Just closed on 32 unit apartment

Just closed on 32 unit apartment

Real Estate Broker · Flower Mound, TX · Member since 2012 · 58 posts · 30 votes

Hey everyone. Just wanted to share my success. It is a 32 unit apartment located in Dallas. It was built in 1983 and features 14 one bedrooms and 18 two bedrooms. The kicker about this property is that each apartment has its own garage. They are single car garages, but they are really long so you could maybe squeeze two small cars in them.

The property has a lot of deferred maintenance that I will be addressing in the next few months. The roof and gutters are the big thing. There is also a french drain system that is completely clogged up that we will have to clean out. The previous owner had just put in a mix of laminate and vinyl wood flooring throughout the units. The interiors are in pretty good shape, but the exterior is extremely neglected. The units have individual HVAC's and water heaters, about half of which were replaced within the last 2 years. The property management company I hired specializes in the value play. They have their own construction division to do all the work. They are a bit more expensive then the other companies I spoke to, but with all the deferred maintenance I feel it needs the extra attention these guys will give it. This includes a full time manager and part time maintenance person. Management cost will be about 10% plus one apartment.

It is in a section of Dallas called Vickery Meadows. It is a low income, mostly Hispanic area. It has the highest population density in the DFW area with approx. 44 units per acre. The area is in the beginning stages of gentrification with a new Walmart, Sams Club and Target having just opened up nearby. There have also been a few apartment complex's that have recently been torn down in order to build newer nicer complex's.

The purchase price was $850k with $50k seller credit to go toward the deferred maintenance so effectively a $25k per door purchase before figuring in deferred maintenance costs. I was able to get a local bank to finance it with a 80% LTV @ 4.625%. 25 year amortization. It is a 5 year note with a balloon at the end, but the bank has an option to extend for additional 5 year periods instead of re-financing. I wanted a longer term, but banks didn't want to go any longer without a steep rise in rates or larger down payment. Closing costs were $22,269.72 along with $2,100 for an inspection. Total cash in was $183k. Expected NOI (per property managers budget) $82,518.

I'm real excited about his deal. It is my first. I have a few other properties, but those are all partnerships that I inherited. This is the first one I have done on my own and will have control over. It is also my first multifamily, the others are industrial.

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

Let's call NOI 82,000.

So at 50% costs gross expected income is 164,000 or 427 a door per month

If landlord pays water 60% gross income is about 206,000 or about 536/door

The 5 year balloon is the killer. I see some banks go 7 or 10 years out at the low rate you have but ltv is 75% and not 80%. My buyers just usually get a seller held second to increase cash on cash but opt for the longer term debt.

The bank option to extend another 5 years does the bank lay out specifically what the options will be or do they leave it wide open?? We make projections on five year term balloons with exits to dump quick if you need to.

I find local banks only do the 5 years as they are worried about future interest payouts to depositors versus rising rates. Regionals and larger banks give more long term debt but are more picky on the property.

How much per door is estimated for immediate capex versus ongoing capex with the property??

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  • Las Vegas, NV · Member since 2012 · 75 posts · 3 votes
    13y

    Hi @David Turner

    So, I re calculated your deal, and looks like you're NOI will be $40k with a 5% cap rate. Is a 5% cap rate good for apartments as you get the benefit all having all your units in the same area? I know for my single family rentals, I would not do a deal for less than a 10% cap rate (paying cash) or at least 10% cash on cash return if financing.

  • Santa Fe, NM · Member since 2013 · 41 posts · 18 votes
    13y

    Mortgage is not an operating expense. Also, some of the repair and make ready might be capital, FWIW.

  • Real Estate Broker · Flower Mound, TX · Member since 2012 · 58 posts · 30 votes
    13y

    @Michael J. These are all some things that have been discussed/considered. My property manager just did a market survey and it shows that we are in line with our market. However, we have one thing they don't: garages. Because of this we are planning on raising rent to account for this. We have also discussed renting the garages separately, but I think we are going to see how the rent increases go first.

