I recently got another apartment complex under contract. In this article I'm going to break down everything that you need to know about how to get another apartment complex under contract, to get you through due diligence and closing. I am so excited because this complex will put me past that 100 unit mark.
I’m going to give you all the information that I can on the process to buy another apartment complex. I will break down everything I've got to do over the next 15 to 30 days for due diligence. We’ll go over the numbers, the rents, the property itself.
I'm going to try and give more information than I ever have on any of my other purchases because I know you love a transparent look at the entire process of getting another apartment complex under contract. So I’ll give you the step-by-step process, however there’s some information that I can't be super transparent with until we get it closed. The reason for this is I don't want anyone else swooping in and trying to offer more on the property.
I also don't want the seller getting uncomfortable with me sharing stuff that I shouldn't before we close. Any of the details that I don't share are just because I don’t want anything to ruin the deal. The seller has been easy to work with, but I’m going to knock on wood again because you never know what can happen, what you can find or what things might come into play.
I want to give you every piece of information I can with this entire process so that you can go to your next purchase with a ton of confidence because my goal is to help you build a huge passive income through investing in real estate.
To start I want to give you the story of how this property came to be, how I found it, and all of the steps I now need to take to get through this process so you understand that this property has been in play for a long time. I've kept in good communication with the realtor for months and he's done a great job following up with the seller. The seller kind of just needed to figure out first whether they wanted to sell the property, what they wanted to sell it for, when they wanted to go through that process.
There's so much that goes into this interaction. We have to get the seller to the point where they're comfortable selling, but we've also got to make sure that we get them to the right price. What I mean by this is the seller has to be comfortable that they're selling it for what it's worth, and as the buyer I've got to make sure that I'm comfortable purchasing the property at a price that meets my criteria.
What can happen is the seller will hold firm to what they think it's worth and it will not be worth it for the buyer because it doesn't meet their criteria. This is what makes deal flow so complicated.
It's hard enough to find a bigger property with a lot of units for sale because it's a competitive market right now. Once you find the property, you've got to make sure you find a number that works for both the buyer and the seller. Sellers always want top dollar and to get as much as they can out of the property. As a buyer, I want to make sure that it meets my criteria.
Sometimes sellers will sell it for less than they should or you can see buyers mess up and pay more than they should. So finding a win-win where everybody's happy can be complicated. As a buyer, things can get very complicated when you find a property with the units that you want, in a location you want, it meets all of your criteria but the purchase price doesn’t work. You might be tempted to bend on your criteria thinking you won’t find something like it again. That's where you can get yourself in trouble.
You've got to know your numbers and not bend. It can be stressful getting to a purchase price where you don't lose the deal but you don't get a deal where your numbers don't work with your criteria. On this property we had some back and forth and I am pushed to the brink. I believe I will get a 10% cash on cash return. Potentially with rent raises I could get up to a 12% which I would be pumped about. 10 to 12% is iffy at best.
I know my market and getting that 12% cash on cash return would be getting the top of the market which I think is possible with this property. At the same time, this is a property where I had to tell the seller it was my bottom line. So if I found things in due diligence that broke the deal for me then I would need to go back to the seller and tell them to pay for it. WIth my criteria I couldn't afford to, it wouldn’t make sense financially for me to get any deeper into this property than I am. If I drop below what my criteria needs to be, that's where this deal is kind of iffy.
Right now the numbers are where I need them to be. If we find other things in due diligence, which I'm sure we will, I'm going to need to make sure that the seller is willing to bend on that. I'm hoping everything will go smoothly in due diligence but there's a lot that can come into play that could potentially throw the deal off.
So I found the apartment complex deal, got it under contract and I have been around the property outside. I've seen pictures of the inside but I haven't gotten to walk through any of the units. I have a good idea of square footage, the quality of all that with pictures, but there's a lot that can happen in due diligence.
Once I've got the property under contract, I've got it at a price that I’m happy with, then we start due diligence. That means I'm going to get an inspector to go through all the units. Make sure things are clean. I’ll go through all of the leases, profit and loss statements, and taxes. I go through everything to make sure there aren't any numbers that I missed when I got the property under contract. I check that there aren't any major issues that need to be fixed because this is a value add property.
A lot of the value with this property is based on a couple of the units that have already been raised to market value. About half the units are at market value, the other half are $200-$300 below market value. The seller knows this has been mismanaged but now I’ll be managing it properly. The rents haven’t been raised so there's probably some work that needs to happen in these units. I will be either raising the rent with the tenants or getting the tenants out and getting new tenants in. There's a good chance there will be renovations that need to happen to get it to market value on all of the units.
There's a lot of what-ifs, like whether I can go in and just raise rents or if there are renovations that need to happen. We hope that everything comes out clean and that if we do find issues that the seller is willing to bend to get those fixed. Best case scenario is I don't have to get any more out of the seller because all the units are great. Ideally they've just been mismanaged and I just need to go in and raise rent. There's never going to be a perfect situation but even with a couple little renovations I can live with that.
So I go through the process to get the apartment complex under contract, I do due diligence, then I’ve got an opportunity to go back and say “these are the issues that need to be fixed.” The seller can either agree to pay for all or part of it, or they might refuse to pay for any of it. That would leave me in a situation where I’d have to decide if the numbers or do I need to bail.
While due diligence is happening, I need to make sure that I'm locking in financing, getting the bank or the brokerage or whoever moving so that financing is ready to close within the time period that I said. It is tricky because you're going through due diligence, looking over the numbers and rents, while waiting for the inspection. Then renegotiating on things if there are issues on a property that only has half of the rents where they should be and the other half that aren't.
There's so much up in the air, and on top of that I'm trying to find the place with the best rates, the best terms, etc. I’m negotiating and getting them to compete, all while I don't even know where the purchase price is going to end up. I hope it'll end up where it's at because there aren't any issues. If there are issues I’ll have to take that into consideration and try and tweak that to make the numbers work.
It all comes into play in getting approved for your financing. It’s a weird situation where everything's happening at once. There are negotiations, you're trying to make sure that you do everything properly. You’re worried about ending up in a deal where you're not getting the cash flow that you need. Once you've got financing locked up, due diligence done, then you've got to make sure that all of the paperwork is done properly. The terms, rates, purchase price and the rents are divided properly depending on the date that it's purchased. Get all of the deposits and before you sign on the dotted line, hand over a fat check, and get ownership of this apartment complex.
This property is one of those where there are still so many things up in the air but it's the number of units that I wanted to buy, it's in the price range that I wanted, and it's got a little bit of value-add opportunity that can help me get the numbers I want.
I am pumped because I’ve got another apartment complex under contract, we're starting the process and let's hope that everything goes smoothly. You are going to get to see the entire journey. My goal is to help you to build a huge passive income, by giving you articles like this about how to get another apartment complex under contract.