I want to own an apartment building (10+) before the 1st quarter is up. I just want to know what its like owning an apartment building and managing one? How much are evictions? Anything yall could tell me I would really appreciate it.
If you’ve never owned a rental house prior, you might be biting off more than you can chew at the get-go. :shocked
I’m not saying you shouldn’t buy 10 (or more units), except that you should definitely consider putting your property under professional management, and learn from the back seat, as it were.
Also, knowing how much it costs to evict someone, is not a ‘first’ critical piece of information you need. If evictions are going to be a major part of your management plan, you’re screwed before you begin. What’s way more important is knowing how to analyze the numbers of a given class of properties ‘before’ you even start making offers. I recommend that you analyze the operating data (proformas and actual numbers) of 100 different properties. After that, you’ll recognize patterns, market value, returns, cap rates, gross rental multipliers and opportunities …and be able to persuasively present and negotiate a deal offer.
PM me if you want a copy of my old analysis sheet, or go buy some analysis software. Either way, you need to deeply understand what the operating numbers mean on a given property.
Meantime, find out what the average market cap and/or gross rent multipliers are in your farm area. Visit with existing apartment owners. They love to talk about their deals, challenges and horror stories. Develop a relationship and network with these owners. You might find a bargain in the process.
And just for giggles… 30 units is the break-even size for successfully amortizing the costs of both full-time management and part-time maintenance people. Under 30 units and you’re gonna be donating time to the cause. Just saying.
And here’s a little secret: Once you get in to the $3M price point/range (some say $2M), more people want to help you buy. That includes bankers, brokers, sellers, management companies, and dirt-poor relatives…! Why? Because big numbers represent bigger commissions and fees for the professional involved in putting your deal together. You become quite the potential hero in these cases.
Of course, the obvious question is, where does the money come to capture deals in this price point? Part of it may come from seller financing and part from 3rd party conventional, or even portfolio lending.
That’s another dirty little secret…most all multifamily property sellers will expect, and will be willing to, participate in the financing to get their prices. What’s more, if you’re buying correctly, and there’s room to increase the value of the property, you can negotiate truly no down deals that still make sense. Of course I’m talking about really sophisticated financing options here. Which brings me to another point. You need to make friends with an aggressive, creative, experienced mortgage broker. These guys have sources of funds and private lenders that can do loans on odd-ball deal structures …if they like the area, the project, and the management…(if not you).
However, you won’t understand how to sell creative financing offers to a seller (or a lender) without first understanding what the current operating numbers mean to you …the bank …and the seller.
For example, if you don’t know the market rents for similar units, you also won’t recognize how much income opportunity there is, or know if the seller is just blowing smoke up your butt about the ‘rents being below market’ (or how much below market, if at all)
Furthermore, sometimes the overall expenses expressed as a percentage of the gross income will look awful by comparison. However, the high percentage may simply reflect rents that are too low. So raising the rents will make the expenses appear to fall in line.
Then there’s vacancy issues. The bank will assume a 5% vacancy rate as a rule (there can be exceptions here, depending on the neighborhood). If the vacancy is more than 10% the terms you’ll be offered by the lender will be stinky (that’s the professional term for ‘icky’) You can work that against the seller.
For example, I’ve told a seller that I couldn’t get the financing I needed to make this project make financial sense with the current history of occupancy. I then offered, to give the seller his price, but insisted that I needed a larger percentage of the sale price financed by the seller. Or suggested one of the following from my reservoir of excuses to get a better deal… Such as:
Or you’ll have to lower your interest on the second.
Or you’re going to have to waive the interest we agreed to pay for five years.
Or you’ll have to lower the price by $250,000.
Or you’re going to have to let me use your daughter on the weekends, etc.
You get the picture. Whatever challenge you face, always translates to better price, terms, or both.
Well, I could do a seminar on this, so I’ll stop here, except to add…
The reason you want to spend the time analyzing 100 operating data sheets is so that you’ll get so familiar with the process and with the numbers in your farm area, that you’ll instantly recognize and deeply understand the opportunities that will come to you. After a while, you’ll discover a steal a month and it will be both exciting and frustrating that you can’t take advantage of every true deal you come across.
Finally, doing this spade work will give you extreme confidence in your offers and your negotiating positions. Negotiations on units is 110% about the numbers. :biggrin
:beer
My wife and I started with 6-units…which is probably not really recommended for beginners, but we made it work. That being said, you may want to start with a regular house to see how you like this LL’ing thing. If it sucks for you, you can find a buyer a whole lot easier than you can for a multi-unit building.
Asking how much evictions cost is like asking how much speeding tickets cost. Why? Because the cost and process varies greatly depending on where you are. Evictions for me cost $65 because of where we own property. It could be a whole lot more where you are.