    Right now, I think the garages are pretty crucial for some of the tenants. During our walk through I saw a bunch of building supplies stored in the garages. For example, there are two garages that are jam packed with roofing supplies. Talking to the previous manager he stated that the two apartments were rented by brothers who are roofers. For them, the garages aren't just a place to store junk. They are their livelihood.

    It's not really possible to rent the garages to non residents as their wouldn't be enough parking. The additional parking spaces are directly in front of the individual garages. There are only a few other spaces for visitors.

    There are only two utilities, water and electric. Trash is a dumpster so we can't sub-meter that. Sub-metering the water isn't really feasible. It would be very costly and the tenant base (hispanic) prefers not to have additional costs, and the City of Dallas requries large deposits to set up service that isn't feasible for this type of tenant.

  • Real Estate Broker · Flower Mound, TX · Member since 2012 · 58 posts · 30 votes
    13y

    @Bruce L. There are two areas we hope to reduce expenses. One of our biggest expenses is water. As I mentioned earlier, we are getting new low-flow toilets for free from the City of Dallas. This should help reduce our water costs since the current toilets are 30 years old. I don't know how many gallons they use, but it could be anywhere from 3-7 gallons per flush. The new ones are 1.6. That is a significant difference. Also, who knows how many of those old toilets run and waste water. My property manager is also going to be spending the next few months going over all the buildings plumbing in order to repair any leaks. This should save us some.

    The other big way we hope to bring down expenses is by bringing the property up to shape. As the deferred maintenance is completed this should reduce the cost of repairs.

  • Real Estate Broker · Flower Mound, TX · Member since 2012 · 58 posts · 30 votes
    13y

    @Ace A. Mortgage expense is not part of NOI and it is certainly not part of Cap rate. NOI and cap rate are a measure of the properties performance. That performance does not change if you have the building paid off, or a mortgage, or what your downpayment is. NOI is based off of operating expense. Mortgage expense is an ownership expense, but it is not an operating expense.

    Cash on cash and ROI take into account downpayment and financing. Thats what they are for.

    As I said before my projected NOI is $82k. At the acquisition cost of $800k that is a 10.25% cap rate. Really its better than this because the manager is not going to be living on site which will allow us to rent that apartment.

  • Chris T.Pro Member
    Rental Property Investor · Charlotte, NC · Member since 2013 · 491 posts · 253 votes
    13y

    @David Turner Thank you so much for providing many of the details and numbers with you deal. It is my hope that I am able to get into the multi-family market and your deal, analysis, and plan going forward is very informative. I am excited for you and am looking forward to future updates.

  • Banker · Dallas, TX · Member since 2013 · 158 posts · 129 votes
    13y

    Congrats on the purchase and on the great loan find! My bank is loaning a lot of money on class c in Dallas and Houston but we honestly wouldn't be able to touch those terms on class c, and I don't know many banks that would. You and your broker did very well!

  • Real Estate Broker · Cypress, TX · Member since 2013 · 822 posts · 468 votes
    13y

    Incredible case study, David. So appreciate your transparency and the wealth of information you shared here.

    Can you institute a RUBS program there perhaps, especially as you transition leases? I think it's great you don't have to pay for the manager's apartment either, since I think your PM is charging you a premium due to the apparent lack of options for management in this unit size.

    Two things that really stuck out to me, though, were how you didn't let the commercial broker intimidate you. I'm always amused when brokers use laughter as a negotiating tool - not very effective. And playing the banks against each other - I think a lot of us newbies with no multi experience think we have to take what we're given, and you proved with a little tenacity, that's not true.

    Again, great job!

  • Commercial Real Estate Broker · Scottsdale, AZ · Member since 2013 · 36 posts · 11 votes
    13y

    David you can definitely do RUBS and get back a chunk of those water and trash costs. It's allowed in Texas. Water prices are only going to keep rising (faster than rents generally) and with the service being included in rent your residents aren't going to have much of an incentive to conserve. Even if you only allocate out 50% of your total water costs (which would be billing each unit an average of only $25/month although this would go down over time) you're going to bump up your cap rate a whole point and put almost an extra 10k a year in your pocket. And that's without mentioning how you can also allocate trash costs should you desire.

  • Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes
    13y
    Originally posted by David T.:
    @Stephen Masek When the balloon comes due I may sell or I might refinance. If the value goes up enough it would be nice to sell and put the proceeds into a bigger apartment complex.

    So what if the value goes down and rents go down? How are those possibilities factored into the plans?

  • Real Estate Broker · Flower Mound, TX · Member since 2012 · 58 posts · 30 votes
    13y

    @Stephen Masek That is always that risk. You can't make money in this game if you aren't willing to risk anything. While it could happen, I don't think it will. First off we bought it at such a low cost ($25k per unit) that values would have to go down quite a bit in order to not be able to sell to at least pay off the loan. And thats only if we aren't able to refinance.

    As far as rents going down, thats not real likely. Texas has been pretty insulated from the recession. Prices here never rose like a lot of places, so they didn't drop like other places either. Not only that, but with the large influx of new people here, there is always demand. The location is in high demand due to being 5 minutes from downtown Dallas. Plus, the garages are a big selling point.

  • Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes
    13y

    Indeed, the garages seem like a key feature, as long as you keep the tenants from running businesses out of them (sometimes a problem in southern California). Cars are a major expense, and last way longer when properly cared for, and that includes being kept in a garage when not being driven. Tenants who understand that might also be ones who will take better care of the units.

    Yep, the fact that it is in Texas is a major factor in favor of the deal.

    Good luck. Please let us all know how it works out.

  • Sudbury, Ontario · Member since 2013 · 5 posts · 1 vote
    13y

    Good job. Our first was a 9 plex and we thought we were getting in over our heads!!

  • Investor · Austin, TX · Member since 2012 · 205 posts · 112 votes
    13y

    Congrats!

  • Lender · Plano, TX · Member since 2013 · 312 posts · 71 votes
    13y

    Do you mind if I ask how you got the down payment? Was that saved up over the years? Or did you have a side investor who helped?

  • Dallas, TX · Member since 2013 · 31 posts · 3 votes
    12y

    @David Turner , may I ask how the project is progressing?

  • Engineer · Savoy, IL · Member since 2013 · 92 posts · 12 votes
    12y

    Love the details included. Thanks for the transparency!

    I too would love to hear an update.

  • Investor · DFW / Austin, TX · Member since 2013 · 188 posts · 80 votes
    12y

    @David Turner As everyone else has said, congrats on your successful purchase of the apartment complex! Would you mind giving us an update, since it's been a couple months into it now?

    I've been curious as to how quickly your complex can get leased and what kind of carrying costs you've budgeted. I think you said the previous owner had the property only 25% tenanted.

    Also, was this your first REI deal, or have you previously been investing in SFR or other before jumping ahead with the apartment deal?

  • Orlando, FL · Member since 2013 · 3 posts · 0 votes
    12y

    wow very inspiring congratz

  • Real Estate Broker · Dallas · Member since 2013 · 116 posts · 10 votes
    12y

    @David Turner Now that it has been a few months since your purchase, can you recommend your property management company for their construction services? Did they do a good job? Any issues? If you like them, whims yk

  • Real Estate Broker · Dallas · Member since 2013 · 116 posts · 10 votes
    12y

    not sure what happened to the last sentence...would you PM me with their contact information

  • Baton Rouge, LA · Member since 2014 · 2 posts · 0 votes
    12y

    sounds like a sweet deal. Congrats! Small multifamily can be a great niche!

  • Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes
    12y

    @David T - congrats on your first apartment complex! I'm shopping for one myself (&/or participation in a private placement), and reading of others' experiences is both insightful and inspirational.

    Would you mind sharing your banker and PM contact info? I'm getting pre-qualified w/ a solid underwriter, but it never hurts to check the market and get some term/rate options.

  • Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
    12y

    @Chris Soignier in this fashion, to send out the alert. However, he's not been around lately, so who knows on this deal.

  • Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes
    12y

    Thanks, @DavidBeard, what did I do wrong, insert a space erroneously?

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