So I'm hoping that some of you will share your opinion's on this topic. Just wondering where your personal strategies would take you on this transaction.
My team of associates will be closing on a 107 unit building in Kansas City's business district. The location is A+++++, as the land alone is valued at almost 500K. We have been putting this deal together for 6 months (well it will be by the time we close on it). All of the foot work has been completed, from the city inspectors, our engineers to confirm the building is sound, estimates from all the contractors and insurance expectations, so forth and so on.
It turns out the city and county wants to negotiate with us on a few items. They are offering a 30 year tax abatement, if and only if we keep them as apartments. It will break down as follows: Current assessed value for 15 years, then 75% of newly assessed value for the remaining 15 years, fully transferable.
The raw numbers:
Purchase Price:s 1.25M
Renovations: 1.5-1.8M For Apartments (High End Apartments)
Off Market Time: 18-24 months
Breakdown of Units: 60+ 2 bedroom units, 25-30 1 bedroom units and the remainder will be Studios.
Estimated Gross Rents: 70-75K per month.
Anticipated Market Value: 4.5-5M upon completion.We anticipate 100% occupancy within 12-16 months, as we will be offering all utilities paid on these units, and Section 8 has offered to run an aggressive marketing campaign within their offices. We are not crazy about the Section 8 offer, but we know it's there if we want it.
Our other option is to spend another 200-300K in renovations, and convert to high end condos/lofts and sell them off individually, with an expected 100% sold, within 3 years.
The returns are obviously way in favor of renting, as there is no comparison. My associates and I, don't have an issue one way or another.
I would be curious on how each of your own strategies would take you on this one.
John
my first thought is section 8 and High end condo's do not go together in the same paragraph.
At least from my experince not many high end condo buyers are going to buy where there is section 8 housing or potential for that.
80 unit apartment building full of section 8 will be over time a building that is a maintenance hog..
Most section 8 apartments I have seen throughout the country need to trade at 10 to 14 caps given the risks and running costs. Investment grade apartments will sell at 4 to 7 caps max. If I was looking at this long term I would look at these options since your asking.
1. If I was going section 8 I would fill it and sell it while it looks nice and new. Make your money and let the buyer figure out what a nightmare 80 section 8 units are like to manage and keep maintained. There are companies that do it but you have to run these buildings like a police department.
2. If I was keeping it as a rental put market renters in the majority ( if you can reasonably do so)
3. At least in most parts of the country Condo Lofts are years from coming back very hard to get take out financing would be my thought.
I have a very good friend from Portland Or were I live who sold her very nice 100 unit building here and went for a 300 unit in Oaklahoma city that had section 8 and lower end renters. That building has just about broke her financially and guess where she now lives.
There is a reason these inner city high cap rate buildings are boarded up all over the country, Crud just drive through Memphis one after the other is a war zone and boarded up. Ya you can buy them for 2 to 5k a door and fix them up but the management is just really intense. On site police or security force is a must.
For the audiance here Most of the folks living in apartments in the mid west are 1 or 2 levels in quality below those renting the little house and bungelows that ya'll are buying for cash flow rentals.
So bottom line for me on apartments is go Investment grade. If you want section 8 do it with stand alone houses. Get a bunch of section 8 tenants living 30 feet apart and you get all sorts of social problems.
JLH
Jay,
I appreciate the feedback.
Yea, we are not crazy about the Section 8 offer, as we can easily go 25-30% over what Section 8 would pay us to rent to open market tenants. They came into play when we were negotiating with the city on what our plans were.
This building is in the midtown area, but it is surrounded by nothing but apartment buildings, and our research shows we have a competitor less than a block away, that converted to high end units. They are asking $825 for 2 beds, and are currently at 96% occupancy, so we don't believe we will need the Section 8 offer.
We have a local lender that will do 80% owner occupied loans with a 700 FICO, if we decide to go that route. Of course that is subject to change, much like the weather…hehe!
Thanks Again!
JohnMost section 8 that I am aware of pay a more than market rents ergo that’s why landlords wil take that caliber of renter not withstanding the payment directly from hud
jayhinrichs wrote:Most section 8 that I am aware of pay a more than market rents ergo that's why landlords wil take that caliber of renter not withstanding the payment directly from hudJay,
Yes in most cases on typical renovated homes, Section 8 will pay more for that property. However on apartments,they will only pay $625 net or $833 gross if the landlord pays all utilites. They no longer grade the properties like they used to do it, there was time when you could do some minor upgrades and get more money, but you had to know how to get it out of them. They stopped doing that here, about 4 years ago. It's now based on their spreadsheets.
