Question for people that own apartments

[totenhosen]

I'm considering buying some apartment buildings. Cap rate on them is about 10%. Have you ever done section 8 housing? Do you get a guaranteed check from the government every month? (basically does it cover your mortgage payment) Any other suggestions/info you can think of would be greatly appreciated.

[Hallett19]

are you looking into buying a building or a single unit ? If you need any help call Ralph Suarez @ 818-949-7639 or email @ ralph.suarez@dilbeck.com, we work at Dilbeck in La Canada and him, his brother and sister all own units all over the place in L.A. Tell him you know Aaron and he will help you out with anything you need. Its a good time to start buying, I have my eye on some units in Tujunga, 2 on a lot..... good luck, I cant wait to start building some equity on some property soon.

[totenhosen]

Originally posted by Hallett19
are you looking into buying a building or a single unit ? If you need any help call Ralph Suarez @ 818-949-7639 or email @ ralph.suarez@dilbeck.com, we work at Dilbeck in La Canada and him, his brother and sister all own units all over the place in L.A. Tell him you know Aaron and he will help you out with anything you need. Its a good time to start buying, I have my eye on some units in Tujunga, 2 on a lot..... good luck, I cant wait to start building some equity on some property soon.
Thanks but I already have my R/E license and I also work for a mortgage broker

[DaytonaU]

i have a four plex with all section eight renters money is always direct deposited on the first . the only problems you might have is
in the beginnig until all paperwork is entered in the system.

[Outnumbered]

Originally posted by totenhosen
Thanks but I already have my R/E license and I also work for a mortgage broker
I think Hallett was just trying to help a guy out, not trying to get a commission. It sounds like Hallett's guy has a lot more experience then you or your broker in the area of units. I would give him a call and take him up on his offer.
As far as my experience with section 8, I have a good friend that had a house on section 8 for years. Once you are hooked up its a good thing. It just takes a little work to get in the program. There are waiting lists in most areas to be on the section 8 lists so the tenants tend to not F'up for fear of being booted off the list. As far as covering your payment, you should know it will depend on how much you put down and how much you pay for the units. Section 8 onlys pays a fixed amount per bedroom etc and is based on the area you are in. There is no guarantee of positive cash flow. You gotta buy it right and put some cash down in most cases.
OL

[rivercrazy]

My take on apartments in the current climate is:
BE CAREFUL. The low interest rates available in the market over the past few years increased valuations substantially. When rates go up - values will decline accordingly.
Go in conservatively with big down payments to protect your investment. The annuity income may be good, but if you need your capital back out in a few years BEWARE

[Outnumbered]

Here is the HUD chart that tells you what the rents are based on the area you are in:
http://www.huduser.org/Datasets/FMR/FMR2004f/ScheduleB_FY2004F_FMRs.pdf
Do a Google search for "section 8" and there are tons of hits.
OL

[totenhosen]

Thanks for all the replies guys.

[totenhosen]

Originally posted by Old Lavey
I think Hallett was just trying to help a guy out, not trying to get a commission. It sounds like Hallett's guy has a lot more experience then you or your broker in the area of units. I would give him a call and take him up on his offer.
OL
I understand that. But I'm sure the guy he referred me to won't do it for free. At least if I do it through my broker I'll get to keep the entire buying agents commission.
I'm planning on putting a minimum 20% down I jsut have no idea how section 8 works or if it's worth it because of the paperwork and in dealing with government agencies in general

[HavasuDreamin']

