Pursuing A Multiunit Apartment Complex Purchase
In a small neighborhood in Portland, there is a 12-unit apartment complex for sale for $2,050,000. Let’s analyze this investment and talk about the utility of it and how to make it happen.
I am learning about real estate investing and have some awesome people in my corner who are helping me gain the necessary experience so that I am well-prepared when I am ready to pull the trigger.
Overview of this Portland investment
I chose Portland as a place to invest because I enjoy living in the city and it has potential to sustain its population growth.
Investors are currently cashing out because the real estate market is hot. It’s the ideal time for young guns like myself to get in on an opportunity.
Smaller multiunit complexes, 2-4 units, can be purchased individually through a regular bank, using a regular mortgage. Prices for these are therefore higher because there are more qualified buyers for them.
Multiunit complexes of 5+ units have to go through the commercial loan process and since the process is different, far fewer individuals can/are willing to go through such a process. This factor makes such apartment complexes a better value.
This Portland Apartment Complex
It’s a 1973 complex with 12 units.
Units are 2 and 3-bedroom.
Roof replaced 2 years ago.
There were recent upgrades to the interiors and exteriors, mostly cosmetic.
Common laundry, parking, and bike storage.
Walking distance to the city center with shops and a grocery store.
Some views of a nice nearby bridge.
There is a library nearby.
It’s about 15 minutes from Portland proper.
Easy access to public transportation.
Average rent is $1,275/unit. A total of $183,660/year in gross income which includes income from the laundry services on site.
Total expenses are $65,654/year for taxes, vacancy, turnover, landscaping, insurance, utilities, maintenance, repairs, etc.
Net income of $118,006/year.
Buying such a property
As I mentioned, once there are more than 4 units in the building, the financing doesn’t get serviced by a traditional bank using a traditional 30-year mortgage.
These multiunit apartment complexes require underwriting from a bank specializing in commercial loans. The factors which are considered are different and weighted differently as well.
The following few qualifiers are used by the bank to decide if they will issue you a loan on the apartment complex:
1. The owner’s financial documents are used to show how much income is generated from rental income and how much property expenses are paid out (taxes, insurance, management). This is why the net operating income is often listed because if the numbers don’t make sense for the bank then it won’t be underwritten.
2. Being able to pay the bank loan with enough of a cushion is critical which means that enough income has to be left over after covering the property’s overhead to safely service the debt obligation.
3. The property will be valued based on current market trends, previous comps and the condition of the building. This value is used to calculate the classic LTV (loan-to-value) ratio.
4. Your experience in handling rental income will be taken into account. Everything from dealing with contractors, collecting rent and managing such properties.
5. Your credit score is much lower on the list, but it is still a factor.
Remember the couple hundred here and the couple thousand there to buy/sell a house? Well, it’s going to cost much more for an apartment complex.
Everything costs more including the inspections, escrow and origination fees. You may have to deal with various agencies to get the process done.
Usually we’re talking a 3-10 year loan for these units, often 5 years. Imagine a $2 million apartment complex with 25% down, that would be payments of $28,000/month at rates of around 5.5%.
Of course, your unit should be able to provide a good portion of this monthly payment – if it doesn’t then the bank may not even approve you and you would have to seek out other options.
The rates are higher than traditional mortgages, usually a couple percent above.
The loan might be fixed for 3 years and then become adjustable after 2 years which means you’d have to refinance. There are all sorts of permutations of this that the bank could use to make it profitable for themselves.
You can’t just pay off the loan fast and skip the interest payments. Often times, there is a prepayment penalty with commercial loans.
If you can’t qualify for the loan
When it comes to business loans the bank wants to make sure they are investing in a good business and that the new owner knows what they are doing. If these criteria aren’t met you may be asked to pay more money down or finance it over a short time period.
In the end, financing may simply not be affordable on your first investment.
The other options you have is to seek out a smaller bank which could allow you to pay a little less on the down payment or offer better rates or possibly approve you for a larger amount.
You can try to find partners who are willing to put more money down in order to make the LTV more favorable for the bank.
The owner of the property might also agree to finance the property for you. Since the loan terms are much shorter it’s fairly likely that the owner would be willing to do this – it could be a win-win for both parties.
If I go through with this property I would do it with a friend whose family is very well-versed in these kinds of investments. I would still need $250k down and I would need to earn enough income to cover the monthly payments.
Where to get started
There are a ton of resources for anyone who wants to get started in real estate. It seems to me that many of us have been accidental landlords after vacating our primary residence to move for a residency or an attending job.
In my readings, I get the sense that there aren’t a whole lot of downsides to having a 6-15 unit versus a 2-4 unit. What matters is the legal and financial sides of it.
To properly navigate the waters dealing with commercial loans and rigorous inspections, it might be prudent to have someone hold your hand the first time through.
If you have a good connection with your realtor consider asking them for a referral to someone who is already investing in such apartment complexes. It’s always helpful to pick someone’s brain and there isn’t much competition – there are plenty of renters to go around. Anyone who is hoarding their secrets is probably best avoided anyway.
Also, I think dealing with a company who focuses on selling such products is helpful, you can get a lot of referrals and assistance.
I am not recommending this company because of any particular insight, it’s simply one of many out there dealing with selling investment properties of the kind which I am interested in. They could be your first resource for getting started in multiunit apartment complex investing.