All Forum Posts by: John Umphress

@Ray Johnson, they are both located near Oklahoma City University, right next to the Asian District near North Classen.   I actually got onto this deal back in March.  And you're right - good deals are getting harder to find.  (Suppose it also depends how you define a "good deal.")  I looked in Texas but didn't think the value was good enough to make me move on any - and that includes some off-market properties that brokers sent me.  (I had reached out to them on some of their listed properties which led them to send me some off-market stuff.)

For those of you considering doing the same, I did research into several dozen MSAs, looking for those that had steady employment and population growth and had recovered pretty well from the recession.  I then looked at MF construction activity.  OKC, KC, Huntsville AL and some others were good prospects.  Set up appointments to look at properties in OKC and went up in mid April.  Looked at about a dozen that met my criteria and these two were in a good location and easily the cleanest (i.e., condition and lack of needed cap ex.)

The seller had reduced the price once from their initial November listing.  I made an offer, they countered at a price where I thought the deal would work with a reasonable amount of leverage, and I told them I would take it if they threw in an adjacent house for a buck - deal!

Been a while since I have posted, as I have been busy!  Closed yesterday on two 36 unit MF complexes in OKC (portfolio deal.)  This was a 1031 exchange using money from the sale of a property in Austin with the difference coming from Freddie SBL financing.  Despite the fact that I only owned an 8 unit building (purchased last year) and had never used Agency financing, it took us just over three months from application to close.

It was quite an experience but I had good assistance from the folks at Red Capital on the Freddie financing - they walked me through a lot of the process and gave me a good idea of what I needed to do.  Smartest move was hiring a local attorney who knew all the folks at the title company, as well as others involved.  Worth every nickel I paid him.  (His assistant was top-notch as well!)

So if any of you are thinking of taking the plunge into MF (and if you can find a good deal) don't hesitate to consider Freddie or Fannie financing.   

John

@Jameson Sullivan, when I went shopping OKC and KC were on my radar screen along with a few other markets.  Just be ready to get on a plane and walk some properties.  Milk the brokers for information - they can usually give you a good picture of different local submarkets and neighborhoods.  Dig into the numbers - ask for at least 3 years of P&L, and two years of monthly income/expenses (T-24?)  Was there a decline in rental income?  Why?  May be a good property with sub par management.  Any odd increases/decreases in expenses?

Meet with the owner/seller if possible.  Ask everyone their opinions of local property managers.  (I flew up to OKC for a day just to interview prospective PMs.)  Keep your emotions in check.  Run some scenarios with different financing.  One buyer applying bank financing may think it's not a good deal, while it may be fine for another buyer using Freddie or Fannie financing.  Good luck!

@Steve A., as this is my first time pursuing Freddie SBL, I'm using a loan broker. Yeah, you have to pay them a fee but that is always true re someone with experience and who knows the ropes. I'm putting a substantial amount of money down, so my deal looks good with respect to LTV and DSR, two things they look at. (1031 exchange, and I am more focused on net income after debt service as opposed to maximum leverage.)

This deal is actually costing me a little extra money.  Why?  It is a portfolio deal for two properties and I am financing the properties separately in case I want (or need) to sell one before the term and so trigger a prepayment penalty.  Doubt that will happen but you never know.  Like having more flexibility.

@Steve A., I'm currently working my way through a deal on 72 units using Freddie SBL financing - 10yr term, 30yr am (I'm a buy-and-hold kind of guy) a smidgen under 5%, non-recourse.  I like my bank but they couldn't match that.  Worth noting that the SBL product is intended for loans $1m and above.  You can go lower but it will cost you some points.

The only properties that I generally shun are those built during the early to mid 80s - I call it the rapid depreciation era.  A quirk are those built in Texas (maybe elsewhere) during the early 60s - many were equipped with boilers and chillers.  Prior to that most lacked cooling and were "updated" with window units or PTACs or retrofitted with split DX cooling systems.   By the late 60s split systems paired with electric resistance or furnaces for heat became the norm.  In short, I look at the condition of the building and equipment.  An older building with new mechanical systems may be more attractive to me than a late 80s - early 90s building with patched together stuff, although later construction generally has larger units.  Location receives a lot of weight.  Older in good area generally beats newer in bad area.

Your property taxes may be a little low.  Based on various tax rates of jurisdictions in Tarrant Co and an appraised value of let's say $300k, monthly property taxes would be about $675/month.

@Account Closed WCAD has 2018 taxes at $36,430 on an appraised value of $1.484m ($2.454 x $100.)  That alone is 42% of your pro forma expenses.  While Texas is a non-disclosure state, the appraisal districts are pretty good about capturing values off deeds of trust, etc so expect that number to be higher after the sale unless you bring a lot of cash to the table. Agree with others that your DCR is too low (1.25 is lowest I've seen quoted) and in my limited experience I've only seen 15 and 20yr terms on commercial RE from community banks.

If you can purchase MF in Austin at a cap above 7, I salute you!

That's why, even though I live in Austin, I'm not buying in Austin!

John

Everyone else has covered most of the bases, but the first question I would ask and want answered is "Why are half the units vacant?"  I've see too many properties touted as "value-add" where the seller is really saying "add the value to ME by paying my inflated price!

@Jonathan A., don't know the vintage of your building, but if there is lead paint and/or asbestos, demo can get more complicated.  Also, there can be unanticipated structural issues related to demo.  Having a single GC over the entire project (demo and rehab) can avoid issues where the demo creates problems for the contractor performing the rehab.  The good GCs will have a team of subs that they trust and are familiar with.  (The best custom builders/remodelers here in Austin have worked with the same subs for decades.)  Don't know about KC, but most jurisdictions allow only licensed contractors to pull electrical, plumbing and mechanical permits.  

Key to any rehab (or any construction work, really) is getting it done quickly and correctly.  Try to get recommendations or references for any GC you hire and put a timeline in the contract re completion of the work.  Include a bonus if the work is performed ahead of schedule.  Best of luck!