10 unit apartment purchase

[zells79]

I am looking into purchasing my first investment property.  The potential for a lot of income is there, but I am worried about being able to rent out the vacant units (7 of them).  The property is in a not-so-nice part of town.  Does anyone have advice about properties in low-income areas?  The realtor mentioned "Section 8."  Help!

Also, the property is listed below market value.  I have a lender that might lend up to 65% of the appraised value, but won't give me a firm commitment to lend before seeing an appraisal.  I am worried about spending $1000+ on the appraisal and inspection and then not getting the financing.  Any advice for a new investor?

Thanks for your help!!!

[tedjr]

If they are cheap enough you can make anything work. I was buying duplexes for 7 to 10 thousand and rebuilding them with govt grants and loans, 100 to 125% LTV. Yes you need an appraisal to get started. I would stay away from 1 bedrooms. Low income one bedroom tenants move in and out like flies. They have no furniyure when they move in and you have a trailer full of trash furniture when they move out owing a month or two rent. It does not matter what race they are, it is just the nature of low income business. It is a hands on business.

Section 8 is where HUD pays the rent or most pf the rent depending on income. Check with your local Housing Authority they administer the program. Some landlords sware by them and will accept nothing else and some sware at them with hatrid. Lots of red tape and inspections. The first check takes an extra month but they come pretty much on time. Like all govt when it fouls up it really fouls up.

7 out of 10 vacant  Why? Is it a foreclosure or bad management. I did not have much trouble renting units when they were clean and made ready. Another thing I learned is a bad tenant will accept a bad apt in bad condition in a bad location. Try to find the best you can get. If they all have perfect credit, making 2000 per month they would not want to live in your place.

[StacyKellams]

Zells,

A 10 unit apt. complex is sold based on the value of it's current income stream from the rents. If only 3 units are rented there isn't much of an income stream and it should be purchased WAY below market.

Do not make an offer based on Pro Forma numbers. Use the existing income stream to make your offer. Run the numbers based on the current NOI (Net Operating Income) to see what, if any, debt service the property can afford.

NOI = Gross Rents - All Expenses (except debt service)

You can then take the NOI and divide it by a capitalization rate to arrive at a purchase price.

NOI / Capitalization Rate = Purchase Price

Give me some numbers and I'll walk you through it.

[David Alexander]

And right on....

Pay for there deal not your work....

David Alexander

[tedjr]

There were times before the 1986 tax reform act where investors were paying not only for proforma rents but tax deductions generated by the property. I remember in Houston when an investor would buy a large apt building and jack up the street rate and bam, put it back on the market at a higher price based on what the property may generate six months later and California buyers would still grab them up. Their gross rent multiples were a lot higher than in Texas and everything seemed like a bargain to them.

I too would expect a large discount for vacant or near vacant buildings but you would not expect to pay zero for a building that has zero income today.

[David Alexander]

Bt, I'd sure want to know why it has zero rent.....

You know when a deal is a deal....  Income or not...  And......

You can't lose money on deals you don't buy....  

[rdy2buy]

  Good stuff! I am a new investor looking for my first deal here in NYC and understand most concepts of investing.  I am looking to wholesale or lease option S/F homes but there are many multi families available, one two blocks away vacant borded up in a good part of town and no one is doing anything about it.  If that building was fixed up it would rent out completely tomorrow.  What do I have to do besides find out who owns it probably a bank.  Please point me in the right direction maybe not for this building but the future ones.  How about making me do all the grunt work and a 60/40 split-60 to anyone getting me on the right track off course.  Thanks please tell me what you would do.

[tedjr]

Howdy Rdy2by:

Try the tax records to find the owner. Contact them and make an offer. Figure out what they are worth fixed up and take away the fix up costs and carrying costs and costs to buy and sell and come up with the offer price. Figure in a nice profit too. Get hard money lender to loan you 70% of the after repaired value which should equal all your above costs. There will be some money needed for earnest money and appraisal and sooner or later even environmental studies to test for asbestos and toxic waste dumps and the like lurking around old buildings. The owner may already have this done to save time and money.

Sounds easy right? The late night TV gurus make it sound so and with no dough. It can work even without your money but you will need a partner and a lender.

[rdy2buy]

  Thanks!  This multi family looks have about 40 units so how do I pull comps when most of the similiar buildings may not have sold recently for proper comps.  Do I have to figure the gross income into my maxium allowable offer.  O.K. my head is spinning! Tell me what would be the script you would use when calling the owner and then later finding a lender especially when you are a new investor.

[tedjr]

Howdy Rdy2by:

One 10 gallon hat tall order to fill here. You are going to need more help than I can offer here typing with two fingers. I do not have any scripts. I just recently  emailed several HML's to try to get help in Corpus Christi on a 4 plex. My usual guy only does Austin. I sent them a one line Question: Need hard money for 4 plex in Corpus Total loan of $70,000 to buy and rehab

I am getting great response.

There are several key questions to get answered  from the seller and the HML in your conversation and other info you will need about the property that you will need to figure yourself which is mainly the rehab costs and the carrying costs.

A lot of seasoned investors will not do these deals because they are too much work. I love them but you need to know what you are doing. It will take a lot of time to get bids from contractors on every aspect of the job. There are going to be unknown items that will come up too like gas lines, water lines, boilers, heaters, all of which you will not be able to check. Like I said you have a 10 gallon size project. My head is spinning too just trying to fiqure how to help you.

You will need to figure the income and expenses to come up with the bottom line or ROI. If you figure the ROI you can divide that by the going cap rate in your area and approach the value for the building once rehabbed. For example if you have $100,000 left over after taxes, insurance, utilities etc the building would be worth $1,000,000 using a 10 % cap rate. An 8% cap rate would give you a value of 1.25 million. Look at other sales in your area for similar buildings to determine the rate. See how complicated it is getting. You can use some other rules of thumb too to help figure the income approach to value. There is the times gross factor. If the total rent  for the projest is $200,000 you can get a quick guess just my multiplying by this number. It may be anywhere fron 2 to 10 depending on the area. My 4 plex units will rent for $400 per month which is $1600 per month and if 100% rented and paid all year that would be $19,200. At 4 times gross this would give you a value of almost $80,000.

I hope all this helps some in finding the value. You will have to hire an appraiser that is approved by the lender you choose to help do the deal. They will more than likely want you to have an investment into the deal too of 5 to 20% of the total project.

As far as what to ask the seller you need to get all you can:

price and terms if any
how long has it been vacant
number of units and size and type of each
previous rents
taxes and insurance and other expenses for previous year
the list is a mile long but these are the most important

Sounds like you will need a partner or at least a mentor to help you put all this together and even a money partner if you can not swing the cash needed.

That about all I have time for now. Hope it helps
age of roof, boilers, etc
# appliances usable if any

[visionary]

Great point, never pay for a property based on future income, it must always be the current income. Do not let the broker trick you into "future projections".

[bukzin]

I have units like this one.

Your property is closer to a job than an investment.  You will be closer to an
employee than an investor.

It will likely be a great deal after 5/10 years for hard work.  In otherwords,
not for the lazy!

Good luck,
Bukzin