Purchasing my FIRST MULTI-FAMILY-12 unit apartment-Any Advice?
Real Estate Broker · Seabrook, TX · Member since 2014 · 31 posts · 25 votes
Purchasing my FIRST MULTI-FAMILY-12 unit apartment-Any Advice?
Most Popular Reply
Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
5y@Cody L., you want the most accurate information possible, true. We have to consider what the Seller's interests and incentives are to report numbers accurately.
When reporting expenses for taxes, it is in the Seller's best interest not to leave anything out. They have an incentive to include all expenses because they want to claim tax deductions, whereas when they are selling to you they want expenses to appear low, thus raising NOI and thru that they also increase price they want.
When reporting income, it is in the Seller's best interest to claim the least amount possible, thus avoiding paying taxes on rents not collected. This helps weed out those Sellers who say, "Rents are $700 per unit" but when you see the Schedule E you find they are $650, $625, $700, $685, Units 3 and 6 were vacant half the year, etc. A lot of times agents and sellers are too lazy to list individual rents and just put down what they "think" the market rent ought to be. We find the truth on the Schedule E. And if they are fraudulently under reporting rents, then your lender probably won't count those toward their lending guidelines unless you get updated leases.
Accurate income and expenses are a negotiating tool. If they are inflating their expenses or deflating their income when reporting to the IRS, you may be able to use that to your advantage to drive down the sale price. If a Seller refused to supply me with that information, I would wonder "What's he hiding?" The Schedule E is basically the "official" version of a P&L statement. I don't need to see your total return, just that one form. Any business that refuses to provide an accurate P&L to an interested buyer would concern me. It is absolutely proper and fitting to disclose this information.
17 Replies
- Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes5y
Originally posted by @Account Closed:
About the loan... you managed to satisfy the lenders business requirements? Business credit score? Years worth of tax returns for the business that met their qualifications?
You don't need any of these requirements for commercial/portfolio loans as long as the numbers work.
- Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes5y
Be very cautious when verifying Seller's financials on the property. You are an experienced Realtor and Land lord, so by now I'm sure you know that people lie or "forget" things that work against them. For apartments, you will have expenses not found with SFH's, such as snow plowing, grass mowing, possibly master meter utilities, cable TV, internet, common area lighting, trash dumpster, etc.
You might also be expected to provide security cameras, mitigate parking disputes and enforce quiet hours.
I would want copies of all leases, not just a "sample" copy. If there are no leases, an estoppel letter signed by tenants and Seller is a must-have!
Keep in mind that tenants talk. Once you increase rent on one unit, the rest will know it's coming and may scatter quickly, leaving you with multiple vacancies. Also, if you are not firm and fair with enforcing the house rules, that will quickly come back to bite you. No giving Unit A slack on rent due date if you always charge Unit E a late fee. This could also lead to discrimination claims, especially if one party feels aggrieved and they are in a protected class. I know we always try to treat everyone the same, but some days just my mood can make me make my decisions slightly faster or slower, or might change how I word a text message.
I would be very cautious about paying any utilities that have variable usage rates controlled by tenants. To be sure you are seeing an accurate picture of all expenses, request copies of his "Schedule E" to see what he claims as the expense on his tax forms. He may want you to sign a non-disclosure agreement once you go under contract, which is fine.
Good luck!
- Investor · Member since 2021 · 62 posts · 108 votes5y
Congratulations! You sound like a seasoned pro, but just to cover your bases I would highly recommend getting Peter Harris's book - Commercial Real Estate Investing for Dummies - he has an extensive checklist of due diligence tasks and advice for how to manage the process.
- Investor · Cincinnati, OH · Member since 2015 · 242 posts · 182 votes5y
@Krystyna Fennelly
I assume you figured out how to get it financed. Lock in as long as possible. In my experience 5 year ARMs are most common but some lenders offer 7 or 10 years.
As for the city, check for code violations or any other records with city/county offices. Also check historical utility, water, and trash costs.
Beware tax reassessment if purchase price is much different from assessed value for tax purposes. Get to work on your insurance quote early and get a big liability umbrella policy.
Big ticket repairs that can bite you include roof, foundation/structural issues, outdated electric and plumbing, HVAC and paving parking areas. Try to understand age and condition of each. Also each apartment, do they need updates, repairs, or renovations when they turn?
Do you know people when you need a handyman, carpenter, snow removal, mowing, landscaping, plumbing, electric, roofing, HVAC?
Do you have a standard lease agreement? What’s your application and screening process? How will you advertise vacancies? How will you do bookkeeping and accounting?
- Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes5y
Originally posted by @Erik W.:
Be very cautious when verifying Seller's financials on the property. Your an experienced Realtor and Land lord, so by now I'm sure you know that people lie or "forget" things that work against them. For apartments, you will have expenses not found with SFH's, such as snow plowing, grass mowing, possibly master meter utilities, cable TV, internet, common area lighting, trash dumpster, etc.
You might also be expected to provide security cameras, mitigate parking disputes and enforce quiet hours.
I would want copies of all leases, not just a "sample" copy. If there are no leases, an estoppel letter signed by tenants and Seller is a must-have!
