Finding Deals with Apartment Complexes

10 Replies

Me and a partner are looking to get into apartments, but there is something I’ve been struggling with understanding.

I understand that all of the money is made in the purchase, but often with apartments we would be working with savvy investors who want to make the most off their asset.

How do you get a good deal while still buying from smart investors?

Originally posted by @Harrison Aakre :

Me and a partner are looking to get into apartments, but there is something I’ve been struggling with understanding.

I understand that all of the money is made in the purchase, but often with apartments we would be working with savvy investors who want to make the most off their asset.

How do you get a good deal while still buying from smart investors?

The profit in apartments is generated by increasing the NOI not necessarily on the purchase. You want to buy a property that has potential to increase income. You either have to buy directly from the owner not another investor or source deals from brokers but you need to be credible and experienced to get deals from them.

@Harrison Aakre You get good deals by looking at a lot of deals, being very selective with the ones that you seriously pursue, and then negotiating well.  Essentially, the same way that you would get them with smaller deals, but by dealing with savvy investors that won't typically have the same urgency that many smaller property owners do.  Are you looking to buy smaller multifamily properties (2-49 units) or larger ones (50+ units)?

Originally posted by @Greg Dickerson :
Originally posted by @Harrison Aakre:

Me and a partner are looking to get into apartments, but there is something I’ve been struggling with understanding.

I understand that all of the money is made in the purchase, but often with apartments we would be working with savvy investors who want to make the most off their asset.

How do you get a good deal while still buying from smart investors?

The profit in apartments is generated by increasing the NOI not necessarily on the purchase. You want to buy a property that has potential to increase income. You either have to buy directly from the owner not another investor or source deals from brokers but you need to be credible and experienced to get deals from them.

 Thank you!  That makes sense.

Originally posted by @Charles Seaman :

@Harrison Aakre You get good deals by looking at a lot of deals, being very selective with the ones that you seriously pursue, and then negotiating well.  Essentially, the same way that you would get them with smaller deals, but by dealing with savvy investors that won't typically have the same urgency that many smaller property owners do.  Are you looking to buy smaller multifamily properties (2-49 units) or larger ones (50+ units)?

 We are looking at smaller 6-18 unit apartments.  Thank you for the help!

Originally posted by @Harrison Aakre :
Originally posted by @Charles Seaman:

@Harrison Aakre You get good deals by looking at a lot of deals, being very selective with the ones that you seriously pursue, and then negotiating well.  Essentially, the same way that you would get them with smaller deals, but by dealing with savvy investors that won't typically have the same urgency that many smaller property owners do.  Are you looking to buy smaller multifamily properties (2-49 units) or larger ones (50+ units)?

 We are looking at smaller 6-18 unit apartments.  Thank you for the help!

 At that size you'll probably be dealing with mom & pops who have owned the properties for a long time and haven't kept rents up to market. You'll probably find plenty of opportunity to update the property and raise rents.

@Taylor L.

Thanks!

Looking at their proforma, they have their cap rate and list price based on the market rent and not their current rent.

When looking at their records, there is also a special assessment for almost 50k.

I have two question:

1. Would I calculate a new purchase price based off their cap rate against the NOI I have calculated based on their current rent roll?

2. How does a special assessment figure into the purchase price of an apartment complex?

Originally posted by @Harrison Aakre :

@Taylor L.

Thanks!

Looking at their proforma, they have their cap rate and list price based on the market rent and not their current rent.

When looking at their records, there is also a special assessment for almost 50k.

I have two question:

1. Would I calculate a new purchase price based off their cap rate against the NOI I have calculated based on their current rent roll?

2. How does a special assessment figure into the purchase price of an apartment complex?

Sellers want to set the price off of market rent but that is not the definition of cap rates. Cap rate is calculated using the property's actual NOI (NOI = RE revenue - Operating expenses). NOI /Cap rate = market value. There are a litany of reasons forecast NOI is not to be used:

  • If it was such a good idea to raise rent why are the rents not higher.  See subsequent items.
  • There is turn over risk raising rents.
  • There is costs in unit turn over.
  • There is risk in getting new tenants.
  • There is effort involved in raising rent and turning over a unit.

Why should the current owner weep the benefits of the effort and risk associated with raising rent? They should not which is why cap rate is based on existing NOI not forecast NOI.

If a property is so mismanaged that the NOI is not close to what competent management will achieve, you are unlikely to be able to purchase the RE using cap rate as a basis. This is not the case for rents that have fallen below market. It is more appropriate in cases where the vacancy rate far exceeds the local market vacancy rate.

Good luck


 

Originally posted by @Harrison Aakre :

@Taylor L.

Thanks!

Looking at their proforma, they have their cap rate and list price based on the market rent and not their current rent.

When looking at their records, there is also a special assessment for almost 50k.

I have two question:

1. Would I calculate a new purchase price based off their cap rate against the NOI I have calculated based on their current rent roll?

2. How does a special assessment figure into the purchase price of an apartment complex?

Find out what the market cap is for properties like that one, and apply that to the NOI you calculated. You can ultimately run a bunch of scenarios - value based on your calculations, value based on their financials, and value based on the broker's numbers (junk). Your lender is likely going to want to see their current rent roll and financials.

What do you mean by special assessment? Like an additional tax?

@Taylor L.

Yes an additional tax against the property for the town updating the street the property is located on. They have a special assessment of 50k that is set to be paid off within 5 years. They have not disclosed this but I found it by searching through tax information.

Originally posted by @Harrison Aakre :

Me and a partner are looking to get into apartments, but there is something I’ve been struggling with understanding.

I understand that all of the money is made in the purchase, but often with apartments we would be working with savvy investors who want to make the most off their asset.

How do you get a good deal while still buying from smart investors?

Avoid buying apartments from unmotivated smart investors.