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Affordable Housing Money Factory - Perfect "Check in the Mail" business...
I work with an Industrial developer in the NW Chicago suburbs, and we are looking into building affordable housing on a couple (or one) semi-desirable, centrally located lot(s) in our area.
We need a business plan that can allow us to build one 6 or 12 unit building at a time, therefore, we can allow it to fill up before we return to the bank for more money to build another, then another, etc. In the end, we want to have between 40 to 60 units, depending on the piece of land we decide to use.
I don't know your market, but it would seem that buying a complex from a cash-strapped developer might be a less expensive way to go. Many developers are walking away from their partially-sold developments here in FL, not to mention the many failed condo conversions that are reverting to rentals.
I don't know your market, but it would seem that buying a complex from a cash-strapped developer might be a less expensive way to go. Many developers are walking away from their partially-sold developments here in FL, not to mention the many failed condo conversions that are reverting to rentals.
Good suggestion. Never thought of that. The problem is that takes big time bucks, to buy existing developments. My current plan involves starting from scratch on an undervalued piece of property, and build value in the property through my own actions.
Your thread title throws up a HUGE red flag to me. Managing an apartment complex is anything but a "check in the mail" business. In other words, this is not a passive income stream for you and will require a great deal of time and effort on your part.
Beyond that, I suspect that you're going to find it nearly impossible to get a bank to finance a project that will be cash-flow negative for a long, long time. Are you planning to buy the land with cash and then finance the construction alone? If not, you're going to be bleeding money for a long time with the strategy that you've mentioned. Do you have adequate cash reserves?
What's the demand for housing like in the area that you've targeted? Do you know current vacancy rates and demographics for this NW Chicago suburb?
Are you planning to buy the land with cash and then finance the construction alone? If not, you're going to be bleeding money for a long time with the strategy that you've mentioned. Do you have adequate cash reserves?
We have the infrastructure that would facilitate the leasing, managing and maintaining of rental properties, even though we have never done that before. Most of the maintenance tasks could be subbed out.
Yes, we would have cash reserves. The property itself woud be a minor cost compared to the construction of the tenant buildings (less than 20%), and I'm sure that would be a cash purchase, as to build enough equity in the property to get financing for the construction of our first 6 - 12 - or 18 unit building.
Quote:
Originally Posted by 8 SNAKE
What's the demand for housing like in the area that you've targeted? Do you know current vacancy rates and demographics for this NW Chicago suburb?
The vacancy rate in most established, 'nicer' apartment buildings is between 5% and 15%. The 'affordable' (crummy) apartment buildings are almost totally occupied by Mexicans, and they are F-U-L-L!!!
As I mentioned in reply your previous question about this, there is no way any lender is going to be eager to finance some bottom of the line apartment in this market. If you really think that you are going to be find a lender that is willing to back you in throwing up units at anything close to the $/sq ft you are talking about you have not been infront of lender in a looooong time. Low end project scare them more than high end, because if you default then they have to find someone crazy enough to be a slum lord. No fun at all... At least with mid-range stuff they could auction off units in a condo conversion, but frankly there is so much of THAT available that they will not want to add inventory -- much better to simply wait to see the rents in the midrange buildings fall if the low end stuff is so jam packed as you think...
If you want to buy a midrange place at some low price and turn it into a flophouse through lack of maintenance and tenant screening that is a lot faster way to short term positive cash flow. No permitting, no zoning boards, no angry neighbors...
The lower on the earning scale your tenants are the less easy your life job as a landlord is. Managing rental properties, especially low end multi-family stuff thrown together at minimal cost, is not a money printing machine. Frankly there are very few residential rental property opportunities that return more than a tiny amount on operating revenue, and many firms that specialize in multifamily properties are very adept at dumping units when full and then finding some sucker to deal with the mess:
Inland Real Estate Brokerage: Property For Sale (http://www.inlandgroup.com/ires/fs/property_detail.asp?PropNo=4096 - broken link)
Inland Real Estate Brokerage: Property For Sale (http://www.inlandgroup.com/ires/fs/property_detail.asp?PropNo=4099 - broken link)
As I mentioned in reply your previous question about this, there is no way any lender is going to be eager to finance some bottom of the line apartment in this market. If you really think that you are going to be find a lender that is willing to back you in throwing up units at anything close to the $/sq ft you are talking about you have not been infront of lender in a looooong time. Low end project scare them more than high end, because if you default then they have to find someone crazy enough to be a slum lord. No fun at all... At least with mid-range stuff they could auction off units in a condo conversion, but frankly there is so much of THAT available that they will not want to add inventory -- much better to simply wait to see the rents in the midrange buildings fall if the low end stuff is so jam packed as you think...
