Would like to buy an Apt. building. Advice???

Greettings all!

The past 6-8 months I've been focusing my attention to (other than my daily dose of Ferrari porn) real estate investment. Ultimately I want to be able to live off the cash flow my rental property would provide me.

That said, I was reading the paper in my hometown (central Illinois) and came across an article about one of the Architectural gems in my hometown has recently become vacant due to a faulty boiler forcing the tenants to leave. The owner (a church next door) wants to demo the building and erect the typical, forgettable day care center.

As this apartment building is old (1920) and located in a historic district, the building (for now) is protected as a landmark, and city council is blocking the demolition. The city has advised the Church to sell.

Some details of the apartment:

Built in 1920
9 units, 3 levels
Prior to vacating, residents were paying $290-$400 (!) a month.
Spectacular architecture.

The bad:
Boiler repair- est. $20K
Repairs to bring up to code- est. $60-70k (according to the church)

I was down to look at the building over the holiday weekend, and it looks better than I expected.
The city states the property at: $150,000.

So I got to thinking......
Purchase and renovate the apt.- $260,000
Up the rent to reflect the area surrounding it- $500-700 ($5700/month)
Dedcuct mortgage- $1300/month (30yrs@ 4%)
Property management- ?
taxes/fees,etc-?

So prior to fees/taxes/property management I'm around 4,000/month in cash flow.
Do these numbers work? Am I nuts?I will be the first to admit I'm a newbie at this, but it's hard not to think about it, when for the same price up here I'd be looking at a 2,500 sf SFR.
I also don't want my want for this building to be saved to cloud my judgement; this has to be a money generator first and formost. Saving a wonderful example of early 20th century architecture would be only a bonus.

Any thoughts/criticisms/rants/advice would be greatly appreciated!

 

there are a few RE pros here that can answer that better than I, I just dablle in RE. IS it a Frank Loyd Wright or a Sullivan ?

 

Thanks, William. I would love to hear what they have to say. It's mostly FLW prarie style with some Italianate thrown in for good measure.
It would truely be a shame to demo it. I suspect I'm not the only one that feels this way and there are more than a couple in line in front of me that are interested.

 

Just off the top of my head you need to add a cost for

Insurance. A million dollar policy minimum.
Land taxes?
You gotta heat the place or is everyone on a seperate gas meter?
Ditto electric
Garbage
Monthly maintenence.

Expect a % of the units to be vacent at any one time.

Local rental taxes if applicable. The bums here take 1% of the gross for rental proerties.


The city may also decide to block your renovations. I t may not be zoned for multi family dwellings and renovations may casue it to suddenly not be protected under grandfather clauses.

I recommend you live in one of the units for the first year if this is your first rental property.

Management is 10% of the gross and you get nothing for that. They call a plumber when somethihng breaks and send you the bill.

Most likely someone has already had the same idea you have. That's to big of cash cow to just sit if it is true. There is most likely someithng keeping people away. Evictions are not fun, it could be a heavily regulated housing market.

Detroit is not a growing area. Do not expect appreciation in the rents.
I live in Pittsburgh. Rents have declined or stayed the same in even the best area's over the last 10-15 years.

It might be a good investment but be very careful.

We have a rule. If it is over five miles from my house I will not buy it. There is a reason for that. We learned it the hard way.

I live in house built in 1902. Anyithng built b4 1950 is going to have old house problems. Huge heating bills, old wiring, old plumbing, god aweful plaster walls that scummy tenants put holes in......

It sounds like you may have found a good investment BUT be careful and RESEARCH YOUR MARKET.

 

What are the linkages in the area? How about zoning around you? What is the city's master plan for the area? Parking? Security? Amenities?

Maint is about 20% of gross (set aside), management 6-15% of gross depending on the firm. This is a commerical property (more than 5 units) and most lenders will want to see a shorter duration on their loan...probably 15-20 years. The rate will also be higher since the loan is based on (est) cash flow. You will also need 25% down, typically unless you have a portfolio of properly managed, profitable (pos cash) properties.

