top mistakes made when buying a smaller apartment complex?

Question

Hello! I’m looking to buy a smaller apartment complex(16-24 unit) but not opposed to smaller or larger.

Just curious what were some of your top mistakes that you learned from when you started buying apartment complexes? Or things you have seen happen to a newer investor in the commercial space.

Thanks,

Pat

Bjorn Ahlblad · Answer

@Patrick Flanagan not knowing how to underwrite. Believing the seller/broker pro forma. Expecting the seller to tell you the truth. Not examining the financials in minute detail. No inspection. Not seeing every unit. No estoppel certs. Those are the main ones, I am sure others will chime in.

Account Closed · Answer

@Bjorn Ahlblad has a good list. I would add sewer lines and code violations.

Patrick Flanagan · Answer

I totally agree! I own properties Out of state and in state. So I’m not opposed to out of state. I’m trying to target sub markets of bigger cities in Oregon. I need to have a lot more practice on underwriting

H. Jack Miller · Answer

To much leverage, to little cash reserves, being to optimistic are the big ones.

Alex Ramirez · Answer

@Patrick Flanagan first and foremost underwriting it incorrectly. Make sure you underwrite it conservatively factoring interest rates going up, as well as your taxes and expenses. Second, picking the wrong contractor. I hired someone I did not know and gave him my trust and ended up running away with my money. Make sure you check on progress constantly. Third, dealing with the city -(permits). Make sure you have a clear understanding in how it works where you are located. The city has delayed my projects for months just because the permits weren’t structured correctly. Make sure you inspect all units, including roofs, foundation, HVAC, water heaters, plumbing, electrical, etc. if you will be demolishing walls you might need an asbestos survey and this can be costly if you find asbestos. Also, if you are close to the coast and you will be modifying the structure of the building, you will need windstorm engineering. Please reach out if you have any questions. I have made so many mistakes doing apartments. Happy to share some more stuff with you

Travis Hill · Answer

@Patrick Flanagan continue to educate yourself through whatever means you enjoy (podcast, youtube, books, etc.) attend RE meetups locally. Find events on social media to attend virtually.

Like the above comments, underwriting cant be stressed enough. Is the market local to or are you out of state? Have your own underwriting template/form to input numbers.

Bjorn Ahlblad · Answer

You could certainly practice pulling your own numbers and practice underwriting. You really need to know as much as possible before your first deal. You might run into a seller who is a stand up guy, they are out there but don't count on it. It isn't just that people lie either; the truth takes different forms. All the best!

Justin Moy · Answer

Congrats on taking this step! This is going to be huge for you.

Definitely being able to call BS on proformas and comps brokers or owners use. Always pull your own comps. Ask them why they did or did not include certain apartments in their comps and tour them yourself. With multifamily there are more lending products to consider, I'd recommend a good lending broker to help you shop what's available. And this one might sound weird, but a lot of people will also say their biggest mistake was not going bigger (or partnering to go bigger). Bigger properties tend to run smoother, have more favorable loan terms, better access to property managers and contractors, and just helps you scale quicker.

Jonathan R McLaughlin · Answer

@Patrick Flanagan in no particular order:

Tax reevaluation to purchase price

Nature and type of pm fees

Issues with abutting properties

Masonry work on pre-war and brick properties.

Rent roll incomplete or make a leading

Off season issues: heat when u are looking in winter, cooling/heat loss in winter

Water flow after storms effect on roof and other issues

You should be able to get the tenants names before the purchase with buildings that size. Big believer in doing some background

top mistakes made when buying a smaller apartment complex?

Most Popular Reply