I have been underwriting apartment loans for about five years. I have seen good deals and bad deals. Rivercrazy is correct about the valuations. The interest rates play a part in the theoretical cap rate, and thus "could" affect value. But if you do your homework before hand, you will know if you are getting a good deal and you will know what cap rate you are buying it on.
Any time you buy an existing complex, you need to REALLY analyze the shiznit out of the operating statements. You should try to get at least 2-3 years operating history. On the income side, how consistent has occupancy been? Are there any concessions going on in the market place. On section 8, pay special attention to the bad debt line item.
On the expense side, check with the assessor's office to see how the RE Taxes are caculated and if/when taxes are going to go up. Get an insurance quote before you buy. Is the retrofit or cap-x line item large ie: are tenants trashing the units?
When crunching the numbers, make sure you have factored in the greater of market vacancy, or actual vacancy. Make sure to underwrite at least a 3% management fee (calculated against effective gross income), usually 4% or 5% depending on size of the project. Make sure you have underwritten a structural reserve........between $150/unit & $300/unit depending on the property condition. After you come up with the projected NOI, divide that by the price you are paying for it, and that is your effective cap rate. If you don't factor these items into the NOI, you could get screwed on financing because rest assured, the Lender will.
I am not real familiar with the LA apartment market, but if you were buying a decent project in the midwest, a 10% cap rate would be oustanding. Most likely you would be in the sub 9.00% area.
Good Luck
One more thing..........I don't know who you are going to use to finance the project, but if you are up to the challenge of dealing with a section 8 property, you may be up to the challenge of obtaining HUD financing. I know HUD's 223f program (which is a subsidized program) will lend 85% of value with a 1.175 cover. That is better than most banks out there, but HUD can cause serious brain damage. Just and FYI.

[Hallett19]

Originally posted by totenhosen
I jsut have no idea how section 8 works or if it's worth it because of the paperwork and in dealing with government agencies in general
That is why people have real estate agents that know all about that stuff :) I'm an agent and have been selling residential for over 2 years, but I would never go into buying something like that on my own.
And OldLavey is right, if you dont come in with a good down, you will be in the red every month, especially in a market like this with prices where they are, the rates wont offset the high prices that property is getting these days.
About cap rates, 9-10% is practically unheard of around here, few areas support that rate in L.A. But the lower the better, things I am looking at are between 11 and 16.5%, something around 10-11% should get you breaking even every month from the get-go if I'm not mistaken.

[totenhosen]

Thanks havasudreaming for all the info.
Actually I'm not looking in the L.A. area. The returns are just not good enough to make it viable. I'm looking at some places in Phoenix area. I can buy a 4-plex for $200k in a so-so area. From the figures they are showing me and from the rent rolls and vacany rates it looks good so far especially in comparision to LA.

[BUSTI]

If you are not an experienced unit investor I would recommend you stay away from multi faminly (5+ units) and look for 2 to 4 unit buildings. Given the very low 2 to 4 interest rates available dollar per dollar the 2 to 4 units are returning greater cash flow enhancing youe debt service position.
All of our clients that have wanted units 10 or less we have motivated to buy 2 to 4 units specifically because there is a shit load of residential product for 2 to 4s such as 3 year arms at 3.75% interest only, and 7 year deals at 4.875% interst only.
As an example we have good deals on a 6 plex in Anaheim on a a paper loan arm fixed for first 5 years at 5.95% with a payment of $3,526 on a commercial loan. As opposed to the the 2plex and the 4plex we just put him in to, financimg the same loan amounts on a interest only arm fixed for the first 5 years at 4.375% with a payment of $2,006! The commercial loan required 25% down and the residential loans only 20 percent down and the guy saves over 1600 monthly right out the gate!
In California we have did an analysis that unit per unit up to 10 units dollar per dollar invested, 2 to 4 units have appreciated more and have tons more financing available. Also rent comtrolled properties and that what government housing subsidies mean, do not appreciate as well as free market housing.
Good luck!

[rivercrazy]

To me the best investment product out there for income investors is still multi unit industrial buildings with with 5-10k square foot spaces. The benefits are a very large number of potental tenants, relatively stable valuations, owner - users may be interested in purchasing down the road, low overall maintenance, low cost to build, etc....And most leases are triple net so the tenants pay the taxes, maintenance, insurance, etc...
Cap rates are also very low compared to other types of properties (7.5 to 9.5% depending on location and quality of the building)