Good afternoon. We are in the process of purchasing our first 8 plex building in McAllen, Texas using a small bank 75% Loan to Value commercial loan. We have prior experience flipping and leasing Single Family houses but new to apartment buildings. Please advise how we can grow our business buying small buildings with High cash flow but Low Market Value appreciation. Apartment buildings take much longer to sell here and do not enjoy the Value appreciation in bigger markets. We would like to Buy additional buildings every year but Want to hear a exit strategy. The idea is to scale, sell and buy in hotter markets like San Antonio after a few years.
This is Rick from McAllen Texas and appreciate all you guys at Bigger Pockets.
Hey @Rick Robles , as I'm sure you've heard with real estate investing, you mainly make your money when you buy. Unlike single family houses, apartments are commercial properties and are therefore evaluated using CAP rates rather than comps. To keep things simple, CAP rate is determined by a properties NOI which we'll say is mainly based on the rent being collected. Therefore for apartments you want to strive for buying ones that you know you can increase the NOI of after you buy it (forced appreciation). There are a number of ways to do this such as increasing occupancy of an overly vacant property, increasing rents to market value, rehab to increase rents, etc. So essentially because the NOI when you buy it is lower than what you believe you can make it, you are buying below market value. Then you go in, make your changes and just like that not only did you increase your cash flow, but you also increased your CAP rate and therefore the value of the property.
Now selling that property in an area that takes a while to sell apartments is another issue, but at least you will have a good cash flowing property in the meantime. And if you really want to exit that market to another hotter one, since you forced the appreciation, you can then evaluate if you are willing to sell the property at a discount (below market value but still good profit because of your forced appreciation) just to get into the hotter market quicker. This is where you'll have to compare the returns you're getting on the current property to the potential you can make in the new market.
Hope this helps Rick and good luck out there!
Hi @Rick Robles !
I am also in McAllen and understand your comment about apartments taking a bit longer to sell around here. However, I see rather strong interest from out of town buyers because the cost to enter the market here is so low. I've worked with several investors out of more expensive markets - CA, NY, etc - who find our prices much more attainable than buying in their own backyard and so therefore, I'd say your exit strategy would include getting your FOR SALE properties in front of out of town buyers. Bigger Pockets and Loopnet would be avenues for this. Additionally joining in our local REIA would connect you with like minded people who might buy when you are ready.
I think the benefit of investing here local vis-a-vis San Antonio is exactly that we aren't such a hot market. Your aren't competing much and can generally bargain down the price. On the flip side, is what you point out however, it's harder to sell.
I bought my 1st 4plex in Edinburg about 6 years ago as part of a short sale and that turned out really nicely. We don't have too many of those but when we find them, they can be great opportunities because as Austin references above, if you buy right, you can sell a little lower when you're ready creating more demand for your property versus the competition.
Anyhow Rick, would love to connect since you are local and we're always looking to connect investors with the right property or buy ourselves!
@Rick Robles I would agree with @Austin Petrie in a sense that buying a deal right is half the battle. The best part of buying right and forcing appreciation via some of the ways Austin mentioned above, is that instead of selling you can always refi and pull out some of that equity to go into the next deal. Just my few cents on this topic.
Luckily, market appreciation doesn't impact multifamily as much as it does single family homes. The value of multifamily is based on the NOI and market cap rate. So, if you can increase the rents by adding value (renovating to increase rents or decreasing the expenses), you will force appreciation and increase the property value.
So, you want to purchase multifamily properties that are under-rented, outdated, and are spending too much on expenses. Take over the asset, raise the rents through renovations, and reduce the expenses. After a few years, you can refinance to pull out cash or get a supplemental loan (if available).
First of all it is great to see more BP members from the RGV.
I don’t think apartments take longer to sell. A deal that makes sense gets picked up quick.
I have an investor that got one of my email blasts and really liked a property in Mission. Just by looking at it I told him it was a good price and didn’t expect it to stay on the market. Sure enough it was under contract within 2 weeks.
Good luck sir!
How is the growth in McAllen, Mission area...?
I never been south of San Antonio but I read and heard that there is lot of growth in that area...
Here is projection of population ... and looks like 50-100% growth expected in that region...
@Rick Robles Welcome to BP! The Valley is a hidden gem in Texas real estate!
Congrats on your purchase!
The advice above is solid. What a great community we have!! When it comes to moving into the commercial realm, a good question to ask yourself is: "Can I be a better operator than the previous operator?" Translation: Can I run the asset more efficiently (raise the NOI and lower the expenses)? This is how commercial assets appreciate.
It sounds as if you're experienced in the rehab process and that you'll be able to force some appreciation. You might even be able to attack the expenses by doing things like metering the utilities, such as water.
I believe the key to your situation may lie in knowing the rents/amenities in the immediate area (6 block radius for example) and work to position yourself well in that market.
Any chance this is the 8-plex on Gumwood? I was just evaluating an off-market deal there not too long ago.
Best of luck,
I replied on my cell phone and it doesn't link to the thread names, not sure why....
In any case, I put your name here so it would ping you that you had a response on your thread, assuming you activated notifications.
Greetings @Rick Robles
If you know you want to scale your business after a few years into buying larger properties, there really is not good reason to wait. If your bread and butter is buying smaller properties, then by all means continue doing so. But you can start educating yourself on how to start putting larger deals together through partnerships and syndication. You can go big and fast now ; )
Great hearing from you @Austin Petrie , just wanted to thank you for replying with strategies to better evaluate small buildings. We do factor CAP rates and NOI as part of our evaluations. One idea we have thought about is putting a whole Portfolio together with Local property management under One Business roof. The idea is to sell the portfolio after it appreciates if the numbers make sense.
Great thanks @Sean Na Dallas is a great market and remember some nice areas around White Rock Lake and SMU. Please keep in touch as we are interested in Growing 10 X just need to buy and start...
Hi @Kasey Villareal just wanted to say thanks for your response and great ideas to market commercial buildings to out of state investors using Bigger Pockets.
Please keep in contact and hope to share some of my experience selling the Valley.
Great to receive your reply @Sean Na
Just want to thank you. We met with a Developer today. We are going to look at a joint venture to build multifamily project 3 stories high and over 250 units.
Thank you for thinking Big.
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