You’re not really buying just real estate here, you’re buying a business. You mention you’ve seen the balance sheet and believe you can eliminate expenses…a good start for buying a “turnaround” opportunity. I’d be looking into other areas as well to reduce MORE expenses and increase income:
What are the RE taxes and can they legitimately be appealed? There are professionals that can help and it may be worth it on a large commercial property.
What is the vacancy rate? Can it be improved?
Are there other associated sources of income that can be implemented (coin laundry/convenience store)?
What are the maintenance costs and why?
Are units being leased at below or above market levels, and why?
What are the general and administrative expenses?
What are the fixed expenses?
What are projected near term capital improvements? How will these be financed?
Do you have the talent to run this business?
Probably many more questions and information you will need to determine if this is a good deal.
I really just need to have somebody go through the spreadsheet with me. I’ll be honest I’m not even comfortable buying a property that isn’t already cashflowing. But I wanted to see if the community thought it would be a good deal as long as I could get it at a cheap price and improve it.
Almost nothing cashflows at full market value. In my limited experience, you must buy at steep discounts to get cashflow and/or you CREATE cashflow by eliminating expenses and increasing income.
Appealing taxes in a large commercial property can be tricky. I certainly am no expert (but I did attend a seminar at my local REI club), but my recollection is that you need to “prove” you are entitled to a reduction while still playing by the assessor’s rules. Not always easy, but can be a great way to reduce expenses if done well.
I would probably seek a little professional advice in evaluating a business opportunity if I was expecting to drop $1.5M or more. I’d try to find out what he paid for the property to get a feeling of how much equity he has and how much wiggle room might be available. Kinf of tough to sell at $1.5M if you owe $2.5M. Deeds and mortgages are public record and should provide this info.
I’m just pointing out the obvious. Although I’ve been part of selling a multimillion $$ business, I’ve no experience with apartment complexes.
You wrote that you don’t think a 151-unit complex needs a full-time manager and property management company.
That many units will suck up an incredible amount of time. Even if run perfectly, there will be stopped-up toilets, late rents, cleaning, the showing of vacant units, checking applications, receiving rent. This will be every single day!
Yes, this will be a full-time business, like jmd_forest said. Don’t underestimate the time and effort that those HUNDREDS of people will need to live in that complex.
I’d be inclined to “try” this property because it has negative cashflow not in spite of it. Unfortunately, you haven’t presented enough information to do even a cursory financial evaluation. Why do you think it might be worth $1.5M if you don’t know the expenses? I’m guessing you might be over your head on this one.
If the $280k that you could eliminate in one day is for management, then think again. This property is in need of continuous, on-site, daily management by an experienced and strong team. Did I use enough adjectives? What is clear is that current management must go on day one (actually about 4 1/2 years ago). A building like this will not run itself.
I’ll add that something here smells fishy. Five years of negative cashflow? The owner is either very well heeled or there is some misstating of income or perhaps the property manager is dipping a bit too deep into the cookie jar.
I can tell you that if you have to get financing, there is not a bank in the world that will lend on this property without a very strong business/turnaround plan. You are not there yet. I suggest you consider some experienced partners on this one.
Do you have any experience in the rental property business? Do you have enough money to support this property while you’re turning it around? Which expenses do you think you can eliminate or reduce? I have friends that manage apartment complexes of this size. Around here, a 150 unit building would utilize one full time property manager and one full time maintenance man. Obviously, if you do it yourself and are an experienced manager, you could almost certainly do the management in much less than 40 hours per week and the same is true of the maintenance.
Youmight be capable to handle a complex this mass alone, if it were mine, I’d opt to have it Professionally Managed. If it were mine I would also not look into properties that were severely cashflowing negatively, especially for the last 5 years. However, if you have a vision and the right plan for this property to turn it around, it can almost always be done and at the same time, sometimes it’s these very properties that are goldmines in hiding! We do not have enough information to give you the right answer.
Conduct a cashflow annalysis backwards and forwards verifying that this will not break you financially. Create a business plan to persuade lender’s to fund this project.