What are the CAP rates in your area?

Agree that you should bank on having at least one unit vacant on average.

Also need structural engineer to come in and take a look.

 

I Agree with Gaurdsred

Can you do owner occupied on a building with this many units? I dunno.

25% down is about right.
20% maint for structure this old is expected. Take it to the bank.

In an aging area like detroit with net pop. loss year over year I'd bank on two or three empties unless you keep rents nice and low vs. comparables. The "quality" of folks who rent their domiciles VS own them can be a big eye opener unless you are in a primo location in these old cities.

Cats are $20-$50/month Dogs are not allowed. Rookie mistake is to allow pets for free or dogs.


Reminder: home inspector is not a structural engineer.

There is a HUGE difference between say a duplex and an apartment building. Tenants are just as willing to rent in a big 100 unit complex with a free gym and pool. You are competeing against these guys with any building over three units.

 

Couple things. If this is your first commercial property at least 25% down maybe 30%.
Great advice from others, if you can do it, live in it yourself.
Also a friendly bank might give you better terms if owner occupied.
Though, think still it will come in as a commercial building.
The churchs estimate for repairs to bring up to code is im going to guess low. Things will be discovered especially in that old of a building.
Also getting it " up to code" an doing it right are not necessarily the same.
Good luck sounds exciting.

 

Living in it make sense if you are trying to secure an FHA loan...but, again the cutoff is 5 units. So, 6+ is considered commercial whether you live in it or not.

Forging a personal relationship with a lender will prove to be invaluable. That was a good comment by Dave M.

Migration patterns may hurt your ability to raise rents. If Detroit is a net loss per year, this probably is not a good investment at this time. I would watch the metro area however. When migration levels off is a good time to buy and wait for resurgence. The leading indicators of such things are a new Target, or supermarket, Home Depot, or a large business relocating to an area within perhaps 8-15 miles.

There are local sources of RE information (Detroit Metro). Check the web.

 

Keying in some of your #'s to my handy dandy excel sheet shows this rough estimate.

Purchase Price: $260,000
Down Payment $50,000
Scheduled Monthly Gross Rent: $5,700
Vacancy/Collection Losses: 5.00%
Loan Interest Rate: 6.00% can get lower w/ARM or interest only
Loan Term (Years): 30.0
Property Tax Rate: 2.00%
Repairs/Maintenance: 2.00%
Management: 10.00%
Insurance:Annual as % of Price 0.75%
Annual Increase of Income: 5.00%
Annual Increase of Expenses: 3.00%
Annual Appreciation Rate: 4.00%
Approx. Buying/Closing Costs: 4.00%
Approx. Sales Commission Costs: 6.00%
Investor's Federal Tax Bracket: 28.00%
Investor's State Tax Bracket: 0.00%
Capital Gain Tax Rate: 20.00%
Depreciation Recapture Tax Rate: 25.00%

Did not include utilities if any, advertising, legal, supplies or misc expenses.


Year 1 cash flow before taxes $30,681
Year 1 cash flow after taxes $21,368

10 year annual return with sale in year 10 is 44.26%

 

That is a CAP rate of 26.30%. That is WAAAAAAY on the ridiculously high side. With all the side money sitting out of the equity market and hard assets being in favor, CAP's are down in the 5-7 range. Using the gross rent, the building should price out at $977,000. Something is really wrong with this deal.

Nobody in their right mind would sell a building with $68,400 in gross cash flow for $260,000. And, that $68,400 is average rent of $285. Say market is $500. Now you have real valuation issues.

Reco you get a structural engineer and an apprasier in there. Cost you $600 total probably. Something is wrong because this does not pass the common sense test.

 

What Red said - Loudly. Plus...

As you can see by this post sandwiched between others with more to say, all of which you'll glance over with excited, then glazed eyes - there's lots of questions and answers all over the map on this kind of scenario.

