Advice Requested On Multifamily Purchase
We are considering a large purchase (197 units) of duplexes/single families in one transaction. They are located in one city, three different geographical areas. We have been moderately small up to this point (9 properties) but this is an exciting possibility which we can acquire with little money down.
A little nervous about going into a deal this big and really want to go into this educated. Any advice would be welcome!
Specific concerns: wanting to cover all my bases during the option period, wanting to ensure cashflow, not wanting to scare the tenants off with new management, what questions should I be asking existing seller and manager? (I do have an excellent 30+ page proforma already in hand.) What questions should I be asking the property manager we would use? Etc.
Thanks!
Wendy
Quote:
On 2004-02-14 19:24, dwpannell wrote:
We are considering a large purchase (197 units) of duplexes/single families in one transaction. They are located in one city, three different geographical areas. We have been moderately small up to this point (9 properties) but this is an exciting possibility which we can acquire with little money down.
I just went from 11 units to 33 units, and the extra work is staggering. Be careful. I am guessing by reading between the lines that you are buying from a private investor or small group. Are they dumping all their properties? Why? Need to get into their head. If they are dumping just a portion of them, realize they will sell their more problematic or higher maintenance props... wouldn't you?
A little nervous about going into a deal this big and really want to go into this educated. Any advice would be welcome!
It is good to be nervous. You need to check very carefully and analyze each property as if it were the only one. If and only if conservative numbers allow you to cashflow 197 units at 20k positive cashflow per month after 100% cashflow amortized over 15 years or less, would I consider it.
Specific concerns: wanting to cover all my bases during the option period, wanting to ensure cashflow, not wanting to scare the tenants off with new management, what questions should I be asking existing seller and manager? (I do have an excellent 30+ page proforma already in hand.) What questions should I be asking the property manager we would use? Etc.
Thanks!
Wendy
Good Luck,
Shawn(OH)
My cousin has 150 units and he has 2 full time office staff and three full time maintenance people. Plus he has been acquiring slowly over the years so his business is stable. From 9 to 206 is an amazing jump and you will not have the infrastructure to handle it. Can you afford a property manager(s) in the interium, wholesale some of the properties, something to defray you having to manage 206 properties.
Brenda
Our plan was to employ a property management company..with them having a team underneath. Will one management company be able to handle this volume? Thoughts?
The owner is a foreign investor from Germany...he is selling all his properties in this area, have not ascertained why.
Wendy
[quote]
On 2004-02-15 16:32, loanwizard wrote:
[quote]
It is good to be nervous. You need to check very carefully and analyze each property as if it were the only one. If and only if conservative numbers allow you to cashflow 197 units at 20k positive cashflow per month after 100% cashflow amortized over 15 years or less, would I consider it.
Could you please tell me by what formula you picked these numbers? How does one go about deciding what is an acceptable return? Return on Investment doesn't work well with this deal because it will be no money down.
I was thinking if I made 10k/month at the beginning with obvious upward potential that would be acceptable. But I'm very open to hearing your take on this...
Wendy
What is the current vacancy rate of the properties and in what condition are the properties. Many vacancies and properties needing rehab would be a big problem as you would have negative cash flow to start and it might be impossible for you to catch up.
Just a future thought. I have heard that when you take over for another landlord you should send out a letter to the current tenants and reassure them of a a continued rental rate and no plan for changes in the near future. You do not want a high turnover in your first year.
Brenda
Occupancy rate is 90% right now, with some deferred maintenance. To my knowledge it is mostly paint/carpet issues as the properties are mostly occupied.
I would know more about maintenance issues once in the option period.
A good point was brought up though: there is a multitude of extra money going into these properties that isn't standard or necessary. They are duplexes and single family homes having security provided for them, lawns mowed and pest control. All of this AND the rents are below market. I'd welcome suggestions on how to improve profit margin, what changes are best to make first, without hopefully scaring the tenants off.
Thanks!
Wendy
As has been said....Treat them as individual purchases. Don't assume anything. Walk through each and every unit.
That said, I'd recomend a gradual buyout. Say 20 per month. That's still a lot, but it will give you a chance to get your wrinkles out while you're small rather than once you're big.
A GOOD property management company will be essencial. Stray away from the mgmt companies that have most of their units in large complexes. Try to find mgmt companies that specialize in smaller units. It's a whole different game. Small complexes don't have full time, on-site, office staffs and maintenance individuals. Additionally, they make their money and spend their time and efforts on their big clients. The small properties are often just gravy, and often go neglected.
