Distressed Multi-Fam Investing

Multi-Family and Apartment Investing
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Distressed Multi-Fam Investing

Tim Burns
calgary, alberta · Member since 2013 · 2 posts · 0 votes

Hey guys,

I'm obviously new here but I have a few questions. Any advice/guidance would be appreciated (even if it's simply "go read this site").

I'll go from easy to hard:
- Am I correct in assuming that I would find foreclosed multi-family properties to purchase in the US at a bank auction?
- It seems the short-term goal of buying distressed multi-fam is to increase occupancy and the medium-term goal is to facilitate better management and fix it up in order to increase rent. What makes one city/market more attractive for acquiring/fixing up distressed multi-fam's than another? Is it simply a matter of where one feels most comfortable and has most knowledge of or is there some sort of objective analysis one can undertake like "oh in cities with high occupancy you have a better shot at..."?
- How does one go about finding out how many people are applying for or getting IRC 1031 deferrals in a particular area?

Thanks!

Andrew

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Rich Weese
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
13y

Tim/Andrew- The first item might NOT be to increase occupancy. In some instances the first item might be to empty the building! Sometimes the foreclosing party will already have accomplished that. Either way, this type of investment is not for the faint at heart. I have seen several investors go into this type of project and been unable to turn it around before they lost their investment. Good luck. Rich

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    Tim, Andrew?? Not sure which one..............

    You can find them in auctions or buy the notes or buy as foreclosures or as a short sale etc.

    There are many ways to find them. Are you trying to buy all cash and also have the money for the repairs or are you trying to get hard money or private money with some of your own money down to buy a property??

    Hard money and private money doesn't get excited as much about totally vacant properties. Those are much harder to turn around versus something a 40 to 60% occupancy levels which I call semi-performing.

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  • Simon Campbell
    Miami, FL · Member since 2012 · 612 posts · 189 votes
    13y

    In locating markets to invest in multi-family properties, you want to look for markets that have a high rental demand. This is indicated by low vacancy rates and increasing rental rates. Another indicator is population increases, new construction and plenty of available jobs combined with low unemployment.

    A mid-term goal of fixing up a property to increase rent does not always pay off. Lets say you buy a 4 unit and you spend $5,000 each unit in remodeling costs. Okay you got $20k invested. What if your rent only increases $100 per month. It will take you over 4 years to recoup your initial investment.

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  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    13y

    Using your list, I'll go hard to easy:

    I'm not aware of any database that warehouses data on 1031 exchanges by area.

    Yes, the goal to distressed MF investing is to reposition the property into better performance. This can be accomplished by better marketing, management improvements, re-branding, installing additional amenities (laundry, play structure, BBQs, etc), upgrading unit interiors, or making cosmetic and/or structural exterior repairs, or various combinations of these. The objective is to make the property more attractive to tenants, which increases occupancy, or more desirable to tenants, which increases rents.

    This is much more effective in an area that has fundamentals supporting Multifamily living. For example, an area with high job growth and population in-migration is perfect for this. People who just got a new job, or just moved to a new area, tend to rent apartments. This doesn't mean that you cannot employ this strategy successfully in an area that lacks those characteristics, but having strong fundamentals allows you to raise up your sail and allow the winds to push you. Weaker areas force you to row against the current.

    Finally, there are plenty of venues to source property. Auctions, brokers, direct from owners, note purchases, etc.

    Good luck!

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  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    13y
    Originally posted by Simon Campbell:
    In locating markets to invest in multi-family properties, you want to look for markets that have a high rental demand. This is indicated by low vacancy rates and increasing rental rates. Another indicator is population increases, new construction and plenty of available jobs combined with low unemployment.

    I agree with Simon on finding where you want to invest and that is critical to MF investing.

