23-Unit Apartment Complex for First Investment

[Michael Dunn]

Investment Info:

Large multi-family (5+ units) buy & hold investment.

Purchase price: $1,050,000
Cash invested: $275,000

23 unit apartment complex with six additional units and a laundry room that are partially built out.

What made you interested in investing in this type of deal?

Wealth accumulation. Potential upside of handling most/all of the maintenance and remodeling needs was additional $$$ in my pockets.

How did you find this deal and how did you negotiate it?

Loopnet.com; Worked directly with the listing Realtor.

How did you finance this deal?

20% down payment & bank lending.

How did you add value to the deal?

Raising rents, remodeling units as they become vacant, improving common and exterior areas, better maintenance and management than prior ownership provided. Treat the tenants like you'd want to be treated and most of them will treat you better.

What was the outcome?

So far, so good.

Lessons learned? Challenges?

Getting the final 'yes' on commercial lending takes a longer and is more involved than primary residence loans. Recognizing what the insurance company is concerned with before purchasing the building. In my case, the parking lot and breaker panels are high on their radar.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Nobody I'd recommend.

[Brandon Sturgill]

@Michael Dunn sounds killer...how'd you accumulate the cash for the down payment, closing, and renovating?

[James Short]

That's awesome, they say if you can skip residential investments and go straight to commercial property to do it. There's a property near me that's similar but I don't have the down payment that you had.

[Adam David Graning]

That’s awesome. Multifam Brrrr is definitely a goal of mine. Congrats! 

[Michael Dunn]

@Brandon Sturgill: Re: Closing funds --> Without getting long winded, I sold a house in 2016 that I had strong equity. I invested that cash into oil & gas assets near the bottom of the market. Since I have worked in the oil & gas industry for 20+ years, this was a reasonably simple transition for me. I used some funds from those investments along with a 1031 exchange on a SFR I sold (rented it for ~2 years after personally living there).

I started the ops account with $30k and am letting the rental revenue cash flow all the improvements. If I have enough funds to cover a remodel when a unit is empty, I do so. Otherwise, I do any necessary repairs and re-rent it. 

Over the next couple of years, my goal is to transition (sell) out of the oil & gas investments and use those funds on a portfolio of commercial real estate.

Have a great day!

Michael

[Drew Cheezum]

Congrats @Michael Dunn!! What were some of the big bullet criteria you looked for when scrolling through listings? Did you consider the CAP and vacancy rates in comparison to the submarket or did you set your own standards?

[Joe S.]

Originally posted by @Michael Dunn:

@Brandon Sturgill: Re: Closing funds --> Without getting long winded, I sold a house in 2016 that I had strong equity. I invested that cash into oil & gas assets near the bottom of the market. Since I have worked in the oil & gas industry for 20+ years, this was a reasonably simple transition for me. I used some funds from those investments along with a 1031 exchange on a SFR I sold (rented it for ~2 years after personally living there).

I started the ops account with $30k and am letting the rental revenue cash flow all the improvements. If I have enough funds to cover a remodel when a unit is empty, I do so. Otherwise, I do any necessary repairs and re-rent it. 

Over the next couple of years, my goal is to transition (sell) out of the oil & gas investments and use those funds on a portfolio of commercial real estate.

Have a great day!

Michael

 It sounds like you did a great job. I would like to point out though that the post I just copied was not your first investment like your title claims.

[Bill Brandt]

You also shouldn’t have used a 1031 on the primary turned rental. That only deferred he taxes. Since you had lived there 2 of the last 5 you could have avoided the taxes altogether by just selling and claiming the primary exemption. The 1031 exchange QI should have told you that. 

[Jillian Dior]

@Michael Dunn

What advice do you have for some one with below 50k cash to invest ?

[Lesley Resnick]

45k a door?  What is the area like?  How about the condition of the property?

The numbers must be off the chart.  In most cities a dog house rents for 800 a month.

[James Short]

Originally posted by @Bill Brandt:

You also shouldn’t have used a 1031 on the primary turned rental. That only deferred he taxes. Since you had lived there 2 of the last 5 you could have avoided the taxes altogether by just selling and claiming the primary exemption. The 1031 exchange QI should have told you that. 

Sadly this is not the first time that I have heard this where the people involved in doing the 1031 didn’t inform the person that it was not necessary.

[Michael Dunn]

@Drew Cheezum Re: Listing Criteria:

-- 8%+ cap rate and 10%+ on the pro forma cap rate. 

-- Distance from my home (the apartments I bought are within 10 minutes of home)

-- I actually appreciated higher maintenance expenses because high NOI decreases NOI and lower NOI equals lower sales point. Since I do 95% of the maintenance, I'm paying myself (a dollar saved is a dollar made) additional income. Not surprisingly, this led me to class C properties.

-- For this buy, I wanted 90%+ occupancy rates. This won't be as big a factor next time. 

-- Price point: I wanted to put x dollars to work for me without having my efforts spread out among multiple property locations around town. 

-- Upside: The building I purchased has a 7,000 sqft basement with several partially built out units and a laundry room. I plan to complete those units at a fraction of what new or purchased units would cost me. At that point, I will refinance the property to pull that additional equity out of it. 

@Joe S. Depending on the criteria you're using, I suppose so. I've also invested in my 401k for a couple decades, bought/sold cars for profit, etc.  

@Bill Brandt: After reading your post last night, I pulled over to the side of the road to consider it. In hindsight, I believe you're absolutely right. That stinks... Won't make that mistake a second time.

@Jillian Dior: I'm unsure I'm qualified to offer that kind of advice. Investment decisions are based on an individual's criteria. The perfect investment for me may be a horrible investment for my neighbor or you -- risk tolerance, expected IRR, control, diversification, etc all vary by individual preferences. To avoid dodging your question entirely, though, $50k is plenty of down payment for a home(s) or small multi-family (depending on where you're buying. Don't forget to leave yourself some working capital. I just finished the How to Invest in Real Estate book and enjoyed it tremendously. If you haven't read it already, you should consider doing so.

@Lesley Resnick: $45.6k / door is on the lower end of the spectrum for the OKC area, but not crazy low. The building had some deferred maintenance, many older HVAC units, etc, but also had 96% occupancy rates for the last couple years. As people move out, I'm raising the rents 15% - 20%. For the units with remodels, I'm going a bit higher than that. Unit rents are $525 - $800. The neighborhood is lower income working class, but not a 'high' crime rate. I've provided the tenants with several months of notice that rents will be going up with their upcoming lease renewals. 23 units * $75 average increase * 12 months * 90% occupancy = $18,630 / year additional NOI.

Have a great day!

Michael

[Brandon Sturgill]

@Michael Dunn awesome. it's a great scenario...one of the incredible things about this industry and what you can accomplish.

Best of luck going forward! 

[Dmitriy Fomichenko]

Congrats @Michael Dunn !