Keep in mind that tenants talk. Once you increase rent on one unit, the rest will know it's coming and may scatter quickly, leaving you with multiple vacancies. Also, if you are not firm and fair with enforcing the house rules, that will quickly come back to bite you. No giving Unit A slack on rent due date if you always charge Unit E a late fee. This could also lead to discrimination claims, especially if one party feels aggrieved and they are in a protected class. I know we always try to treat everyone the same, but some days just my mood can make me make my decisions slightly faster or slower, or might change how I word a text message.
I would be very cautious about paying any utilities that have variable usage rates controlled by tenants. To be sure you are seeing an accurate picture of all expenses, request copies of his "Schedule E" to see what he claims as the expense on his tax forms. He may want you to sign a non-disclosure agreement once you go under contract, which is fine.
Good luck!
Maybe it's just my experience but I've never been asked for my taxes by any buyer (and I wouldn't supply them) and never asked anyone.
Why would their schedule E match up with their own reality or what you can expect to see? Who cares what he happened to tell the IRS.
- Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes5y
@Cody L., you want the most accurate information possible, true. We have to consider what the Seller's interests and incentives are to report numbers accurately.
When reporting expenses for taxes, it is in the Seller's best interest not to leave anything out. They have an incentive to include all expenses because they want to claim tax deductions, whereas when they are selling to you they want expenses to appear low, thus raising NOI and thru that they also increase price they want.
When reporting income, it is in the Seller's best interest to claim the least amount possible, thus avoiding paying taxes on rents not collected. This helps weed out those Sellers who say, "Rents are $700 per unit" but when you see the Schedule E you find they are $650, $625, $700, $685, Units 3 and 6 were vacant half the year, etc. A lot of times agents and sellers are too lazy to list individual rents and just put down what they "think" the market rent ought to be. We find the truth on the Schedule E. And if they are fraudulently under reporting rents, then your lender probably won't count those toward their lending guidelines unless you get updated leases.
Accurate income and expenses are a negotiating tool. If they are inflating their expenses or deflating their income when reporting to the IRS, you may be able to use that to your advantage to drive down the sale price. If a Seller refused to supply me with that information, I would wonder "What's he hiding?" The Schedule E is basically the "official" version of a P&L statement. I don't need to see your total return, just that one form. Any business that refuses to provide an accurate P&L to an interested buyer would concern me. It is absolutely proper and fitting to disclose this information.
- Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes5y
Originally posted by @Erik W.:
@Cody L., you want the most accurate information possible, true. We have to consider what the Seller's interests and incentives are to report numbers accurately.
When reporting expenses for taxes, it is in the Seller's best interest not to leave anything out. They have an incentive to include all expenses because they want to claim tax deductions, whereas when they are selling to you they want expenses to appear low, thus raising NOI and thru that they also increase price they want.
When reporting income, it is in the Seller's best interest to claim the least amount possible, thus avoiding paying taxes on rents not collected. This helps weed out those Sellers who say, "Rents are $700 per unit" but when you see the Schedule E you find they are $650, $625, $700, $685, Units 3 and 6 were vacant half the year, etc. A lot of times agents and sellers are too lazy to list individual rents and just put down what they "think" the market rent ought to be. We find the truth on the Schedule E. And if they are fraudulently under reporting rents, then your lender probably won't count those toward their lending guidelines unless you get updated leases.
Accurate income and expenses are a negotiating tool. If they are inflating their expenses or deflating their income when reporting to the IRS, you may be able to use that to your advantage to drive down the sale price. If a Seller refused to supply me with that information, I would wonder "What's he hiding?" The Schedule E is basically the "official" version of a P&L statement. I don't need to see your total return, just that one form. Any business that refuses to provide an accurate P&L to an interested buyer would concern me. It is absolutely proper and fitting to disclose this information.
If I know a property can lease for $1000/month, what do I care if the previous owner inflated his costs or deflated his income. Or classified capex as regular repairs to lower his tax bill. That's between him and the tax man.
But, even if his schedule E was totally honest, you assume someone elses costs are going to be the same as yours.
- Real Estate Broker · Seabrook, TX · Member since 2014 · 31 posts · 25 votes5y
@Account Closed Yes financing still has to go to the board for final approval but my banker has reviewed the property detail and believes there will be no issue. I use a local bank, I have a few accounts with them, a line of credit and one other small commercial loan. They do pull my credit, I have to provide a financial statement annually and I'm a personal guarantor but much of the weight is put on the property itself.
@Erik W. @Jeff Ronningen Thank you both for the detailed list of information, I've added a few things to my due diligence list. Jeff: My bank is of offering 4.45% on 3 year or 4.95% on 5 year, 25 yr amortization. I'll being going with the 5 year; do you feel like the rate is competitive with what you've seen?
The sellers p&l matches pretty well to what I would expect and is pretty well detailed. Though I do have extra questions outlined for her. I'm shopping insurance, as well as having her provide a copy of her current ins. She has multiple tenants that have been there years, as many as 10 years and her rents are low. I don't want to piss everyone off but rents are way past due for a raise. I plan to spruce up the exterior and each unit as they come available (only one vacant currently that the listing agent asked her to leave vacant for showings).
