Houston Apartment - 29 units

Multi-Family and Apartment Investing
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Houston Apartment - 29 units

Chris Bounds
Investor · Sugar Land, TX · Member since 2012 · 554 posts · 232 votes

Ok BPers. I said in a post a while back I'd post the numbers on a small apartment complex that I am pursuing. Here they are. Comments are welcome:

Purchase Price: $325,000
Units: 29
Mix: all one bed/bath (one efficiency)
Structure: 2 two-story buildings
Current rent: $500
Vacancy: 45% (16 vacant units)
GOI: $95k
NOI: $37k (seller's info)

My estimated repairs:
Interior (vacant units): $80,000 - mostly cosmetic with new appliances and window A/C units.
Exterior: TBD (new balcony railing $8000 + updated electrical (units have gas stove hookups currently), siding repair, and paint, possible dry wood termite treatment)

Potential 1 year outlook:
Vacancy: 11% (conservative)
Rent: $550 ($450 for efficiency)
NOI: $169k
GOI: $59.7k

The only two pending snags for me on this deal are: cost for termite treatment and cost for electrical upgrading. The termite issue is the big one for me. I hear fumigation is not cheap. Also, I'd have to vacate one building to treat it. That means either they have to move out or I have to renovate units for them to move into first - which means more upfront cost. The occupied units all need work ($60k estimated), but I had planned on doing them progressively after filling the vacant units. Even still this seems like a heck of a deal, but with my funds it could be a deal breaker - unless the seller is open to renegotiating.

Comments, suggestions, advice?

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13y

Hey Chris Bounds, I used to live in Rosenberg in the late 80's and early 90's. We were there last here and I'm stunned with how that area has grown. It reminds me of "Blade Running" instead of what I remember.

Anyways. If there is good demand, and termites haven't eaten the place up, this looks pretty promising. You don't just fumigate for termites. You can't really get rid of them. They live in huge underground colonies. You have to create a chemical barrier below your property to encourage them to eat other buildings. And they can do a LOT of hidden damage.

You're paying $11,500 per unit for $500 in rent. That's a 4.3% ratio. You have some room to spend money for the repairs.

The big question is do you have the cash to deal with this turnaround situation? Its going to take money to do the repairs and to hang on until you can get it turned around.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    Hey Chris Bounds, I used to live in Rosenberg in the late 80's and early 90's. We were there last here and I'm stunned with how that area has grown. It reminds me of "Blade Running" instead of what I remember.

    Anyways. If there is good demand, and termites haven't eaten the place up, this looks pretty promising. You don't just fumigate for termites. You can't really get rid of them. They live in huge underground colonies. You have to create a chemical barrier below your property to encourage them to eat other buildings. And they can do a LOT of hidden damage.

    You're paying $11,500 per unit for $500 in rent. That's a 4.3% ratio. You have some room to spend money for the repairs.

    The big question is do you have the cash to deal with this turnaround situation? Its going to take money to do the repairs and to hang on until you can get it turned around.

    1Reply
  • Michael B.
    Apopka, FL · Member since 2012 · 207 posts · 120 votes
    13y

    The vacancy rate is (16/29) or 55%. That's high.

    Make sure you understand why that is. Is it because the apartments needed updated? I would worry that something else is going on. For a low price rental that seems like a really big number.

    0Reply
  • Chris Bounds
    OP
    Investor · Sugar Land, TX · Member since 2012 · 554 posts · 232 votes
    13y

    Jon Holdman This one is at 45 South and 610. Low-income area, but lots of big box stores and chain stores around. Definitely a good deal if can wait for the turnaround. I'm expecting 4-6mos interior repair work and marketing to start the upswing. But the whole termite thing might cramp my personal budget for it since it will require more upfront costs. Inspections and quotes are coming so I'll see soon.

    Michael B., yes I meant 55%. The 16 vacant units is correct. Old owner didn't do any rehab. Even occupied units are not in livable condition. At least I'm sure the city inspectors would say so. There are other class C apartments in the area that seem to be doing well - from the outside at least.

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

    The other 16 units might be so worn down that they are not rentable currently. Could be a seller who is broke and does not have money to make repairs.

    Also check if the 500 rent is high for the area and is why the vacancy is bad. Could be a bunch of short sales or foreclosures happened and the new buyers at cheaper debt service are lowering rents to rent up fast and stabilize.