So in this case when we will be putting more into these apartments than we would typically, we will be able to demand $850-875, with the tenants paying their own light bill. We are going to construct a 1500 sq feet fitness center in the basement, as this space is pretty useless, along with storage units. There will be laundry rooms on each floor. And of course they will be all electric units.
John
in the south east we still can get the add on's for refer micro and few other benie's.
Sounds like a market rent type product, do not know anyone that would build a workout facility for Section 8
Good luck with it.
Well we looked at section 8 204 unit in Atlanta , think our client passes we so did we.Taking on a large head ache just don't have the stomach for it. Yes I like section 8 for cash flow on single family homes .Not sure if I am ready to tackle a big 204 unit head. Bank foreclosure. So looks like another investor lost on it already.
Good luck John with large properties we are just getting into the commercial side of things. Slowly I might add.
Hope all is well
Alex
Mortality rate is very high for these props
That’s why apartments are rated in classes. If this apt in KC is so great why is it vacant and blighted one has to ask the question
There was the day those props were transformed to lofts. But that was commercial to resi conversion not one landlord failing and another buying ones dre ams of 18 percent returns
jayhinrichs wrote:Mortality rate is very high for these props That's why apartments are rated in classes. If this apt in KC is so great why is it vacant and blighted one has to ask the question There was the day those props were transformed to lofts. But that was commercial to resi conversion not one landlord failing and another buying ones dre ams of 18 percent returnsJay,
My best guess as to why this building has set vacant for all those years, is simply the money it will take to turn it into a profitable complex. The building prior to being in its current condition, was a low income building. The current owner, unfortunately did what so many do, and that is, do as cheap as renovation as possible. Never upgraded anything substantial during his renovation, and only fixed it when it was necessary. We saw pictures of supposed renovated units, and they were pathetic at best. He rented 2 beds for around 425-450, and one beds for as little as 300, he stood no chance at making any money.
When we were looking over his financials (not that we cared about them, we knew what needed to be done) his maintenance expenses were, not suprisingly, way to high. It simply ate him alive, and given the fact he was way below market rate for a 2 bedroom unit, just could not generate the revenue, like he had been taught or believed, one of the two.
John
Alex SC wrote:Well we looked at section 8 204 unit in Atlanta , think our client passes we so did we.Taking on a large head ache just don't have the stomach for it. Yes I like section 8 for cash flow on single family homes .Not sure if I am ready to tackle a big 204 unit head. Bank foreclosure. So looks like another investor lost on it already.Good luck John with large properties we are just getting into the commercial side of things. Slowly I might add.
Hope all is well
Alex
Alex,
Good to hear from you again.
Everything is going great, thanks for asking.
I love commercial projects, especially in this market.
I hear you, sometimes dealing with Section 8 can be a test of one's self control. They can sometimes make you walk out biting your tongue.
I don't see this project as being viable to Section 8, simply because we are putting way to much into these units, to justify accepting the rental decrease. The housing authority of KC, likes getting their nose in these types of projects because it means 100+ new vouchers that they will get paid on, so they jump at this stuff. We would of never approached them ourselves, they came to us with this offer, and we acknowledged our appreciation, but knew well in advance we would not do Section 8.
Have a great week!
John
slum lord is the name of the last owner.
what I have seen happen is after you get sick and tired of the tenants tearing your properties up you then just get calous and do as little as possible.
In San Francisco we called them Projects pretty much 100% african americans and Mexicans. With average home prices in SF at 750k and rents far above 2k… The city builds these big low income PROJECTS and they just turn into war zones.
Same in all cities in the US. Detroit has pretty much torn all of theirs down, and other markets as well thats why there is a strong rental market per se for single family. Although as we all know have to be very careful who you put in your property.
Like I said most Mid west citys are littered with these type of properties, KC, St. Luis, Memphis, Indy, Chicago,
One can make a run at them but if your going sec 8 and your putting these people in tight living conditions you need armed security 24 /7 to have any hope
jayhinrichs wrote:slum lord is the name of the last owner.what I have seen happen is after you get sick and tired of the tenants tearing your properties up you then just get calous and do as little as possible.
In San Francisco we called them Projects pretty much 100% african americans and Mexicans. With average home prices in SF at 750k and rents far above 2k… The city builds these big low income PROJECTS and they just turn into war zones.