Also any recommendations for exterior amenities for a small complex like this?
- 5yNick AtwoodBusiness MemberRealtor · Forest Grove, OR · Member since 2017 · 35 posts · 15 votes
Commercial lending space is a lot different if this is your first commercial venture: increased appraisal costs, inspection costs, etc. . Check out commercial loans of Texas, if it's a city with over 100k population, they're willing to write fully fixed term loans which is pretty rare in the commercial lending space; they've also got some great reviews online. Also, find a quality inspector and make sure there aren't any big ticket items needing fixed like foundation repairs.
- Investor · Cincinnati, OH · Member since 2015 · 242 posts · 182 votes5y
4.95% for 5 years seems a bit high. I was shopping in August and found more than one lender offering 4.5% for 5 years. I would think rates should be equal or lower now. Ended up doing a Freddie Mac SBL for under 4% and longer duration, but those loans are challenging with additional costs and requirements. That was a learning experience. Also minimum loan amount is $1M. I have a good mortgage broker who really knows multifamily financing programs and lenders. He shops my loan out and finds the best offer. In my opinion, commercial loans are where a broker can really shine and provide value. You really only need one, if you don't have one yet I suggest you investigate finding one to work with.
- Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes5y
@Cody L., you sound very knowledgeable and experienced compared to the OP, to whom my response was directed. If you know all this and can forecast market rents and expenses, then good for you! But these strategies I am sharing may be new information to someone who is learning the ropes and making a first-time purchase. Now, I'm going back to the chat with @Krystyna Fennelly, who based on her responses has found value in my posts.
To the OP: Definitely ask to see a Schedule E. It is not "just between the Seller and the Tax man." Rather, it is a valuable document that will educate you as you move into a new type of investing. I learned that strategy from a developer / investor from the Kansas City and Lawrence, KS areas with whom I was connected via a local friend. He and his dad have developed over 3,000 apartment units from ground level up and rehabbed close to 800 others both for themselves and for investor clients. Wisdom and experience like that is hard to find and a rare gift when said person is willing to talk over 2 hours sharing pointers. When he says to do things, I do them.
- Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes5y
Originally posted by @Erik W.:
@Cody L., you sound very knowledgeable and experienced compared to the OP, to whom my response was directed. If you know all this and can forecast market rents and expenses, then good for you! But these strategies I am sharing may be new information to someone who is learning the ropes and making a first-time purchase. Now, I'm going back to the chat with @Krystyna Fennelly, who based on her responses has found value in my posts.
To the OP: Definitely ask to see a Schedule E. It is not "just between the Seller and the Tax man." Rather, it is a valuable document that will educate you as you move into a new type of investing. I learned that strategy from a developer / investor from the Kansas City and Lawrence, KS areas with whom I was connected via a local friend. He and his dad have developed over 3,000 apartment units from ground level up and rehabbed close to 800 others both for themselves and for investor clients. Wisdom and experience like that is hard to find and a rare gift when said person is willing to talk over 2 hours sharing pointers. When he says to do things, I do them.
I try not to get into back and forths on here as I just come on here from time to time for fun and to help where I can, but honestly I think that's bad advice. In my own experience, if you were trying to buy a multifamily and demanded tax returns they'd just laugh at you and move onto the next buyer. I had a guy that wanted estoples for my multifamily. At the time, in 10 years and 1000+ units, I'd never heard the word "estople". I looked it up, and told him 'no'.
Maybe it's the type of property I'm buying, or my submarket, or just my super narrow amount of experience, but I've never seen a schedule E provided on a deal. - Real Estate Broker · Seabrook, TX · Member since 2014 · 31 posts · 25 votes5y
@Nick Atwood This one is in a very small suburban city, population 2019 shows 14k.. but I will still look into this. Sounds valuable, good to know my options and may work for the next! Thanks for the info! As far as inspectors, one of my favorite residential inspectors switched to handling their commercial account many years back so I've hired him and feel like I'll be in great hands there. Thanks!
@Jeff Ronningen Thanks again. Do you know anyone nationwide you would recommend? (This is in South Texas) I will ask around locally as well. Also would you do the SBL again? I definitely prefer lower rate of longer duration, and wouldn't mind some extra upfront fees and requirements to get it.. for future properties. This one is under a million but I plan to do more.
- Specialist · Kansas City, MO · Member since 2018 · 331 posts · 148 votes5y
@Erik W. would you share the local Kansas City developer? I’d love to meet them. Happy to DM!
- Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes5y
@Logan Freeman, unfortunately that isn't possible. As I mention in my initial response, the only reason I got introduced to him was thru a friend of his, who knew me as an investor and friend for almost 4 years before making the introduction. For lack of a better term, he "vetted" me. I'm sure you realize how valuable such a person's time is, and if I post that info or start sharing it with people via PM he will be receiving calls from people he doesn't know.
I encourage you to continue seeking out such people via your current network. No doubt if you've been active in a market for awhile, you'll eventually find a connection who has a lot of experience and is willing to share. I invested for over a decade before stumbling over this gem.
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