How To Buy Your First 25-Unit Apartment Complex

In the winter of 2013, Jake and I purchased our first apartment complex, a 25-unit with tons of “potential”. It had taken us two solid years of rejection and negativity to get to this point. We felt as if a weight had been lifted off our shoulders when we assumed ownership, but little did we know that the real work was about to begin.

In this article, I want to show you how to buy your first apartment complex by exhibiting the “Patience, persistence but willing to walk away” mentality and how to locate value-adds in a deal. I want to highlight our progression from a rundown 25-unit to an attractive 156-unit apartment complex using the identical investing framework.

On our first deal, we were unfamiliar with Cap Rates and Cash on cash returns, two benchmarks that we utilize when analyzing a deal. Our experience with commercial loans was minimal, and managing a “big” property was foreign to us. To sum it up, we were the classic newbies that lacked experience but more than made up with enthusiasm and the will to work. We thought we were buying the Taj Mahal, yet in reality the property was a mixture of cottages, duplexes and a six-unit motel.

Jake affectionately termed the property “The crack den,” and not because of all of the deferred maintenance.

The apartment complex did contain multiple value-add opportunities. What’s a value-add? A value-add is an improvement that adds value to a property by increasing its cash flow. A few examples include: renovation, repairs, debt restructuring, vacancy lease-ups, cost savings and instituting revenue generators. These value-add opportunities should all be directed to increasing revenue or decreasing expenses, thereby elevating the Net Operating Income of the property.

Where were the value-add opportunities in the Courtyard property?

Let’s begin with the perception of the property, which was originally called The Shamrock Motel. Its reputation to the community was an undesirable property that catered to weekly renters, and would rent to any potential tenant that had a pulse. We set out to reposition (fancy word for fixing a property and creating value) the tenant base and institute a system to screen tenants. This would allow us to dramatically reduce our “turn” costs when a tenant vacated and would secure a more stable revenue stream.

These better tenants would stay longer and actually pay the rent every single month. Evictions and tenant damage dropped almost immediately once we began to screen the tenants. The perception of the property changed within the first year, thus allowing us to attract much better tenants.

We knew we were on the right path when the mail lady told Jake she felt safe once again delivering the mail to this quaint community.

Also read: Turning One Deal into Multiple Deals w/ Bruce Petersen

The next area we targeted was the expense side of the equation. We realized the expenses of the apartment complexwere running on the high end. Our mistake was our ignorance in what it would cost to run a multifamily property. We just knew that certain bills appeared rather large. We immediately contacted the garbage company and the phone provider. The cost of both of those services was slashed overnight. Next, we decided to remove the cost of cable and required the tenants to pay for their own cable. This single cost-saving step saved us over $6,000 per year.

We also placed a cap on the use of the tenant’s utility usage. We would pay for the first $100, and the tenant would be responsible for the remaining portion. It’s amazing what happens to utility bills when tenants share in the responsibility.

Our value-adds did not end there. We were just getting started. It was time to address the income side of the balance sheet. First, we cleared out the sheds on the property and began to rent them out as storage sheds. This added value two ways. One, we were offering an amenity to the tenant by providing additional storage. Secondly, we were able to generate an additional $200 per month. Once a tenant begins to store all of their possessions on your property, those yearly rent increases of 3% will be met with less resistance. It becomes more difficult just to pack up and move out to another apartment.

Read further: https://jakeandgino.com/how-to-buy-your-first-25-unit-apartment-complex/