Realize that this purchase could very well break you and send you to foreclosure. $10K per month sounds like a lot, but that is only $50 per month more in expenses (per unit) and $50 per month less income (per unit) away from break even position. That may sound like a lot, but swings in the market like that are not uncommon.
Start calling around insurance companies. Since Sept. 11th, the price to insure rental properties has jumped. They could very well triple.
Check the tax assessed values of the properties. In many areas when a property is sold, it's reassessed at a higher value and the property taxes increase. If they are currently assessed lower than your tentative purchase price you should expect this increase.
Verify all of his numbers with the past 3 years of his taxes.
Talk to the county appraiser and make sure the price is about where it should be (or lower) for these properties.
Tell us the numbers that you are calculating and let us take a crack at them to make sure they're realistic. Give us:
Price
Financing (amt, rate, ammoratization) of all loans
GSI
NOI
vacancy rate
That will give us a good start.
Quote:
On 2004-02-16 01:51, hibby76 wrote:
As has been said....Treat them as individual purchases. Don't assume anything. Walk through each and every unit.
That said, I'd recomend a gradual buyout. Say 20 per month. That's still a lot, but it will give you a chance to get your wrinkles out while you're small rather than once you're big.
* I hadn't considered a gradual buyout. However I have ensured the right to sell off as many as desired immediately. I have also lined up at least 5 investors who are interested in up to 10 each. I will ask about a gradual buyout but I'm not sure that would work with the financing package we have. *
A GOOD property management company will be essencial. Stray away from the mgmt companies that have most of their units in large complexes. Try to find mgmt companies that specialize in smaller units. It's a whole different game. Small complexes don't have full time, on-site, office staffs and maintenance individuals. Additionally, they make their money and spend their time and efforts on their big clients. The small properties are often just gravy, and often go neglected.
* This is good advice, I will pursue this. I realize the strategic importance of property management on this one. We were considering our current property manager who is also our realtor. His brokerage firm suggested he hire a team within that firm that he would oversee. What concerns me with that is bringing in new hires. I'm not sure I'll be settling on that option...want someone with experience which my realtor does have but the new hires might not necessarily.
Realize that this purchase could very well break you and send you to foreclosure. $10K per month sounds like a lot, but that is only $50 per month more in expenses (per unit) and $50 per month less income (per unit) away from break even position. That may sound like a lot, but swings in the market like that are not uncommon.
* I have been aware of this possibility since I first began considering this purchase. It's that fear that's prompting me to educate myself as much as possible, I can still back out of this at any time but I won't do it out of fear. It has to be from a sound mind and good judgment! That being said, 10k does not sound like a lot to me, for taking on that much debt. I need to figure out how to make this profit more than that. *
Start calling around insurance companies. Since Sept. 11th, the price to insure rental properties has jumped. They could very well triple.
* I have begun that process. The information I received from one was that an insurance saleseman basically becomes like a broker with a purchase this large. The one person suggested I let this "broker" find me the best deal. Is this true?
* Obviously I would want the best rate possible, but most insurance companies aren't going to deal with this kind of volume. Any recommendations on where to begin calling? *
Check the tax assessed values of the properties. In many areas when a property is sold, it's reassessed at a higher value and the property taxes increase. If they are currently assessed lower than your tentative purchase price you should expect this increase.
* The current tax assessed values of these properties total 10.2 million. We would be buying them in the neighborhood of 7-8 million. We would protest the taxes based on price to have them lowered.
Verify all of his numbers with the past 3 years of his taxes.
Talk to the county appraiser and make sure the price is about where it should be (or lower) for these properties.
* The owner recently refinanced with a bridge loan and had appraisals done. The total appraised value was 14.2 million. The taxed value is 10.2 million.
Tell us the numbers that you are calculating and let us take a crack at them to make sure they're realistic. Give us:
Price * no greater than 8.5 million
Financing (amt, rate, ammoratization) of all loans * At 8.5 million (worst case scenario) at 6.125%...debt service would be $52,334/month (I know that amount is right but will check on the amortization years amount)
GSI *?? Are you referring to EGI? Estimated Gross Income less 10% Vacancy: 127,776
NOI * Without protesting/lowering taxes, insurance at current rates, assume stop paying security for tenants, assume 7% management fees... 60,117
* It is so hard to judge NOI on these. As mentioned before, if I go by the current proforma the owners are paying for the tenants' security systems, lawncare and pest control. They also have several on site maintenace crews for whom they are paying full rent and all utilities as well as a salary. There is a lot of fat on this proforma that can be skimmed away, but how quickly can I do it without scaring away the tenants. Suggestions? *
vacancy rate * currently 10%
That will give us a good start.
