In 2020, I want to share my experience of finding, vetting and (hopefully) acquiring 50 units.
The new decade did not start off the way I envisioned it. My team and I had a 25 unit apartment under contract from 2019. Although the majority of the work happened in 2019, the contract was not terminated until the first week of January 2020. I told myself after hearing the news that this would not set me back. So I pressed forward, picked up the phone and/or drafted emails to all the brokers I have worked with in the past year. I needed to get back into the hunt immediately. You can read about that adventure further here.
Quite a few deals came across my desk, and for the first time since getting the 25 unit apartment under contract, I sat down and began underwriting deals. Only one of the properties in particular piqued my interest. On Friday afternoon, I called the broker and asked to set up time to see the portfolio. We were not scheduled to see the property until Monday of the next week.
The Sunday prior to walking through these two apartments, I posted my experience of the 25 unit property on Bigger Pockets. It was a decision I will not regret. There was so much engagement and positive vibes that came from publishing my experience. I began to engage another member. He advised me that had a factory under contract and asked if I was interested. There were little details on where the property was in the message, but to call him if there was interest. I thought to myself what is the worst thing that could happen if I inquire about the factory building. Unbeknownst to either of us, the factory building was 20 minutes east of the two apartment buildings I was set to walk through on Monday. I set up time on Monday to walk through the building, and also requested and received more information and comps on the factory building.
So back on the road I went. Podcasts queued up. And surprisingly for January, the weather that was on my side. I first went to see the factory building. It was oozing with potential. The gentleman who showed me the property also had a General Contractor on site to walk the property with me. Definitely helped with talking through everything with me. While speaking with the GC, there are a few things that we pointed out that could pose some problems. One being the river being in such close proximity. We needed to figure out how far the property extends to, and if we could do further construction and work on the property. If we could, it would most likely require retaining walls. I also noticed there is limited parking at this building. The state requires at least one parking spot per dwelling unit. This was the red flag for us. I did not see enough space for 15-20 spots next to the building, let alone additional parking for each parking. If we created a parking lot it would be a costly endeavor.
After walking the property I had a bunch of thoughts running through mind. With the right renovation this could be a residential conversion, potentially condos or apartments. Fun fact they made baseballs here for the minor leagues. There was just under 30k sq ft. The bones of this property are fantastic. The entire building is brownstone brick, first floor looks as if it was painted over, however the second and third floor have been sandblasted. The roof definitely needs to be repaired, but it might have provided us an opportunity (if we choose) to make it a pitch roof. After sharing my thoughts and experience with the team, we put our heads together to see if we should focus our attention on building an apartment.
We knew the play was an apartment building. In the neighboring towns, they had built new apartments in an existing factory. This was a huge success according to the locals and also from finding out there was a wait list for the property. We mulled over ways in which we could find parking around the building. One means was if we did create a parking lot on the lot, it would most likely require a retaining wall. Second was make the basement a parking garage. However the side of the building only has enough for one entrance as it stands today, would require structural work. If we wanted to utilize the basement floor, we would also need to bring in an elevator. Third and least preferred method was attempt to contact the worn down triplex across the street. We hoped we could purchase the house, tear down the house, and build a parking lot. All options would probably be a six figure job.
Aside from not having a great option for furnishing residents with parking, we knew that this endeavor was not our expertise. I will say without a doubt there is definitely opportunity here. With the right operator it will be an amazing opportunity.
The above story covered a couple weeks of time, and I haven’t even got to the other property I was visiting on that sunny January day. The first building I went to is a 15 unit building. It was 100% occupied, with Tentant Paid utilities!!! The breakdown was 10 – 1 Bed, 3 – 2 Bed, 2 – 3 Bed 2 Bathroom. Three units on the basement, six on 1st floor, six on 2nd floor. They had a coin-op laundry and LED lighting is already in place. I thought this was exactly the type of apartment I would want to own. At the same time, I saw little meat on the bone and it would be tough to drive NOI higher.
There was another building that was part of this portfolio as well. The other building was a few miles away, and was a 31 units, 26 residential and 5 commercial units. These two properties are cross collateralized. (Cross–collateralization is a term used when the collateral for one loan is also used as collateral for another loan. If a person has borrowed from the same bank a home loan secured by the house, a car loan secured by the car, and so on, these assets can be used as cross-collaterals for all the loans.)
I noticed immediately that the second building had A LOT of competition in the surrounding area. There are brick apartments lined up and down the street. It was also all street parking. This building is owner paid utilities, which is probably a considerable factor as to why the expenses are so high in the OM.
After sharing my thoughts on both buildings, we mulled it over to see where the opportunity lied. We thought about renovating the basement in attempts to in coin-op laundry. We went back and forth to see if there’s a way to make the building all electrical and to change from owner paid to tenant paid. We would have to see if there is a way to either install heating/hot water metering or repipe, then install meters. This would shift the expenses from owner paid to tenant paid and drive expenses down. This is not an inexpensive project though.
We wanted to perform due diligence to see if that type of capital expenditure was worth it. If the other buildings are owner paid utilities, would that be detrimental to us. We started contacting surrounding buildings to see if they were Owner Paid or Tenant Paid Utilities. This is definitely a strategy I recommend to everyone, regardless of property type.
We weighed our options, and began collaborating on our business plan if we got this under contract. The properties were priced to sell in the market, and the brokers do a great job of marketing the properties. We knew that there would be a bunch of offers and that we needed to make a compelling offer. The offers were due on Friday. So after running the numbers and making sure it still aligned with our expected returns, we provided the LOI to the broker. We received a call afterwards that it would go to a best and final on the Monday. It was the first time I went to a best and final.
We did not change anything from our offer. We thought we had a fair offer, and were not willing to move away for our fiduciary standards in order to get a property under contract. And as we thought, there was a better offer on the table and it went elsewhere. It was invaluable learning experience again.
I took it upon myself to research ways in which to have a more robust best and final offer. One of the ways I found is to contact a preferred lender (preferable one you have relations with), and walk through the deal with them. If they like the deal, they will potentially submit a letter of interest on behalf of you. This shows the seller that you have debt backing to close the deal. This is another tool in the tool box that I will definitely utilize moving forward.
January has now concluded. I am still hustling to find and acquire those units. Each month, I gain more knowledge and experience that I will take forward with me. This is a marathon, and I have a great pace.
Stay Tuned for my next post recapping February.