I never owned a residential property, but I’m willing to take the risk and jump up to a commercial building. Residential properties are too crowded with investors. I don’t mind flipping them, but I would rather buy and hold commercial buildings. I would always use a property manager to manage my houses; I’m not trying to deal with any tenants! I did a little bit of homework, so I know some of the things I need to consider when valuing a property; like Gross operating income, operating expenses, taxes, NOI, Cap rate (let me know if I forgot something). The only thing I really don’t know anything about is evictions. I was looking at the Offering Memorandum for a certain property and everything seem good. I knew they were pro forma numbers, but I calculated the numbers myself and everything looked good. Im only 19 years old so I don’t have no money, no credit, nada, so I was going to see if the seller would take back financing. I knew I could convince the seller to do so because less tax is involve, he wouldn’t have to worry about getting hit with a big capital gain tax, and plus who wouldn’t mind having money coming in their pockets every month. I was going to have him take at least 80% financing, and I could look for a private lender to fund me the other 20%. I didn’t want to be over leverage to the point I was going to take on negative cash flow, but when I added in all the expenditures, I found that I was going to bring in at least $3000 a month. The only reason I didn’t move on was because the lender I was working with said that the owner was having problems with the loan, so I backed out. He also said I wouldn’t be able to apply for a commercial loan because I must have at least 30,000 dollars reserve in the bank. I didn’t know they take that into consideration when giving out loans. I know it’s smart to have money in the bank in case things happens, but I thought if the property had a debt-coverage ratio of at least a 1.2, they wouldn’t mind giving out loans. Is what the lender told me true for all commercial lenders?
O ok. I was thinking that. I knew for some reason that evictions depended on what city your in. How do I found out evictions? Should I talk to Investors, brokers, property owners? Whos the best person to go to? Whats the process like when evicting a tenant?
You should call the clerk at your county courthouse who handles evictions and small claims issues. They will be able to tell you the process there. You could talk to a lawyer, but you can probably get a good handle on how the process works by talking to the courthouse clerk. Where I am, I can represent my business myself for evictions so there’s no need for a lawyer.
The process where you are will likely be different from where I am.
Could someone please explain this to me:
original principal: 3,850,000
Commencement: Dec 1, 2005
Maturity: Jan 1, 2015
Term: 10 Years
Amortization: 30 years
Interest Rate: 5.5%
Assumable debt: 1 percent
Notes: Existing loan allows for a “reload” of loan proceeds to a maximum of 80% of Purchase Price
What does it mean. Isnt amortization and years the same thing? What does the note mean?
Thank you for the info. Im going to call the clerk’s office tomorrow.
This means the payments are huge; a balloon is going to pop on Jan. 1, 2015 (less than 3 years from today); and the bank will allow an assumption of the portion of the loan that equals 80% of the sale price at the time of assumption. That’s really a terrible loan term. Sounds like a portfolio loan arrangement.
The interest is high and amortization is too aggressive (assuming there’s even enough cash flow to cover that level of a repayment term).
You’re probably better off taking the property “subject to,” and then refinancing sometime before Jan. 2015. This way you’ll have a track record with the project to offer a lender; will likely have increased rents and a larger NOI; a fatter bottom line; an “easier” time getting refinanced (as an owner) at which point the bank will be looking more to your management performance, not your bank account, or credit (as much).
Owning and successfully operating an income property greases the skids to getting subsequent financing on a project.
Have fun. I admire you for going for this at such a young age. You’re gonna be rich, while others your age fritter their youth on stress relieving activities, rather than goal-achieving efforts. :beer
My lender was trying to tell me that was a bad loan, but I didnt understand why. When you say the bank will allow an assumption of the portion of the loan that equals 80% of the sale price at the time of assumption, what do you mean?
I think the lender you talked with is correct. The terms suggest it was a hard-to-get loan and thus some kind of portfolio loan.
Frankly, I’m not familiar with the loan refinancing terms you were outlining and only trying to make sense logically of what you offered. I probably should have kept my mouth shut.
However …what I think you’re saying about the loan is …the existing lender is willing to consider making an 80% loan-to-sale-price (which has to be a misunderstanding) loan.
More likely they’ll consider refinancing 80% of the sale price backed by an appraisal and an analysis of the operating numbers. Short of that, and I have little idea what you’re saying, or what I’m talking about.
:banghead
Many variables go into managing an apartment community (When you are leasing an apartment, refer to it as a community). If it’s located in a bad neighborhood, be prepared for anything. Murphy’s law will be in full affect with Class C/D properties in bad neighborhoods because the resident profile (and yes, call them residents) will be your lower income/poor credit types. You always want to make sure your residents are happy. This means you respond to their problems and concerns in a timely manner and make sure their maintenance issues are being taken care of. With 7 years of apartment management experience there are 2 main reasons within your control for losing residents. 1. Maintenance requests are not being taken care of and 2. You are not following up and calling them back. They want to know that their issues are important. The fun part is the financials because you control the value of the property. Increase revenue, reduce expenses, thus improving NOI and the value of the property goes up!
Thanks for the advice.