Same in all cities in the US. Detroit has pretty much torn all of theirs down, and other markets as well thats why there is a strong rental market per se for single family. Although as we all know have to be very careful who you put in your property.
Like I said most Mid west citys are littered with these type of properties, KC, St. Luis, Memphis, Indy, Chicago,
One can make a run at them but if your going sec 8 and your putting these people in tight living conditions you need armed security 24 /7 to have any hope
Jay,
I agree with you 100%, this guy was something else.
The great thing about this one, is it's located in area known as apartment row, as there are one large building after another lining the street. There have been several large commercial investors, buying up these builidings over the last half dozen years or so, and they are putting their money where their mouth is. I wholesaled a 137 unit building to a client out of Minnesota, and they dropped 2.5M into this building, and it took them 2.5 years to renovate it. They are doing very very well out of that building, as they are in a very prime location and they are getting almost 900 per unit on 2 beds, and 550 on 1 beds. I don't think we will be able to go that high with our rent, unless we pay utilities, which we are looking into. With all these investors coming in, and changing the mentality of this area, it's chasing Section 8 tenants out of there, as they simply cannot afford it.
I have never been a fan of having Section 8 renters in apartments, for the very reason you mention, way to many problems to corral. I don't mind them in duplex's or even 4 plex's, but anything over 6-7 units, I feel your asking for trouble. I love Section 8 for houses, and will not hesitate to place one, but I look very closely on my apartmtents that I manage. As they say, don't want to rock the boat, when it's on smooth waters already.
I don't think we will go with armed security guards, as this will definitely send the wrong message. We are going to have gated entry parking, well lit, and will be installing a state of the art surveillance system, with 24, very very expensive cameras. We will be able to have web access to the cameras, and turn off and on any camera we choose, at anytime. They are motion activiated, and will record to a DVR, on any motion detected, and will continue to record, until the motion is no longer detected.
Thanks Again!
JohnI just have to wonder what our audience thinks of these conversations.
I have just got to think they have no clue as to what we are talking about.
Tenants that trash units, Tenants that the US governement pays for their rent and they still trash the units…. Just think how RICH a country the US would be if we did not support all of these people. I am dead certain a person could not just wash up on the shores of Aussie land and live for free….. Sec 8 rent EBT card for food….. steal cash where you can.. then have generations of off spring do the same.
How the heck we are still afloat with the amount of money we pay to support all these people I will never know.
Then you have the Mexicans that come accross the border and use our medical care. They use the emergency room as there everyday doctor. B/C in the US NO one can be TURNED DOWN for medical care because of lack of payment… The African AMercians do the same…. Obama care has some merrit with regards to this.
Its just insane what the tax paying americans pay for.
Now we are hemeraging our properties to foriegners and we are too stupid to figure out what a great deal these rentals are.
Although those Aussies that buy in the hood and low end rentals, will learn a lesson when they loose all their money. Home depot will get the last laugh.
JLH
Jay
its the same here
the only differance is your housos , can , by law ,carry firearms
your section 8 tennents smash up a $50K house
our housos smash up a $450K + house , then ask to be moved to a new one because the old one's un-inhabitablea 16 year old kid gets paid to have babbies and gets given housing and gets more dole for more kids
Do you call it the hood because its a neighbourhood , or its full of hoodlums ?
i can only imagine these ( war zones, as you put it ) are so large , that it becomes disfunctional and preditorialas for the washing up onshore
yeh if only you knew …PS. i like your investment model
jayhinrichs wrote:I just have to wonder what our audience thinks of these conversations.I have just got to think they have no clue as to what we are talking about.
Tenants that trash units, Tenants that the US governement pays for their rent and they still trash the units…. Just think how RICH a country the US would be if we did not support all of these people. I am dead certain a person could not just wash up on the shores of Aussie land and live for free….. Sec 8 rent EBT card for food….. steal cash where you can.. then have generations of off spring do the same.
How the heck we are still afloat with the amount of money we pay to support all these people I will never know.
Then you have the Mexicans that come accross the border and use our medical care. They use the emergency room as there everyday doctor. B/C in the US NO one can be TURNED DOWN for medical care because of lack of payment… The African AMercians do the same…. Obama care has some merrit with regards to this.
Its just insane what the tax paying americans pay for.
Now we are hemeraging our properties to foriegners and we are too stupid to figure out what a great deal these rentals are.
Although those Aussies that buy in the hood and low end rentals, will learn a lesson when they loose all their money. Home depot will get the last laugh.
