Buying an Apartment Building Creatively?

General Real Estate Investing
1

An apartment building priced at $1.8MM, has low NOI due to poor management. No problems with physical structures. Situated in an excellent rental market.

I lack sufficient income to qualify for conventional financing.

I have a couple of other smaller apartment buildings in the area with zero debt but don’t want to do cash-outs.

Hard money on new apartment would just kill my cash flow totally.

Is there some way to structure a deal where I can turn new apartment around so it becomes bankable in a year, then the seller gets paid?

2

Further to the above:

What if I ask for a management contract in exchange for a purchase contract to close at $1.8MM a 12 months?

I can turn the property around during that time. I collect all rents and sends seller a monthly equivalent to one-twelveth of his current NOI.

12 months later, I have the building stabilized and now fully bankable.

3

This appears to be an excellent candidate for a Master Lease/Option.

However, the bank will want to know the performance history for the last couple of years, to get the best rates and terms. It’s difficult to show a reliable history in one year’s time.

You would want a 24-month MLO, with a six month extension option. This way you’ve got time to reposition/stabilize the units, and then more time to demonstrate a solid performance history to qualify for the better financing rates and terms.

Nonetheless, the last 90-days of occupancy are critical to verify in order to qualify for the best financing terms. You want to show at least a 90% occupancy for the last 3 months, and preferably a higher occupancy rate to really settle the issue.

OR>>>

You could take title to the property “as-is” with the promise of refinancing the property as soon as the management is straightened out. If you can increase the value of the project enough with better numbers, you might be able to refinance the entire balance owed to the seller (or sell the project as you mentioned) in a couple of years.

Most of the time, sellers will participate in the financing (to get their price) by holding a 10-30% second. I think you should build seller financing into the “final” financing, just in case you can’t refinance the whole balance. or sell it for the price you think you can get. The better terms you can offer, the better price you should be able to get.

You could even give the seller the down payment you have now, or put that money into an escrow account to be tapped as agreed to make repairs, upgrades, or whatever, as the building is improved/stabilized, etc. This way, you’re not putting up two down payments; one to buy the building and another to fix it. Just some thoughts.

This does mean that you’re likely going to be burying money (of your own) in this property for a while, since, again, seller financing is common and many times necessary in order to entice a buyer to pay your price… Just saying.

4

Hi Javipa,

Thanks so much for your advice.

Hard money lenders tell me that since I am a seasoned investor, i.e. having other apartment buildings for at least 2 years, then banks will give a conventional loan on a building with only 6 months stabilized history. Do you think they are stretching the truth?

If the 6-month seasoning requirement is true, in your suggested MLO option, since I don’t hold title to the building, I would imagine a bank would still insist on 2 years history.

5

It’s hard to suggest anything without knowing any of the variables. How much is the mortgage already on there, if there is one? How much cash and equity do you have from your other buildings? What interest rate are those hmls offering? What’s his motivation to sell? What is the cap rate of this property? What is the vacancy rate in the area and average rents and how does that compare to this building?

For example, what I’m thinking is if there’s no mortgage on the apartment building, get a hard money loan 1st for 50%LTV on the apartment building. Ask the seller to hold a 30% LTV second on that property. Ask the seller to hold the remaining 20% on one of your other properties, so it’s a no money down deal. You can’t tie up your cash on hand if you have to put money into cleaning up this building. That’s ridiculous! I’ve bought apartment buildings no money down before. There’s no reason why you can’t ask for the same terms.

If the hml is 9%, then you’ll have to offer the seller 2% on his VTBs, so it averages 5.5% if the net cash after amort. isn’t much more, as an example. The VTB interest is low, but the numbers need to make sense on what the building is now making. But, I don’t know what your variables are.

Your motivations are different from his. If he wants to sell and get out, he’ll have to work with you and the numbers will have to make sense or he’ll continue to loose money on his bad management. That’s the bottom line. You need to make him understand that. If not, keep looking or try again in a few months.

Personally, I would never do a master lease option if I have equity in other property. What happens if you can’t get a mortgage in a year or two? You just cleaned up his building and lost all that time and money.

