First apartments under contract

28 Replies

Hello all,

Wanted to write a little bit about having my first apartment under contract. It was only one apartment and then recently another deal came through the funnel and now two apartments are under contract. Both on the eastern shore of Maryland, one in Kent County and the other in Queen Anne's County. A 7 unit residential in Kent County and 10 unit mixed use in Queen Anne's County. Sometimes it seems to be how it works, the deals just start compounding on each other after enough marketing and word of mouth, might be pushing our team to the limit on this especially with two flips going on simultaneously, but it seems like it will be worth it in the long run getting through these challenges.

Some of the challenges have really been the construction and permitting processing that are going on. Both of these apartments require significant work and are more like an apartment complex (large houses divided up into apartments) than an apartment building that are both over 100 years old. Definitely frightening due to the age of the structures and certainly wouldn't be getting into them if the GC on our team didn't have 30 years of experience in extensive renovations and new home construction. Both will essentially be complete gut jobs, and replacement of exterior structures as well- roofs, windows, siding, etc. Any vacant units we will go in and completely redo, and then cycle the current tenants to these newly renovated units if they'd like to move and upgrade. With how competitive it is here in Maryland, and it seems how most markets are, our niche seems to be highly  distressed, damaged, dilapidated buildings which most people pass up.

Wanted to emphasize to anyone else out there getting into these that it's all about having the right people around you- contractors, inspectors, lenders, local legislators, property managers, attorneys, title companies, and for Maryland having someone that is a lead inspector is huge and make sure they are experienced! Maryland lead laws are very strict as they should be.

On the mixed use we are running into some questions in getting the appropriate sewer and water allocations because the one unit in the ten unit complex will be a laundromat for the apartment complex and the volume of water is of concern for the town. It's the only commercial unit in the complex and is required to be so because of the town laws of having the frontage be commercial to keep a historic feel to the main streets. The laundromat seems to be a decent idea on paper, and we found a local company in Baltimore to split the revenue with us 50/50 and supply all the equipment and do the required maintenance that may come up. This will be self service as well as full service, we will likely staff two people, one in the morning shift and one in the afternoon, to do laundry, fold, hang, iron etc.

We are working with a local lender who is asking for 25% down on the purchase price and 20% down on the renovation budgets, which for the 7 unit is around $160,000 renovation budget and the 10 unit is around $550,000 renovation budget. With a year of interest only period which is fantastic to help with cash flow. For each property we are buying at a lower cap rate with knowing they are value add, I don't see an issue buying at a 6 or 7 cap if after a year or two you can increase the cap to an 11 or 12. Especially when the first year is interest only as it greatly helps with cash flow when there's some vacancy due to renovations occurring. Depreciation will help with taxable income and we are likely doing a cost segregation on both of these apartments because there are so many assets to retire, as well as, starting to depreciate the new assets we are putting into the property making our taxable income minimal.... hopefully!

Currently, we are set to close on one late January and the other late February. We are working on getting state grants and local county/town grants for these properties to help with the renovation costs. Both state and local grant agencies seem very receptive to the rejuvenation of these properties and their towns, and we are hopeful we'll find a grant that will partner with us.

Thank you for reading and if you have any suggestions please post!

Have a few meetings with state, county and town employees. Anyone have any success on grant programs in Maryland Kent County or Queen Anne's County or Centreville? Please let me know. One of these buildings are considered historic too. Maybe someone has had a similar experience in Baltimore or Annapolis

That's great news! I think once people know that you are doing this kind of work, and you can show them some of the projects, more deals will be coming your way :)

Have not had the chance to work with government agencies for grants or a like, but in small towns you might have some luck with city council/mayor/city manager. 

Alex

Originally posted by @Ben Guttman :

@Ken Nyczaj congrats. I would recommend looking up @Yonah Weiss on here. He does cost segregation but may know the right people or those who have done it before.

If you have any insurance questions- I’m glad to help.

Thanks for the shoutout Ben!

 

Ken,

A couple of quick thoughts from an Insurance perspective:

1. renovation while the structure is occupied is an issue for some Insurance companies that handle the Renovation Builders Risk (policy you might normally use if this was vacant).  Discuss the options with your agent so they can shop it if needed

2. Some Insurance companies shy away from Laundromats while others have special programs and target them.  The pricing can vary based on that and other factors.  Make sure that your agent has access to multiple markets.   The same applies for Apartment Buildings.  

3. Some of my Laundromat clients have added drop off/pickup service for Dry Cleaning and Wash & Fold services to increase their revenue.  I haven't seen it yet but I expect you could also offer tailoring as a drop off/pickup.

4. On the Laundromat policies, be sure to discuss the options for Business Interuption due to Utility Services (Electric, water, sewer) with your agent.


Good luck on the projects

Originally posted by @Ken Nyczaj :

@Yonah Weiss hello Yonah, maybe we can talk within the week about a few things? I’ll send you a message if ok?

 Sure thing, send me a DM

@John Mocker thank you for the advice. Eerie Insurance is who we are using, a little more expensive than others, but we've used them for flips and rentals in the past, and Eerie seems to be very reputable. Great advice on the laundromat, we are still waiting to hear what the policy will look like.

As far as cost, the 7 unit apartment will be around $3,000 per year. Seems reasonable?

@Jordan Berry Thank you for the connection! This will be my first so I'm sure questions will come up. Thank you for the resources, I'll be sure to check them out!

Ken,

Without knowing the limits, coverage (Replacment vs ACV, Special form vs Named perils),construction (Frame, masonry, ...), Deductible, etc. its hard to say how that premium compares.  My guess is that it is in the ballpark but you may want to get some other quotes to check it.  

Seems like we have come to an agreement on sale price after some back and forth.

Currently looking for more grant funding and may be able to through a state energy grant. We are looking into adding solar panels to the roof to help pay for the electric bill of the laundry facility on site.

@Jordan Berry we decided to put washers and dryers in the units instead of having a laundry facility, the permitting and sewer/ water allocations were just starting to cause to many concerns in the local town. Thank you for your resources though, they'll come in handy in the future!

December 24th update: 

Local Bank in Queen Annes County Maryland gave us our loan commitment yesterday on the 10 unit apartment complex in Queen Annes County. This is the apartment we were most concerned about on the financing due to the complexity. Now, for the appraisal to come back favorable is the next step as well as the permitting. Since weren't not doing a laundry facility and keeping the commercial existing use, it should be smooth from here. 

With great rapport built between the local bank and our lender, 18 months interest only was granted too which will greatly help with our cash flow during turnover and renovations. If anyone is looking for a great local bank in Maryland that loans in Annapolis Baltimore Wilmington areas, I'd be happy to pass along the banks info.

We've had the loan commitment for the 7 unit apartment in Kent County, and all permits now for about a week and closing is set for mid January.

Definitely has been a learning experience with these two apartment complexes but hopeful all my teams due diligence will pay off and we minimize our negative surprises come ownership time.

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