JLH
Jay,
Your exactly right..the free rides in this country are a bit much…it's time people pick themselves up and get a damn job!
I have always wondered what the "true" statistics of unemployment are, not calculating those that just don't want to work, because we as a nation, will continue to support their drug habits, by offering them free housing and food.As far as where the money comes from…it's called the "PRINT" button! LOL
I don't know about other major US cities, but I see a trend developing here in KC. The city is "redeveloping" it's neighborhood's. Right at the outbreak of this foreclosure mess, KC started a very ambitious plan to redevelop downtown, there was even talks about moving our pro sports teams down there, until someone woke up and said.. "Parking Anyone"?
What came out of this was the Power & Light district, a 2 billion dollar plan to wake up downtown. We got a new multi-purpose arena, multiple restaurants, H&R block world headquarters building, NCAA Hall of Fame and many many more business'. I have to admit, it is a remarkable turn around and has made KC's downtown a safe place to be.
What this is doing is bringing in higher priced rentals and lofts, forcing the lower income residents to look elsewhere. The expansion is slowly moving south out of downtown, as hotels are renovating, or being developed, housing developers are building new town homes, and other MF units. Again, all of these are asking higher rents for their buildings.
The city just announced plans to construct a new Crime lab, that will level 4-6 blocks of a very undesirable section of KC. And without question, developers will look at this opportunity to move in. The city will use it's muscle to get whatever properties that are in the way, eliminated. They are offering 125% of current assessed value for these homes, however in this area, these homes might carry an assessed value of 15-25K, on a good day. It's easy to see why the city is moving on this project now…it's time to buy Real Estate!
I think KC, has seen it's errors in the past of offering up low income public housing, in desired areas like downtown and the business district (between downtown and country club plaza), and they are taking "legal" steps to correct it.
When you add everything up, it's quite clear to see why developers and commercial investors are buying up everything they can get their hands on in this area. When the transformation is complete, the values on these buildings will sky rocket.
Just as an example, the country club plaza, which is world known in Kansas City, is home to very upscale shopping and very very upscale living. If you want to buy down there, it will be well into the 7 figures, to even be considered. This area is literally in midtown, by definition, and is about 40 blocks south of downtown. Now it is right on the state line, and across that state line is the wealthiest neighborhood per capita in KC Metro.
This trend of "redeveloping" in KC has been going on for about 10 years, and I honestly think it's the city's way of saying it's time to change things up and over price the living opportunities in these areas, to drive out trouble.
Great feedback, I appreciate it!
John
Most big cities have embarked on some sort of revitilization as you describe.
Detroit put Casino hotels downtown.
Portland were I live went with extensive Loft conversions and tax free zone's…. NO property tax for 10 years. and there are still areas if you are under the mediam income you can get 10 year tax abatements. Most of those are only avaliable for Owner occ.
Whereas most of these types of projects got stalled here in the credit crisis, hopefully you will have some thawing out.
I think another trend your seeing is the upper income. instead of paying big bucks for a golf course home in the Desert or Florida, they are buying these condos and lofts in the towns they live, selling their big suburban home and then buying something smaller in the warm climates or just travelling.
I would say 25% of our downtown loft sales are to retire's who are moving from the suburbs back downtown.
KnoxOff wrote:Jayits the same here
the only differance is your housos , can , by law ,carry firearms
your section 8 tennents smash up a $50K house
our housos smash up a $450K + house , then ask to be moved to a new one because the old one's un-inhabitablea 16 year old kid gets paid to have babbies and gets given housing and gets more dole for more kids
Do you call it the hood because its a neighbourhood , or its full of hoodlums ?
i can only imagine these ( war zones, as you put it ) are so large , that it becomes disfunctional and preditorialas for the washing up onshore
yeh if only you knew …PS. i like your investment model
Well I guess its the same all over the world. I would venture to guess we have more illegal aliens than the entire population of OZ
It has broke California. Although on the flip side if we sent all the Illegals back to Mexico. Nothing would get done in CA. No farming, No burgers being flipped, No dishe's being washed, No yards being taken care of. No maid service etc etc.
The "hood" is combo of Hoodlums and neighborhood. Coined by the African Americans for their neighborhood.
Have you ever heard of White Flight, This is an extremely common occurance East of the Rockies. One Black family moves onto a block and half of the Whites put their houses up for sale. within a couple of years the block has gone from 100% white to 90% black and this is how neighborhoods turn.