Good luck

6

Dave,

Thanks for your comments.

I believe the seller has no mortgage on this property. They have owned a bunch of properties in this area alone and managed to unload maybe 50% in the last 2 years.

Vacancies should be under 5% in this part of the city but this building’s vacancies and delinquencies were about 40% last year. Expenses look to be on the high side. Cap rate is 4.5%. Stabilized cap rate should exceed 10% at asking price. Seller would not negotiate on price.

No problems with the building itself. Some TLC needed. I can’t imagine spending more than $20K sprucing it up.

I have over $400K equities in my primary home, even with the poor RE market. But my income only qualifies for a $120K HELOC. No other meaning dry powder left. Blew it all on a couple of all cash rehab deals.

My two other apt buildings have a market value of somewhere around $1.3MM at this point. Zero debt. Closer to $1.6MM when I get the office space filled. Interest seems to be perking a bit now that small biz may finally be looking for space.

7

If I were you, I would sell the primary home instead of relying on the HELOC and move into one of your apartments. Even if you got $250K for that house, you’ll be in much better shape if the expenses come in a lot higher than you expect (which I’m guessing they will).

I gave up my mansion in a great neighbourhood years ago and moved into one of my apartments. I had a lot of personal attachment to it, but it had to be done to buy an apartment building I wanted and the expenses came out a lot higher than I expected, so I was glad I was ready for it. Plus I was on the front lines. If anything was happening that was causing a higher vacancy, I’d be right on top of it to deal with it.

8

Yes, your experience makes a difference for conventional lenders. However, how much difference, is a question.

If you do a MLO, you’re gonna be qualifying for financing like any buyer would. It’s not a refi. You’ll need to show “x” down, “x” reserves, propertiy performance, etc.

That’s why I prefer to do a sub2 (not naked sub2), but use a Land Trust, LLC, or whatever to obscure the transfer of title. That way, I’ve already been demonstrating (at this point it’s not an issue, but 20 years ago it would have been) a solid experience in the management of multifamily by the time I’m ready to get new financing.

It’s a little less, not much less, anal getting refi money, except that the LTV is a gamble (depending on the age and performance of the property). If the income shoots up 30%, and the expenses are normal, the value of the building should theoretically shoot up 30%, too. However, this assumes the price you paid was market or better in order to actually realize the “real increased value.” That increased value may allow you to recapture your investment capital, and still carry back financing to accommodate a new buyer.

There are some new guidelines that make it practically impossible to refinance if titled in an LLC. And I’m not sure the seasoning requirements once the LLC has transferred title into your name. So, check that out with your mortgage broker. Also, of course fixed rate long term financing will only come with a personal guarantee, if I’m not mistaken, with the title taken personally in this market. I could be wrong. I’m doing some homework, based on some new information myself.

If you find out first, let us know.

9

Hi All, I am enjoying this thread and I hope it is OK to jump in with a similiar situation.

I have several SFR’s (free and clear) and I am interested in purchasing my first apartment. Like COMREINVESTORs prospect, the rent roll is very low (43% vacancy). 5 years ago, this property had 90% occupancy and returned $475k/year NOI. Now it looses @$200k/year. It is in receivership and has been for @ 2 years. Price has dropped from $6M to just over $2M and is now in the range that I have a shot at it.

Structurally, things looks good. Ample parking, lovely grounds, pool area and large pool house are potential highlights once cleaned up. Good rental area in residential neighborhood, close to major transportation and military base. It will need updating and some purging of bad tenants. Expenses are very high, corporate owner has been out-of-touch for several years and security has become a problem. I think it is a 1-3 year turn around.

I have always paid cash for my other properties so I am quite new to the complexities of financing something like this. I do plan to sell/rent my home and move into the complex to make sure I know what is happening.
I have enough cash to put @ 20-30% down, but then I would have nothing left to rehab. And the negative cash flow absolutely has to be addressed, which will take money. I like the master/lease option from the perspective of saving my capital to focus on turning it around. But is that an option with bank-owned properties? If not that; how successful have you been with getting banks to offer seconds to cover the DP?