The large multi-unit apartment building
May 24th, 2007 by KenricToday I met with my friend who invests in apartment buildings for lunch. We went over how he had structured some of his deals and partnerships. I’m trying to figure out how to structure a partnership to go into a 80+ unit building in Texas.
I’ve bought many houses before but this is a whole new animal. For starters, 70-80% of the time earnest money is non-refundable. This means that we’d have to put down 1% of earnest money or $25,000 on a $2.5 million dollar place that we wouldn’t get back if the due diligence revealed some issues.
The next question is how do we hold title? LLC, LP, TIC? Right now, it’s looking like a TIC (Tenant in Common) is the way to go. This allows all partners to 1031 out of the deal. And now what’s this “master lease” part of a TIC?
Then there’s the big commercial loan. It’s now more about the property than my FICO score. I have to produce a financial and investing resume, as do my partners.
I’ve got alot of learning to do.
Posted in Apartments | 18 Comments »
Stumble it!
TIC’s are very popular right now, but I think most people do not understand the pitfalls. Lots of the small investors want to move up to get what they perceive (or rather what they are told) are better returns. The trouble is that the sellers and the market makers see this and are creating TIC’s as a way to maximize the sellers’ profits, not the buyers’. Multi-family properties are grossly overpriced already, and TIC’s are a way to squeeze out the last few dollars of profit.
When TIC’s go out of fashion, lenders will not finance them and buyers will remenber that they are partial, non-controlling interests and will discount them accordingly.
If I were in your shoes, I would build up a portfolio of houses and 2 to 4 unit properties that I alone own. It’s tough to do that in the Phoenix market (or most other markets) right now. Patience and restraint are needed in the current real estate market environment. Build up cash and keep your eye open for opportunities. Over time, you can start moving into larger multi-family properties, if you so desire.
In the meantime, I would get a job with benefits in my field and max out savings (cash and retirement). That way I would be better prepared when opportunities appeared.
By Another Investor on May 24, 2007
Commercial deals are much more complicated than residential deals – we have been in escrow on a 30 unit deal since Dec06! It keeps getting pushed out because the lenders are asking for more and more documentation. Main problem is they do not ask for everything up front, rather its one after another after another. Death by a thousand cuts.
I still like multi-units and feel there is significant advantage in value plays due to the high number of units if you can create efficiencies.
By RealOG on May 24, 2007
Another Investor,
I don’t quite follow your “creating a TIC to maximize seller’s profit” and “TICs squeezing last few dollars of profit” reason. The whole reason for creating a TIC is because if we hold as an LP, we can’t separate ourselves later. What good is making money only to pay taxes on it when we sell just to reinvest into another? We aren’t planning to sell portions of the TIC to others, we sell the building as a whole.
By Kenric on May 24, 2007
Sorry, I should have said the sellers and the market makers are marketing to TIC-type buyers.
My problem with TIC’s is they are a lot like other partnerhips. You are going to pay huge set-up and management costs and you have no control. Let’s say that Kenric, Clifford, and Shaun become TIC’s in an 80 unit apartment building in Waco, Texas. One morning Clifford gets up, decides to go surfing, and is run over by an oil tanker. His estate is now the owner of his interest and the heirs could care less about units in Waco Texas. Or Shaun moves to Oklahoma to partner with Trisha, and needs his money out yesterday for a better opportunity in Tulsa. Here’s Kenric in Phoenix, trying to fix the problem. But Kenric does not control the property or the other owners. Big mess, no matter how many pages long the TIC agreement is.
My problem with the 80 unit property is that the multi-family and C&I markets are extremely efficient. Commercial agents are a different breed and they know their buyers and sellers. In this market if the numbers on an 80 unit property are any good, the property is usually marketed and sold to an experienced investor long before you see it. Cap rates (most of which are calculated on best case numbers, not actual), are ridiculously low. Given where we are in the real estate cycle, the appreciation potential over any reasonable holding period does not justify these going in cap rates.
I would like to see the efficiencies that RealOG will create with his 30 unit property that will raise his going in cap rate two or three points. I’m not that good, so right now I’m accumulating cash, not properties.
By Another Investor on May 24, 2007
Another Investor, the scenario you mentioned is obviously not good. Would whether you had an LLC, LP or TIC even matter in these cases.
By Kenric on May 24, 2007
My point is that whatever the form, any partnership has the potential to go sour, and attorneys make a lot of money sorting out partnership disputes. I would rather own the deal myself. I use leverage instead of partners. If I don’t have the money to do the deal, then it’s not for me.
Ask yourself if you are ready to move up to 80 units. Do you know enough about multi-family to analyze the deal? If the answer is no, then stick with properties (or other investment vehicles) that you can fully analyze until you do.