If you want to buy a midrange place at some low price and turn it into a flophouse through lack of maintenance and tenant screening that is a lot faster way to short term positive cash flow. No permitting, no zoning boards, no angry neighbors...
The lower on the earning scale your tenants are the less easy your life job as a landlord is. Managing rental properties, especially low end multi-family stuff thrown together at minimal cost, is not a money printing machine. Frankly there are very few residential rental property opportunities that return more than a tiny amount on operating revenue, and many firms that specialize in multifamily properties are very adept at dumping units when full and then finding some sucker to deal with the mess:
Inland Real Estate Brokerage: Property For Sale (http://www.inlandgroup.com/ires/fs/property_detail.asp?PropNo=4096 - broken link)
Inland Real Estate Brokerage: Property For Sale (http://www.inlandgroup.com/ires/fs/property_detail.asp?PropNo=4099 - broken link)
The way I look at it, someone had to be crazy enough to build those...and I don't think they were chasing fantasy returns. How was he able to do it, and then rent them for 20 or 30 years? Are you saying he never made much ROI on those two buildings? Slum lords are misery profiteers, and some people in the apartment rental business have become favulously wealthy doing it.
BTW those two complexes are EXACTLY what I'm looking into.
I can pretty much guarantee that those places were built when drywall cost a fraction of what it did today and no one heard of "Energy Star" anything. You can buy those place on the cheap because no one will finance them and no one with cash wants the hassle of owning a crummy building that turns tenants too frequently.
I really doubt that anyone has owned those places more than a few years until they got tired of the hassle and found another sucker -- that is the how some multi-family REITs work. They do not hold anything very long, they buy a place that is so trashed that the municipalities want to condemn it and then fix it up just enough to get occupancy high enough to make it look like it will flow some cash and they are out with their profit.
The lower end place take a beating from wear and tear and if you start with bottom of the line junk you are asking for junk tenants that will not live up to their leases and skip out whenever their low end employment ends...
Believe me, the higher your tenants income, up to a reasonable point, the less likely they are to be nightmare. You want people that do not want to move. If you get multi-family get older single men, retireed woman, people that just pay their rent and do not bust stuff.
Believe me, the higher your tenants income, up to a reasonable point, the less likely they are to be nightmare. You want people that do not want to move. If you get multi-family get older single men, retireed woman, people that just pay their rent and do not bust stuff.
Point definitely taken. Poor people resent parting with half their pay check to rent their crappy apartment, so they will utilize every opportunity to screw the landlord. Going to small claims court to bicker over stained carpet gets old.
However, people in the Midwest, especially those in middle and upper-middle income suburban areas do not have the 'entitlement mentality' that most inner city tenants have, the kind you will find in cities like Baltimore and Harlem.
Even lower income folks in my area are not that bad.
However, people in the Midwest, especially those in middle and upper-middle income suburban areas do not have the 'entitlement mentality' that most inner city tenants have, the kind you will find in cities like Baltimore and Harlem.
Even lower income folks in my area are not that bad.
Don't take this the wrong way, but you have no idea what you're talking about. I have a friend who owns thousands of units in the Midwest, including Chicago. To say that you're living out some sort of pipe dream when you say that they lack the 'entitlement mentality' is an understatement. You're going after the bottom of the rental food chain and you're going to get a lot of the entitlement mentality in that group, no matter where you throw up apartments.
Do you have any actual experience with apartment buildings or residential rental property of a different type? Your posts do not indicate much actual knowledge in this field and have much more of a theoretical tone to them.
Last edited by 8 SNAKE; 09-14-2009 at 01:21 PM..
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Never thought of that. The problem is that takes big time bucks, to buy existing developments. My current plan involves starting from scratch on an undervalued piece of property, and build value in the property through my own actions.
