Multi-family housing can be seen as acquiring a bunch of single-family homes. Imagine each unit being a “home” and do your budget checklist accordingly. The vast task of obtaining a multi-family also has hurdles that you wouldn’t necessarily see when taking on a single-family home. Our company recently expanded into multi-family housing and this is how it went:
Multi-family homes are a great way to expand and grow your portfolio. One criteria our company looks for is that the multi-family has 40 units or above. The logic behind this is the amount of work it takes to manage one large apartment building with multiple units is less than managing a number of duplexes and triplexes spread across different areas.
Acquisitions of multi-families are very similar to single-family homes… in the first stages. Our company noticed a block that was rundown, but the surrounding area was a prime location. We kept our eye on two potential apartment buildings, one that had been vacant for awhile, and the other was a ‘ mom and pop’ managed building that wasn’t in the best shape. Similar to the strategy you apply to off market deal single-family homes, we established relationships with brokers and contacted sellers to find off-market deals. After noticing recent renovations in the vacated building, we found the ‘mom and pop’ owners on LoopNet, but then it was taken off. This motivated us. Our company contacted the seller directly. He was in a transitional period and this signified that he was a motivated seller.
When looking into taking this jump to multi-family, we wanted all the information we could get our hands on. We received the rent roll and the T-12. The T-12 would give us an idea of the income and expenses of the building over the last year.
This is where things can get tricky. Unlike single-family homes, a much larger amount of cash up front is needed to gain a multi family property is needed when gaining a multi-family, unless you have a couple buckets full of cash. The negotiations started after we came to the conclusion on our final price. Our company started out with the offer of just $600K. The seller countered with a much higher price. After another set of eyes viewed the offer and we consoled, it was concluded that our underwriting was a bit too conservative. Our offer then went to $900K and after sitting on it awhile the seller finally accepted. This allowed us to go under contract.
During our inspection, we had the inspector walk all of the units. This wasn’t necessary as seen in the redundancies in his report, but it is necessary for investors to walk every unit. The balconies needed to be configured in a way to be self-sustaining and guide water properly, but other than that and cosmetics, there was nothing that jumped off of the page as a red flag.
Nobody wants to labeled as a “re-trader”, but in our scenario, once we ran the numbers, we were negative cash flow. The first couple of months at the current interest rate to seller, and our term of 1 year was too short. An interest only negotiation rate was discussed with the seller. He declined and we ended up settling on 3% the first year, 5% the second, 7% third year with a 3-year balloon payment on a 25-year amortization.
We wanted to give the place and entirely different look and feel. We started off with changing the signage and name after acquiring the property. The exterior of property we plan to address first along with upgrading and renovating other aspects of the property. Everything else we quoted in the scope of work. Our in-house GC helped with that.
We decided to outsource our laundry to Coinmach with a 90% us 10% them, split, after they get first $14 per machine. The laundry brings in approx. $400 per month in income. We’re not looking to make too much money on this. It’s essentially something nice we want to provide for our tenants. We’re still considering some type of cable provider as well.
In conclusion, despite starting the deal in October and not closing until April, it was a great experience. It’s always exciting to dig up great deals—and it’s even better when they close. We learned a lot, including how to save on inspections, the best ways to structure seller financing deals.