"Repairs to bring up to code- est. $60-70k (according to the church)"

Remember, they're getting discounts, donated materials and free labor from members.
"I've got a backhoe! *Hallelujah!* I've got a table saw! *Hallelujah!* I've got a scaffold! *Hallelujah!* I've got a case of wine! *silence* For Communion! *Hallelujah!*" etc...
Read: Your cost will be higher.

From memory on other details - one member stated he learned the hard way to keep the building within 5 miles.
Your mileage may vary, but that's far enough, especially for a 1st property. My folks have a few rental properties - 25 miles away. Let's just say it's best if it was closer.

Another mentioned "free" pets are rookie mistakes. Correct - Pets are for people with yards, dammit.

Don't forget about plumbing. When the city lays the gauntlet down on plumbing - you'll pay. Dearly.

Who will approve each new tenant? Based on what criteria? If there is a law requiring live-in management, what criteria does the management have to fulfill in terms of on-site availability per local ordinance? If they get free rent and not much else, they'll still need to work elsewhere, thereby keeping them away from the property, which, in turn, means certain criteria won't be met per some city by-laws.

Will the church next door still be your friendly neighbor in a year? Will you run away with the pastor's wife and/or church treasurer after she embezzles church funds? So many questions.

You want to play it smart?

Real Estate Investment Trust. REIT

From memory: Where other categories got their asses kicked down to average 22% losses in 2001-02, REIT's gained 3%. That's a 25% spread, man.

 

I use some of the forms from the book "Landlording." They are decent. Always check references.


Maybe after the treasurer embezzles money from the church he can buy it cheap and live in a nice converted little church with high ceilings. I always thought that would be fun, but I like open spaces.

 

Jim's got it down pretty well with those numbers.
Due to this being a commerciall building however the loan will most likely be 20 years. Thus monthly costs will be higher.
I recently closed on a commercial property. Interesting new deal banks are doing. I have fixed for first 10 years at 6.75%. Then it adjusts once at the ten yr. mark. Forget now what its tied too but limited to 6 points.
Realistically at year 9 look at the market an assess choices to refi what have you.

 

No way repairs will be that cheap.

At least here in Florida, most buildings over 50 years old will need all wires replaced for code or insurance purposes. Any wires that are aluminum need to be replaced. Plumbing will need to be redone/replaced. etc....

Usually, once you begin, unless the city/county are willing to work with you, EVERYTHING needs to be brought up to current building codes......sometimes litterally impossible to do. For example, 9 units may require 18 parking spaces by code and the property can only support 9 due to lack of land. In that case, you would need variances. It may be difficult and/or impossible to get them. Result....you can't get final signoff.

My suggestion.....get the property under contract (that way noone else can get it) and allow yourself some time to do your due dilligence on the possibilities for it. Use that time to have engineers, architects, contractors as well as the local governments formulate a plan of action should you proceed with the transaction.

Also, since it's a church that's selling it........see if they will go for seller financing. You could offer them much more than they would get putting it in the bank and you could get the ability to have more favorable financing terms without the issues of commercial lending.

 

Two things jump out besides what was already mentioned.

1. Revitalization plan = good.
2. If this property was written up in a major paper and has yet to sell...big red flag. That means several investors have passed.
3. Spend the cash and have it appraised and inspected by an engineer. Old tax assessments mean little with respect to market value...which is a good thing if you own the property!
4. Local real estate associations in the Illinois area will have a handle on capitalization rates (CAP rate) for the area which when you divide into gross annual rent gives you a nice rule of thumb for valuation.
5. I would bet getting this building to code will be $150k.

Have fun and keep us posted!

 

As I mentioned in my reply above.........GET IT UNDER CONTRACT FIRST!!!! Don't spend time working on it with the possibility that someone else will buy it from under you. Get a contract that allows a time frame for you to conduct your due dilligence, with the ability to get out if you're not comfortable. Who knows, in the time your exploring possibilites, perhaps you could flip your contract for a few bucks.