    If that's the case you might find 450 is the number after rehab to achieve 90% occupancy. The name of the game is to NOT try to get top market on an apartment rehab right away. Instead you rent below market with the nicest units to land the best tenants moving to the area and also away from other complexes.

    You want low turnover because you can have thousands in lost rent in reconditioning a bunch of times to get rent ready again. When you stabilize then in the following years you can move rent closer to mid market rates once filled up. You do not want to be so high when turning around that you are only getting 1 or 2 lease ups a month.

    If you are not using all cash for purchase and repairs you will need a private or hard money lender. For a refi you will need at least 12 months and likely 18 on the apartment building to pay off the private money or HML. The refi bank unless it has been a year will go off of the purchase price and not the new forced appreciation value. The banks on these once turned around are doing a refi payoff of 75% LTV of the new value.

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  • Tom C.
    Investor · Kingwood, TX · Member since 2012 · 97 posts · 21 votes
    13y

    I don't own a MFP, but it seems odd to have an appartment with so many vacancies earn a GOI of $95K, and a NOI of $37K in a complex like you are discribing. That means expenses only 62% of rents, which actually seems low with so many non-performing units that likely can't cover some of the fixed costs (PTAX, yard-care, etc.). Your projection looks like it has higher expenses too. With a vacancy that high, I would wonder if the market can bare the current rent levels. Even still, it seems like an interesting deal. Curious if you have validated the NOI? Are you financing this?

    1Reply
  • Sam Craven
    Houston, TX · Member since 2011 · 673 posts · 360 votes
    13y

    I am new to multifamily but am actively searching in the Houston MSA, here are some observations.

    The GOI i calculate based on your numbers is $76,000. Are they generating cash other ways?
    cap rate based on their NOI is: 11.4%

    Considering the condition of the property and what it will take to get rented up, I would like to see a higher cap rate at least in the 14% range.

    VERIFY their expenses (or everything really). Do their expenses include property management?

    All considered, i like the deal at a slightly higher cap rate, the upside potential looks good but i dont think i would buy on potential NOI. Is the seller willing to seller finance with decent terms? I would be willing to accept a lower cap rate if so.

    keep us in the loop!

    1Reply
  • Ryan M.
    West, MI · Member since 2012 · 674 posts · 182 votes
    13y

    Are you going to manage?

    These type of projects are easy to burn out on.

    0Reply
  • Chris Bounds
    OP
    Investor · Sugar Land, TX · Member since 2012 · 554 posts · 232 votes
    13y

    I've personally inspected the property with my contractor. The vacant units (and the occupied units) are repairable. They just need a good facelift - every single one of them.

    The seller is a wholesaler who picked it up at an auction. I haven't verified the competing apartment rents, but from a quick glance online the $500-600 range for a 1/1 is appropriate. That's why my first target post-rehab was $550, to give GOI a little boost without pushing the market limits.

    Seller's expenses has holes in them. Obviously since it's already distressed and he isn't planning on holding he isnt paying for things like landscaping and pest control. It doesn't factor repair and reserve funds either. My 1 year numbers do.

    I'm using 100% hard money with a lender I've worked with on many SF deals. PP and repairs wrapped in, the same way I buy my SF homes. My numbers show that filling only 5 vacant units makes it cash flow even with hard money. But that assumes 5 NEW tenants, not (in the case of termite fumigation) putting old tenants into new units because I have to consolidate them in one building.

    I've contacted a bank that is willing to do a refi the hard money once vacancy is stabilized, even within 6 months. No cash out though. I'd have to wait 18+ months for that to be considered.

    One year projected value at 8% CAP is $1.3 million.

    Oh the property manager is on site. One unit manages. They are given free rent now. I'd switch that deal to reimbursed rent with extra incentives for on-time rent collection, leasing, etc. Of course, it would be on a trial basis based on performance. Once stabilized I'd look for a PM company to manage the onsite manager.

    0Reply
  • Josh Rowley
    Rental Property Investor · Jacksonville, FL · Member since 2013 · 43 posts · 20 votes
    13y

    Are other similar projects selling for an 8 cap? If so and your repair budget is accurate then the upside seems worth it. Plus u get to keep the cash flow. I like multifamily projects bought for the right numbers.

    0Reply
  • Donald Hendricks
    Investor · Clarksville, IN · Member since 2012 · 226 posts · 96 votes
    13y
    Originally posted by Chris Bounds:
    .

    Oh the property manager is on site. One unit manages. They are given free rent now. I'd switch that deal to reimbursed rent with extra incentives for on-time rent collection, leasing, etc. Of course, it would be on a trial basis based on performance. Once stabilized I'd look for a PM company to manage the onsite manager.

