Recently, I purchased my first multi-million dollar multi-family apartment complex without the aid of private investor’s money. It was not easy, but in this blog I will tell you the steps that I took. There are ways to use this same example with outside capital.
First and foremost I am not new to real estate. My partners and I fixed and flipped almost twenty properties in the years prior giving us the proper experience, capital, and cash to dive into this extremely competitive and expensive market. With our combined experience and unique talents we spent a considerable amount of time honing the specific characteristics of our ideal property. This was an important step that helped us greatly further down the line.
Our target property was something that had a combination of these characteristics:
-Our price range was $500k-3 million.
-Cap rate: 6% or greater
-Asset class between C-B
-Median household income: >$35,000 low end; but preferably in the $50,000 range
Cincinnati metropolitan area
-Must be built in the 1980s or later
-Must have PVC drain lines
-Must have separate gas/electric
-Exposed brick exterior preferred
-Pitched roof preferred
-Welcome and open to distressed properties
-Value Add features strongly welcomed
This was the general checklist we went through before analyzing anything in depth or bothering with the submarkets. This short list of specs was what allowed us to show brokers in clear terms exactly what we were looking for. Once complete we compiled lists of every owner that had either bought or sold property in a multi-family zoned area in the last fifteen to twenty years. We also compiled lists of every broker in our area who had a multi-family asset in our target areas.
Finally, a broker had something in our range. We requested materials right then, and scheduled a walk-through later that evening.
We ended up putting 5% of the LTV into a CD at the bank so the bank could make money off the interest and we would be able to use the money later on in the future.
-20 year term
-25 year amortization
-Minimum closing costs
-No pre-payment penalty after 12 months
Upgrades / Value Add
We noticed each unit had individual hot/cold water lines, but the property was still master-metered, running almost $30/k a year. Through a lot of work, we were able to put wireless sub-meters that allowed us to back-bill the tenants for the cost of $200–250 per unit.
We also took advantage of rooms that the previous owner had left locked and unused for years. We simply asked the tenants if any of them would be open to paying more for extra storage space and found that most residents were thrilled with the option.
In the long term, once the units were all sub-metered for water we planned to start adding washing and drying machines to each unit.
Once the deal was complete, we hosted a BBQ for the tenants to raise any questions before we officially took over as landlords, giving us a face to face relationship with our tenants.