I've been involved in the SFH game for a while and have had some success with it. But lately, I've had a strong desire to jump into investing in multifamily units. I'm currently reading the book Multi Family Millions and gaining a stronger grasp on how things work.
The biggest thing I learned since getting involved with real estate is that hesitating to take action is the worst thing you can do. After I close my most recent wholesaling deal today, I want to really go in with this. I've even been in contact with a guy who works for a hard money lending company that specializes in commercial properties so finding financing won't be as big of an issue. The main thing now is finding a deal.
So a few days ago, I ran across a craigslist ad for a 100 unit apartment in Atlanta. The owner is out of state in CA and wants to get rid of the property. The asking price is $1.7 million, occupancy is currently 71%, and the cap rate is 10%. The surrounding area is something I wanted to pay attention to. Wal-Mart plans to open a new store nearby. And the North American Porsche headquarters are moving their facilities from Sandy Springs to this area. Both of these things will bring new jobs to the area and possibly more tenants looking for a place to live.
Is there anything else I need to look for to determine if I should make a move on this? Obviously, there are things like repair issues that would be looked at during the due diligence period. But is there enough here to even make this worth looking at? And if so, what's the next step?
Do you have any money to buy this property with?? Even with a HML you will need considerable cash for points, some down, and closing and due diligence costs.
You have to be really careful in Atlanta what you buy. You can get burned pretty bad with some of those properties.
Listen to these words OCCUPANCY IS CURRENTLY 71%. Throw out words like (currently), (potential), (easy turn around), etc. All that is doing is puffing the property and overselling a problem that needs to be fixed where they are wanting an inflated price.
Do you want to hold this property long term or resell once stabilized in a few years?? You are only about 30 minutes away from where I live by the way. If you want you can shoot the property to me or call me etc. or e-mail and I can take a look or you can just post on here so everyone can give input on it.
What you should do is ask around from others who have knowledge on apartment buildings.
Touching on this topic of a MFR that has less than 100% occupancy:
If one is trying to value a commercial / MFR property and there is a fraction of full-occupancy (71% in this example)... how does one go about valuing a purchase price? I know that the overall NOI has most to do with it, but let's say there was 0% occupancy (such as a small retail commercial building with no current tenant ... - would one then value the property simply based on its "replacement costs" + "land" ?
In this case with a MFR with 71% occupancy, what would be the way to come up with a value - (all else being equal?)
First, I would be sure to due a good deal of research for a property that is listed on Craigslist. Over the past few years, the deals on there have become rather shady. To me it seems odd to list a 100 unit apartment building on Craigslist.
Unlike SFR homes you are going to have strongly consider maintenance, managment fees, insurance and employee salaries into consideration. Just think that if you are renovating a bathroom for $3,000 in a SRF it could easily be $300K for a 100 unit building assuming all the bathrooms need to be redone.
When looking at purchasing properties like you are describing you go by what you think the "highest and best use" is.
When I worked for developers we looked at a property for not what it was in it's current state but what we wanted to use it for. Then you build a pro-forma of soft and hard costs and your targeted return and work you way backwards. You build in contingency money for worst case examples and then arrive at your price for the property going in.
The small retail building you would need to look at ( age of the building, who would go in there for the highest rent and it is mom and pop or corporate, is the building best demolished and build new, is the land better used assembled with adjacent properties, etc.)
As you can see it's not just a simple formula but a careful and detailed analysis goes into looking at every property individually.
Same thing with a apartment building. Is the current use the best use?? Can a higher density be built on the land for apartments?? Are apartments oversaturated but the land is valuable and the best use is retail or medical office for the land etc.?? Is the building good but unit mix and amenities need changing etc.??
Clay @Joel Owens has brought up some very valid points. In regard to the hard money, how long will you need to use it? What is your plan once the HML calls loan? Will the property cover the debt service for all the expenses? If it's not even 3/4 full, what makes you think you will fill the remaining units? What experience do you have in dealing with 100 tenants? Have you checked all expenses for yourself, and are not relying on seller?
If Walmart is going in, how close will it be? Will the noise from trucks etc. affect the property? (I know in an area where Wal Mart put in a superstore next door, and the apartments next door that once were in high demand, lost their appeal). How well do you KNOW the specific neighborhood, values, etc.?
There's a big difference between doing SFR where you've had "some" success with it, and jumping in full bore to a 100 units. In construction we have a saying "measure twice, cut once" Get someone that knows that market to help you, and review everything there is to know about the property. Good luck.