    I would also agree with him on the small multis that are not valued on Cap rates. Let's look at a fair sized MF. Raising the rents by 100 is pretty extreme in MF so I will change the scenario to 2500 upgrade for a 50 bump. Let's put this on a 50 unit property in a 7 Cap market. 50units X 2500 = $125,000. Raise rents 50 X 50units X12 months= $30,000 per year. It takes the same 4.17 years for your ROI. Here is the beauty of CRE and this is one of the reasons MF turn over every 5-10 years. the Value of CRE is the NOI divided by the CAP rate for that type of property in that market. You just increased the revenue without any increase in operating expenses and therefore increased the NOI by 30k. 30k divided by .07 (7cap) just increased the selling price by 428,571. On a five year hold (30k x 5=$150k+428,571=578,571 ROI. Of course you have to sell to realize the extra bump.

    The main concern is the ability to get the extra $50. Even fixed up will you be able to get the extra $50.

    Even at an $25 increase it is a 214,285 increase. Say a five year hold you made an extra $75,000 in cash flow. 214,285 +75,000=289,285. Not a bad ROI.

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  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    13y

    Tim/Andrew- The first item might NOT be to increase occupancy. In some instances the first item might be to empty the building! Sometimes the foreclosing party will already have accomplished that. Either way, this type of investment is not for the faint at heart. I have seen several investors go into this type of project and been unable to turn it around before they lost their investment. Good luck. Rich

    2Reply
  • Marc Bodinger
    New York City, NY · Member since 2012 · 253 posts · 7 votes
    13y

    Tim Burns Are you looking to invest in MF properties in the US? What parts?

    0Reply
  • Tim Burns
    OP
    calgary, alberta · Member since 2013 · 2 posts · 0 votes
    13y

    Wow, I wasn't expecting so many responses. Thanks!

    Joel & Rich:
    It would be predominantly financed externally. If I wanted to remodel all of the units and it was 50% occupied upon purchase, would I just remodel 50% now and the others upon turnover or would I have to boot people out? How would I know if I have to empty out the building?

    Simon:
    That helps, thanks.

    Brian:
    A 1031 exchange is public info isn't it? Is there no database that publishes that info?

    Jeff:
    I hadn't thought about the large appreciation in the property as a result of the increased NOI. Does one have to do extensive comp research to try to forecast how much they could increase rent by given a certain $ spent on remodelling or is there any rule of thumbs that help?

    Marc:
    I'm considering the viability of Dallas and Atlanta but I'm not ready to invest in a specific property yet (as I'm sure you could tell).

    Separate line of questioning:
    - Condo conversions: how long do they take, how much do they cost, and at what point (looking at buy-rent ratio) do they become profitable?

    P.S. it is Andrew. It's my brother Tim's account - haven't bothered to make my own yet.

    Thanks again, guys.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    Hi Andrew,

    The loan programs that are there for foreigners are usually at a lower LTV so that affects your cash on cash return.

    Turning around a project locally where you can be there everyday is tough. Turning one around by yourself even with crews from overseas is extremely difficult with a low success rate.

    Some foreign investors and United States lenders I have talked to have mentioned a scenario where you partner with someone here in the states and then you are able to obtain a higher ltv with less down.

    I have some other investors from Canada looking to invest here in Georgia and also other states for multifamily. Typically in a 50% or 60% occupied property there is a bunch of deferred maintenance and some things have gone past their average life expectancy. Whether that is the kitchen and baths need total redoing or just certain heaters or ac's or the roof needs replacing.

    The existing tenants are likely staying because the rent is cheap or they like the area and there is not much available. As you rent the empty units after rehab you can approach the older tenants and raise the rents or move them into a newer unit if they agree to the new price.

    When you buy these units to turn around plan on a good chunk of the existing tenants leaving when you up the price later on. You are just using them for cash flow until you can turn it around. If an existing tenant wants to move to a new unit and pay more look at how they are living in the current unit. Even though a place is old and needs repair many tenants will still keep the place clean and show pride in where they live. Others will live like bums whether the unit is old or new.

    When you turn around you want quality tenants so that your new units do not get worn down really fast after the improvements and the new higher cash flow can be shown to sell or refi off later once fully stabilized.