Now the Blacks being half the population in a lot of big cities and south and south east, will then settle in their own neighborhoods by income just like the whites do. The successful black doctors and Lawyers do not want to live with the crack and snatch sec 8 low lives any more than white folks do.
Then you have the grand daddy of a crappy tenant, american and Human being and that is the White Trash. these are by far the landlords worse nightmare, Little smarter on landlord tenant laws. Can be very vindictive on a property, has a unreal sense of entitlement… And live like total pigs…. by and far the worse tenants and or properties I have encountered are White trash tweaker types.
thank you for the compliments on our business model its very very popular here in the states. I put 9 properties on the market last Wed. to our affiliate's and sold 7 within 12 hours. Of course I say sold. We sold the First deed of trust not the property and the buyers of the notes become the bank and they get 50% of the equity with Not one management duty or worry.
At the end of the day we have far more experince dealing with the tenants than most people buying property so we feel we can do it better just because Hey its our money at risk and being local with huge experince in the bank
OK off to work I am negotiating a 72 property portfolio from a local bank that took it back they want us to take it over…
So you have to pay the illegal immigrants to do the work ,
and you have to pay the welfare people to not do the work
KnoxOff wrote:So you have to pay the illegal immigrants to do the work ,and you have to pay the welfare people to not do the work
YOU GOT IT….
However to be fair to our Welfare folks most of them work… They just need assistance because they have 2 to 5 off spring and work minimum wage jobs just no way they can support their families without help and 995 of them do not have a father contirubuting to the income acutally its the reverse they let the men folk live for free and ramble from one place to another.
You do have the chronically unemployed that will never work.
Most of these are African American males that bounce from house to house job to job and city to city, Its really a cultural issue within their sociodemographics….
I was looking at our Sec 8 rent rolls the other day and we are 97% female african american…. And of course this is the south east and not the Northwest were we only have a 1% African american poplulation. So most of the Sec. 8 here is White. Howevever there is nowhere near the amount of governement assistance that you will find in the south east and mid west. Probably close to 50 to 1 ratio. For every 50 sec 8 east of the rockies we have 1. and thats no exageration.
This is why when you see our black sports stars you will rarely see the father figure, It will be all about my "momma"…
The US as a whole already has a 50% divorce rate. In the Mexican familes its far smaller than that same with chinese Indian and such, In the Black community its far higher.
JLH
I had a really good Friday.
My associates and I met with the City Planners to discuss some of their “wishes”, on this building.
It seems that they want us to conform to neighborhood preservation designs on this building. So we asked the obvious question, please explain.
They do not want window units facing Linwood (the main street in front of building), this won’t be an issue as we are installing PTAC units, so they won’t be seen from the front of the building. When we told them that this was our plans, they hesitated at first. Their concern was having to cut into the brick sides to install the PTAC units, and they were worried that we would have mold growing on the side of the building from the condensation put off by these units. We explained that we have the solution to that. The building, of course, has a flat roof. We are going to cut in 4 new drainage ports in the exterior of the building, and run new gutters down, and collect the condensation off of each PTAC, by simply piping them into the gutter.
They of course wanted the usual done, nice clean building with no major changes to it’s appearance.
The one that almost got us laughing in the meeting was their desire to have super efficient windows in the building, as they appreciate the steps we are taking already for a energy friendly building, however they would like us to take the windows up about 10 notches. The windows they have in mind cost around $1600 ea! Keep in mind that’s my wholesale cost! The windows we use cost us about $135 ea, as they are 2 steps above the cheapest. We asked them if they had any idea how many windows were in the building?
We politely said that is not an option, as it would run the costs of this renovation through the roof, and they would end of having it vacant again. They understood.
We also discussed the scheduling of getting new water service to the building, as the water main is located in the middle of Linwood( which just happens to be a really damn busy street). They are going to have to close Linwood for 8-10 hours, which will cause all kinds of issues. The city graciously agreed to only charge us $17,000.00 for the tap on the main, like that was some deal or something. They did say it would usually run 20-25K for this type of job. We will have 1 3″ water main for the fire sprinklers, and a 2-3″ main for the building supply, trying to get this down to 2″, to save about 5K.
Over all it was a great meeting, the city is really excited about us taking this project on, as they are spending millions to revitalize that area, and they have some concerns with some of the buildings there.
Not sure why I shared this, just thought it would be an interesting read.
Think we are crazy? This neighborhood is very easily a D- area at best (and that might be giving it to much credit). If anyone is interested, I’ll share with you why we could not care any less than we do.
Take Care!
John
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