Chris, you mentioned a cap rate, but that can be manipulated by sellers by hiding expenses or using pro forma income. To best analyze the deal, you need the current gross income, the unit mix, and the current vacancy (which you already have).
Clay, Joel provided answers to your question on evaluating deals that are not fully occupied. In the example, of course a building with 0% occupancy still has value, but how exactly do you come about finding it? Assuming the building is already using its highest and best use, the only way to do it is work somewhat backwards and using a pro forma for income. Lets say each door gets $100 (for simplicity sake) and you have 10 doors, but the building is empty. I would use $1000 as the pro forma gross income, then take out 50% for expenses and arrive at a pro forma NOI of $500. Then lets say the gong cap rate for that area was 10% and I was comfortable with that return. Thus, the value of the property would be $60,000 ($500 NOI x 12 months divided by 10% cap = $60k). So based on the building pro forma, it is worth $60k. But as an investor, I need to go through all the work to fill the build,IMF and stabilize it, so I want to be paid for that. In order to get paid for it, I must pay less than $60k. That is where the backwards math comes in. I can't tell you exactly how to calculate what discount you should seek as every investor is different and every investment is different. In the 50% rule, it is common to have 10% of that going towards vacancy. So, in our new example, lets say the building was 50% occupied. Since my 50% expenses includes 10% for vacancy already, I need another 40% to stabilize. Thus, I want to be paid for that 40% of tenant placement work so I would offer approx. 20% minimum to 40% maximum off of the value of $60k. Lest say I wanted 30% discount for the 40% placement, then my max offer would be $42k ($60k X .7)
I greatly appreciate all of the responses. Right now, I'm still in the learning phase when it comes to the commercial side of real estate. My knowledge of real estate has greatly improved since I started almost a year ago. When it comes to single family homes, it's so much easier to identify what is and isn't a good deal based on the many different factors.
Commercial properties are a completely different game. I definitely wasn't planning on buying a 100 unit apartment today or anything. I just wanted to get some practice in being able to identify what is and isn't a good deal. When I'm ready to get into it, I'll more than likely stick with something between 4-12 units.
And here's the apartment I was referring to.
Thanks, indeed, for the replies - (*this forum is sure a great medium...*)
To recap and further clarify on the issue of trying to value a property that has a multitude of deficiencies (high current vacancy, repairs, etc.):
Let's assume that the subject property is, indeed, a multi-family apartment complex. And all else being equal, it is the "highest+best use" for the structure/property going into the future.
If we are performing due-diligence and trying to account for bringing the property "up-to-par," how would you approach items/issues that might be further down the road. For example, upon reviewing the property and adjusting for Will's example of the need to place 40% with new tenants, we find out that there will need to be new water heaters replaced in three years. Perhaps there also needs to be a new roof, but not for six or seven years down the road. The seller might tell you that every roof needs to be replaced "down the road" as do water heaters and given this, he doesn't see the need to offer a "discount" for future repairs/capex.
So, other than discounting the typical needs of stabilizing a property from the beginning and unless something significant (like a roof, etc.) needs to be repaired/replaced pretty much at the time of ownership change, how far into the future is necessary to calculate on a pro-forma and to evidence a seller about its significance?
Clay, that is a great question and not easily answered. If a life span of a roof for example is 30 years, and it is 25 years old, you could easily argue/negotiate that the roof is on its last leg and in need of replacement soon. If it was only 12 year sold, then the life span still has another 50%+ to go and possibly more difficult to negotiate anything from that item. You also should realize that your 50% rule would allow and cover 15 years worth of reserves to cover said expense, but in the 5 year example, very little time.
Everything is negotiable and the better you are at negotiating, combined with the seller's extent of motivation, the better deal you can arrange.
Originally posted by Will Barnard:
... You also should realize that your 50% rule would allow and cover 15 years worth of reserves to cover said expense, but in the 5 year example, very little time.
This is very interesting and the type of info I was looking for. I've seen many different approaches to valuation in terms of time - (some look at an office building in terms of the next five years of cash-flow, or maybe 10 years, for example, etc. etc...)
So you're saying that for residential investments, investors like to envision the immediate 15-years of expenses/capex on average - as a basis?
Clay, I can't speak for all investors obviously and the 15 year example was just that, an example. I am not sure if I would want 10 or 15 or anything beyond or between. I would have to make that decision on a per property basis and not a standard.
Agreed, Will. Well noted.
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