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  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    13y

    I'm not aware of 1031s being public, I've done them and never saw anything that led me to believe that anyone would know it was a 1031 exchange, and I've never seen any source supplying information on the exchanges of others. In some MLS's agents can indicate in the "sales conditions" (or similarly named) field that the deal was a 1031 exchange, but I suspect that the reporting is sporadic. Plus, it could be an exchange "out" of one area, where the exchange "in" is in a different area, so I don't see the value of the statistics anyway.

    Regarding your question about rents, you would start with rental comps of nearby similar units that have been upgraded, coupled with information from the on-site management regarding the traffic, conversion ratios, concessions, and occupancy of made-ready units. I say "made-ready" because oftentimes overall property occupancy is suffering because ownership lacks the funds to turn units. On one of my recent rehabs, I was able to get about 10% increases post-upgrade, and on another one, over 20%. It just depends on a large variety of factors and you have to evaluate the totality of the circumstances.

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  • George Paiva
    Investor · Milford, CT · Member since 2012 · 592 posts · 285 votes
    13y

    Great info provided. I may add that if you are looking for Multi's in need of rehab. I would hope you are a contractor or partner up with one. Also ensure you have deep pockets. As folks indicated it requires a lot of cash tied up in the beginning to do repairs, rehabs and unexpected capital costs (new roof, HVAC, Plumbing, Electrical, etc...) And don't forget you will have to carry the vacancies.

    I don't want to paint too bad a picture as there is money to be made in this approach. Personally I look for these in my backyard where I can drive to access and perform a lot of the needed work myself. For the long distance investments I stick to carpet and paint replacements. ;)

    Good Luck and keep us posted on your deals!

    0Reply
  • William Bannister
    Commercial Landlord · Oshkosh, WI · Member since 2013 · 299 posts · 88 votes
    13y

    I have bought a few property from the hudgov site go to there index and scroll down to multi family every month they are selling multi family units very rare a month goes by with nothing for sale.
    I will warn you month of December the multi family proeprties sell for outrageous prices for some reason maybe tax reason people are looking to redploy capital or something. The site will list property over 4 units and take them to auction. Be prepared to bring some earnest money to the table because your creative strategies will not work so well at these no reserve auctions;)
    The last one I bought was a 12 unit for 184k sold for 257k . I held it about 9 months put in less then 5k. Its a decent place for cash buyers to go.

    1Reply
  • Rich Weese
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    13y

    Unfortunately, sometimes you don't know. Why is it 50%? Occupancy trending down or up? Are the 50% paying rents? Is the lead drug dealer in the 50% and are any of the others his minnions? There are so many questions like this, it is tough to know. I agree with other posters that it will be tough where you don't have eyes on project 24 hours a day and you lack previous real experience in this type deal. Good luck. Rich

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y
    Originally posted by Brian Burke:
    I'm not aware of 1031s being public, I've done them and never saw anything that led me to believe that anyone would know it was a 1031 exchange, and I've never seen any source supplying information on the exchanges of others. In some MLS's agents can indicate in the "sales conditions" (or similarly named) field that the deal was a 1031 exchange, but I suspect that the reporting is sporadic. Plus, it could be an exchange "out" of one area, where the exchange "in" is in a different area, so I don't see the value of the statistics anyway.

    ...

    Agree with Brian on the 1031 exchange not being public info. The only 1031 exchanges that HAVE to be public are reverse 1031 exchanges, because the QI has to take title in those (since the replacement property is obtained before the relinquished property is sold); not sure how many reverse exchanges occur, but I suspect that they make up a small percentage of the overall 1031 exchange count. Otherwise, a 1031 exchange is basically done with an assignment of contract involving the QI; nothing needs to be public there.

    0Reply
  • Geoffrey Murphy
    Real Estate Investor · Hartford, CT · Member since 2011 · 222 posts · 17 votes
    13y

    Great Post All. I am defenitely learning alot.

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