If I were in your shoes, I would re-read the Republic article yesterday on apartment rents. I would write down the names of those interviewed from G&E and Hendricks, call them, and tell them I was looking for a job in multi-family brokerage.
Take those guys to lunch and see if you can get a job with one of them. You will learn a lot more from a year or two in the business than you will anywhere else,
By Another Investor on May 25, 2007
Hi, Kenric,
I can’t speak from the large multi-family ownership perspective, but I can tell you what my grandparents (experienced investors) told me when I inquired with them whether they thought partnering with other investors would be a good idea. They told me NEVER to partner with anyone other than my spouse or a close relative. Even family can provide complication, of course. But, they said something similar to what Another Investor is telling you here. Too many cooks in the kitchen and hands in the cookie jar, and so on….
From my point of view, there just aren’t enough honest and right-minded people in the world for me to be able to pick the best ones to go into marriage–I mean, business–with.
Business partnerships and marriage seem to be very much alike….which is why my fiance and I dated for 5.5 years before getting engaged! I needed a long trial period! LOL!
I would only partner with my spouse. And, then, we are just slowly working our way up from single-family to small multi-families. But, I dream big every night!
By Trisha on May 30, 2007
I could not disagree more with the “go it alone” sentiment everyone seems to have. Leverage other people just like you leverage money from a bank. Just be sure to set it up with terms you are comfortable with.
If folks dont believe, look at every single multi-(b/m)illion dollar deal out there. How many people have done it on their own – without money, expertise, or some other form of leverage? Blackstone, Trump, even Kiyosaki owe their success to leveraging other people. Partnering is an absolute key to success.
You might be able to get rich on your own, but you get mega-rich working with others.
By RealOG on May 30, 2007
I used to be against partnering also. It’s easy to make your own decisions and do your own thing. However, per my discussions with wealthy investors who have multiple millions of networth, they’ve all said that in order to get to that level you must partner. Going alone can only get you so far. Even if it just means bringing in a pure money partner, think about what an extra $50k in partner money could do for you. Borrow $50k, give them 10% of the profits. Something like that…
By Kenric on May 30, 2007
You think that by partnering, you will somehow leapfrog into more wealth faster. The reality is that what you get back largely depends on what you put in. The ROIC must be significantly higher than it is on smaller deals to gain any advantage. The additional risk added by losing control of the property outweighs the advantage of the larger deal in my experience. Is there a risk premium incorporated in your analysis?
You seem to want to skip the steps needed to learn the more intricate business of multi-family and commercial/industrial properties before you dive in. That’s not wise, in my view. With your lack of experience, you could be one of those people RealOG wants to “leverage.” Take your time and learn from the smaller deals and you will get where you want to go.
By Another Investor on May 30, 2007
Another Investor, I’d like to continue this by making it tomorrow’s post.
By Kenric on May 30, 2007
To any interested buyer, I am trying to find buyer for a 36 unit apartment complex. Seven years old, 91% occupied in the State of Georgia Approximately 134 Miles South of Atlanta. Asking price $1,750,000 or best offer, for informational proforma call (478) 231-1614.
Regards, R.F.Sumlin
By Rickie Sumlin on Oct 15, 2007
Start smaller. If you are unsure about what to do and how to do it, I would not agree with you buying an 80 unit building at $2.5M. Try a 6-12 unit building. After you purchase the building there’s going to be a whole new set of issues related to the management of the property. I own many units and consult other apartment complex owners on how to raise the values and cash flow on their properties. Give me a call if you have any questions.
Donnie
602-741-0565
By Donnie on Feb 27, 2008
I Don’t know if this is the right place. I am looking for some extra ideas. I am married have 2 kids a decent paying job. I experinced a little reward and fun in the real estate boom. Now I have a rental property (single family home) I have my primary residence. Of course I am mortgage to the hilt. houseing going down. Since we starting having kids we are no longer Double income. I still want to invest in real estate and serveral other things but capitol and leverage is an issue. Any expericed people with ideas?
By Big Rod on Apr 22, 2008
I like Kenric’s idea of investing with a group on an apartment building investment. You really have to trust the person you are investing with, but if they know what they are doing the return can be good without the difficulties of management or needing huge amounts of capital.
By RealOG on Apr 22, 2008
Hi All,
I am an single family, small 4-6 unit investor. I am looking to take my expertise to the next level with large multi units, where could i find these type of properties and what are the best options for management if out of state?
By Resolve411 on Mar 18, 2009
I am looking for a 150+ unit apartment complex in Denver Colorado. Please call Jason Mccool @ 303 901 3830
By jason McCool on Feb 13, 2010