* I welcome any and all input. Thanks!
As Hibby and i have said, treat them as individual purchases. Why? Because you wouldn't buy 1 property with an anticipated cashflow of $50.00 per month would you? What do your 9 properties cashflow per month now? Any raises in rents and reductions in expenses resulting in more cashflow are the fruits of your labor and rightfully belong to you. After all, if you fail, the failure belongs to you. Seller won't be there to bail you out. It can be done. All of my property has been purchased 0 to very little down 15 year amortization. So I know it can be done. It is purely a function of time, rate and dollars. Personally i might offer a subject to offer with a buyout or refi in 5-10 years, using the arguement of what will they do with all the cash and what type of investment will net them a better return than your offer.
Good Luck,
Shawn(OH)
Quote:
On 2004-02-16 18:23, loanwizard wrote:
As Hibby and i have said, treat them as individual purchases. Why? Because you wouldn't buy 1 property with an anticipated cashflow of $50.00 per month would you? What do your 9 properties cashflow per month now?
* About 150/month at no money down *
Any raises in rents and reductions in expenses resulting in more cashflow are the fruits of your labor and rightfully belong to you. After all, if you fail, the failure belongs to you. Seller won't be there to bail you out. It can be done. All of my property has been purchased 0 to very little down 15 year amortization. So I know it can be done. It is purely a function of time, rate and dollars.
Personally i might offer a subject to offer with a buyout or refi in 5-10 years, using the arguement of what will they do with all the cash and what type of investment will net them a better return than your offer.
* Can you please explain this better? Unfamiliar with a subject to *
Good Luck,
Shawn(OH)
I just plugged some numbers and they look good. Here are my inputs:
FINANCING
Financed: 8.5 M
6.125%
30 year ammoratization
monthly pmt of $51,646
INCOME:
$127,776 per month
Your break even point is when your expenses are $76K per month (including vacancy) (59% expenses)
If you run them at a 50% expense factor (which is expensive, but you should be able to run them well, with a good property mgmt. company with that) it will give you 12K per month CF.
If you can trim that down, then there's more money for you.
Have you already secured your funding??? This is not always as quick or easy as you may think. This can be a nightmare. Give yourself extra time and money. Make sure you take into consideration your closing costs. Negotiate rates with everyone (lenders, title companies, brokers, etc)
As for the insurance, let the broker take a crack at it, but don't give him exclusive rights to it. Competition is a good thing.
Lastly, 90% of property management companies are what I would call bad ones. 5% are good, but very expensive. The other 5% are good and affordable. My point is that you should talk to LOTS OF THEM. Read through their contracts. Often times they are gnarly and protect themselves.
Most mgmt companies get a percentage of the GOI (Gross operating income). You may want to find one that will take a percentage of the NOI instead so that they have a motivation to keep their expenses down.
What do I need to be looking for with Property Management? How can I tell the good from the bad from the ugly?
I've already gone through one possible manager, but unfortunately they can all "sound good". How can I know before actually handing over the reins? What kinds of questions should I be asking?
The broker has gotten tentative approval from the lender, obviously property and buyer considerations to follow.
Closing costs are to be wrapped into the loan, but I will obviously want to keep them as low as possible. What parts are negotiable? How do I approach that?
Approaching this one property at a time, I've been trying to decide what is the minimum I would accept on an SFH. $150/month profit? More? Less? I posed that question to my realtor earlier today and his response was $50. Naturally it isn't his tail on the line!
Thanks so much for your input, it has been and is very helpful.
Talk to your local apartment association and see if there are any that they recommend.
Talk to apartment owners.
Find out how many units they manage and what size they are.
Call up and act like a prospective tenant. Get addresses of properties and take a look at them. Ask yourself if that's what you want your property to look like. Talk to the current residents about the management company.
Read through the contract and negotiate anything that doesn't sit well with you.
Your broker gets paid when you close...not when you make money. Take their advice with a grain of salt.
EVERYTHING is negotiable. Points, especially. I'd try to pay NO MORE than 1.5 points on this deal to the mortgage broker and the lender. Seriously...1 point of 8M is 80K. have they done a years worth of work on it??? Think about it that way. EVERYTHING IS NEGOTIABLE. Treat them all like used car salesmen.