cash in a deal and bring on maybe 1 or 2 investors and get an intimate return on cash or retain 100% of a deal and getting a 19% cash on cash return?

    Me personally it is really something only you can answer..  AS for the common theme on BP most would answer no cash into the deal .. but again just depends if your used to having partners or not.  many don't want or need partners.. others that are in the syndication business their whole model revolves on managing partners and a lot of them.   Like Ivan who posted I know he puts a big chunk of his own money into his deals does larger deals and has built up over the years a very impressive portfolio and has the staff with him to handle it all.

    If U follow some of the crowdfunder flame outs  they grew their portfolios faster than they had ability to handle their thousands of investors.. and when investors cant communicate on almost an instant level these days it gets pretty dicey pretty quick.

    So to me it just depends on your staff and ability to manage others money.

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    2Reply
  • Tj Hines
    Specialist · Tampa, FL · Member since 2012 · 933 posts · 492 votes
    6y

    @Todd Kruger congrats on the deal!

    Does anyone do a sort of reverse syndication? (No need for it! But to clarify since I'm not an attorney, it may be wise to seek council)

    Selling off a portion of my existing deal to get back my $400k cash and repeating the same model
    over & over? (If you're syndicating the deal you can replace your cash with investor equity)

    Should I even be considering this if I don't necessarily need the cash back to move forward on my next purchase? (You're the only one who can best answer this)

    Should I just own & operate as was my original plan or is there another more lucrative avenue syndicating to get my $400k back and having $0 cash in the deal? (Again, I think the answer is in your question. "You get your 400K back!" Then again by leaving some cash in the deal will definitely keep your interest aligned with the investor interest.)

    1Reply
  • Ola Dantis
    Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
    6y

    @Todd Kruger Personally, I won't go the post-syndication way, as the purpose of syndication in the first place is to pool capital unavailable to a syndicator OR to take down a bigger asset, which the syndicator cannot otherwise take down on their own.

    Clearly, you have the financial means to take this deal down on your own. 

    Also, you have to think of pooling together a bunch of investors, who you can now have to manage and report to. 

    Since there is some value add from rent premiums, I'd suggest you implement that business plan and do a refinance to pull equity and deploy that capital on the next purchase, which can then syndicate using this deal as a great case study. 

    1Reply
  • Todd Kruger
    OP
    Flipper/Rehabber · Albuquerque, NM · Member since 2019 · 61 posts · 64 votes
    6y

    @Ola Dantis

    Thank you!

    1Reply
  • Yonah WeissPro Member
    Cost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes
    6y

    @Todd Kruger Congrats on the deal!

    @Mike Dymski & @Jay Hinrichs both mentioned that having some patience and refinancing in a year or two, to pull out your cash is probably your best and safest bet. Interest rates are super low now, and I don't know what kind of rate you got to begin with, but depending on what type of financing you did get, you may even be able to refi in six months. Good luck. (don't forget about the tax benefits that come with owning larger properties)

    1Reply
  • Anthony Rosa
    Rental Property Investor · New York City · Member since 2019 · 703 posts · 538 votes
    6y

    Congrats on your purchase, good for you!! since you mentioned syndication, is it possible in maybe 5-10 years to turn the building into Co-operative apartments? You want to sell shares so maybe its possible to sell each individual unit to an Owner AKA shareholder.  Each unit is allotted X amount of shares which is dictated by apartment size -the larger the apartment the more shares that owner/shareholder has.  Each shareholder pays a monthly maintenance fee (in addition to their loan of they financed their unit) according to a calculation of shares multiplied by X.  You are the Sponsor since you own the building and get to sell as many as many or all of the units.  A board is elected by the shareholders and if you maintain 51% ownership you get the final word. This is simplified because bylaws, rules and other items need will need to be arranged.  Landlords have done very well for themselves by going this route of profiting off the rent then selling each unit.  

    2Reply
  • Ryan Clampitt
    Real Estate Broker · Laguna Niguel, CA · Member since 2019 · 7 posts · 2 votes
    6y

    @Todd Kruger what state and city did you find this opportunity?

    Thank you

    0Reply
  • Todd Kruger
    OP
    Flipper/Rehabber · Albuquerque, NM · Member since 2019 · 61 posts · 64 votes
    6y

    @Anthony Rosa

    Anthony, great info. My complex consists of 7 individual buildings each with a different physical and legal address and consists of 6 different parcels, so your idea seems possible. I had my bank’s loan structure allow for partial releases so I could keep all my options open going forward. Thank you!

    3Reply
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