    I'd switch that forthwith, Donald Trump style. You're fired!

    0Reply
  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    13y

    Make sure that you include in your calculations the loss of tenants during your rehab. If they expect rent increases after the rehab, you will lose more.

    Sam contact me when you find the 14 CAP deal. I have investors interested in anything North of 8 CAPs in you area.

    0Reply
  • Todd P.
    League City, TX · Member since 2013 · 29 posts · 3 votes
    13y

    Chris Bounds can you give us an update on this deal? Sounds just like the kind of deal I'm looking for now. Thanks

    Todd

    0Reply
  • Chris Bounds
    OP
    Investor · Sugar Land, TX · Member since 2012 · 554 posts · 232 votes
    13y

    I'll give a full recap once the project is finished, but here is a quick status update.

    I did end up purchasing it. Self-managing for now until the rehab is finished. Interior rehab is about 60% complete. 3 completed units already leased, although it took a bit longer than I thought to price them right.

    Like most big rehab projects, expenses are higher than estimated and it's taking longer than expected. There was plenty of spread for me to make the final call though.

    On another note, message me if your interested in purchasing small cash flowing apartment complexes.

    0Reply
  • Byron K.
    Real Estate Investor · Phoenix, AZ · Member since 2011 · 36 posts · 2 votes
    13y

    @Chris Bounds any update on this deal?

    0Reply
  • Chris Bounds
    OP
    Investor · Sugar Land, TX · Member since 2012 · 554 posts · 232 votes
    13y

    This isn't much of an update, but vacancy is 34% now. Interior rehab is 90% complete and exterior rehab is about 50% complete. Once exterior is finished and cleared by the city I'll finish up the last few interior units. It's almost time to start working on the refi!

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y

    Sounds like you are making good progress on this major project, Chris. Good work!

    0Reply
  • Chris Bounds
    OP
    Investor · Sugar Land, TX · Member since 2012 · 554 posts · 232 votes
    13y

    Thanks @Jon Klaus . It's been load of work, but also a lot of fun to watch it near completion.

    0Reply
  • Bryce Y.
    Dallas, TX · Member since 2011 · 308 posts · 59 votes
    13y

    Great work! Is your plan to refi out of hard money, then refi again in a year to pull cash out? Seems like a lot of closing costs...

    0Reply
  • Chris Bounds
    OP
    Investor · Sugar Land, TX · Member since 2012 · 554 posts · 232 votes
    13y

    @Bryce Y. No I'll just refi and enjoy the cash flow until I sell it. I will consider off-the-market sales before the refi. Afterwards, I'll likely sell as the 365 days nears to save on capital gains.

    0Reply
  • Chris Bounds
    OP
    Investor · Sugar Land, TX · Member since 2012 · 554 posts · 232 votes
    13y

    Quick update. Exterior rehab is basically done. Some minor touch up painting and that's it. Vacancy should be at 21% by the months end. It's been fun turning this thing around. Ok it wasn't ALL fun at the time, but looking back it was a good buy. Now I'm pursuing a refi while considering an off-market sell.

    0Reply
  • Michael T.
    Investor · Dubai, United Arab Emirates · Member since 2013 · 14 posts · 0 votes
    12y

    Chris, did you ever find a good PM company to manage this, looking for a similar PM to interview when I am in Houston next month.

    0Reply
  • Chris Bounds
    OP
    Investor · Sugar Land, TX · Member since 2012 · 554 posts · 232 votes
    12y

    @Michael T.
    No I self managed while I was rehabbing. I am listing it for sell next week.

    0Reply
  • Dusty Corning
    Involved In Real Estate · Katy, TX · Member since 2009 · 35 posts · 24 votes
    12y
    Chris Bounds Did you end up selling the apartment complex?
    0Reply
  • Chris Bounds
    OP
    Investor · Sugar Land, TX · Member since 2012 · 554 posts · 232 votes
    12y

    @Dusty Corning

    No I decided to keep it. I knew selling was not too likely that quickly, but I gave it a shot anyway. I'm working on my refi now.

    0Reply
  • Jordan T.
    Investor · Bel Air, MD · Member since 2013 · 10 posts · 1 vote
    12y

    @Chris Bounds I would be interested in hearing the latest numbers and how they matched up with your estimates last march (2013).

    What have you put into the property and what is it worth today?

    Thanks!

    Jordan

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