At Infinite Focus Capital, we have concentrated our strategy on investing in mom and pop apartments that have a value-add component we can leverage to increase the value of the property. But what is a mom and pop apartment and how do you identify one? Once you identify one how do you turn the characteristics into an opportunity to add real cash value to the property?
Essentially mom and pop apartments are managed by a single person or by a family. They usually have few, if any, systems in place which can include a lack of web presence, no accounting or property management software and a general lack of cost effective, efficient marketing. A high percent of mom and pop landlords are paying the utility costs for their residents and do not utilize Ration Utility Billing Systems, or RUBS. Many times, the properties suffer from high vacancy rates and deferred maintenance along with below market rent. As the mom and pop owners are not charging market rent, they are also not charging typical fees and are usually on the border of being burned out in their business.
A recurring theme we hold with great regard is that our tenants are not simply a tenant or resident but our customer. As top performing apartment operators, our goal is to provide a well maintained, safe, and clean home for our residents. We believe in providing and exceptional product at an affordable price; that product is the home our customers live in. Mom and pop owners do not share this opinion. They are typically not a professional landlord and we find they usually express at least one of these 6 characteristics
Small business
Motivated seller
Poor management
High vacancy rates
Deferred maintenance
Below market rent
Small Business
A lot of small businesses in the country are run not as businesses but as hobbies and multifamily real estate investment is no different. In the 1970s and 1980s family run businesses hit their peak but, in the years since, competition has mandated that these companies adapt to the changing market conditions or risk failing. Two of the most important things we look at in apartments are the systems and processes they have in place and often mom and pop apartments are grossly lacking in both. Even a standard for renting units can be missing from many of these operators. When we are doing our research, we try and determine if the landlord performs a background check on every potential tenant, charges an application fee, and follows the same standard for each applicant. The last point is one of the most important because by following the same standard for EVERYBODY, you greatly reduce your risk for litigation.
Many small businesses are family operations which can be nice in the beginning but often lead to division and infighting. When things start to fall outside the plan the family members tend to blame each other rather than taking ownership and finding a solution. When this infighting begins the property tends to suffer and this is a prime opportunity for a professional investor.
Another great opportunity is when the family decides to retire. Quite often the property has been in the family for so long there little to no mortgage left. This makes it possible for a buyer to negotiate seller financing where the seller holds a mortgage for part of the down payment, which can help lower the out of pocket amount a buyer needs to come to the table with.
Motivated Seller
Possibly the most important characteristic of a mom and pop owner to look out for is their motivation for selling. To drill down into the real reason a seller wants to divest from the property may take some detective work but having this piece of information can help you craft the best letter of intent (LOI) for that seller, it can also help you determine how desperate the owner is to sell quickly.
Some of the common motivations include:
Divorce
Partner acrimony
Bankruptcy
Burned-out landlord
Inherited property
Retirement
Bad health
New business opportunity
Relocation
Code violations
Purchased another property
Family infighting
Out-of-town owner
Motivations can also be thought of as opportunities to solve a problem. Each of the previously mentioned motivators is a problem that is looking for a solution. If you can help by offering a solution, the seller may be willing to negotiate a lower price which will help you in your quest to buy a property right. If a seller is looking to retire, perhaps they would be willing negotiate an amount of seller financing on the property or for the down payment. If they are burned-out, maybe they will accept a lower offer price. If they are inheriting the property that they have never managed or seen and have no interest in keeping, then these are surely motivated sellers. On the other hand, if they are looking to 1031 Exchange into a larger property, they will likely hold to their price longer which can make negotiation more difficult.
Poor Management
When we are researching the property, we ask a series of questions to gauge the skill of the management.
Is the family managing the business?
Do they have a maintenance staff?
Do they have RUBS in place?
Do they have a web presence?
What do they do for marketing the property?
How do they accept rent?
Are the floor plans marketable?
Do they have systems in place?
What software, if any, do they utilize?
Do the units look modern?
If any of these items is missing it opens an opportunity for huge value-add for a buyer. One way to look at buying a mom and pop apartment is that you are buying a failing business and turning it around. Investors make their money by solving a problem and each of those 10 questions can lead to discovering a problem.
High Vacancy Rates
A high vacancy rate is not necessarily a bad thing when looking at an apartment to purchase. If you stick to your buying criteria and only buy on the actual performance of the property rather than the proforma, you can think of a high vacancy rate as an opportunity. Often, a high vacancy rate is a result of poor management.
Some common causes for a high vacancy rate can include:
No web presence - Is there a website for the property? Do the owners use SEO so they can be found with search engines? Do they list vacancies on Craigslist or another rental site?
Exterior deferred maintenance - If the exterior of the property is in disarray many potential applicants will be turned off and move along. Many times, simple cosmetic fixes such as power washing the exterior, trimming the trees, adding mulch, pulling weeds, or painting is all it takes to spruce up the property enough to turn heads. This time in a good way.
Unrealistic expectations - Some mom and pop apartment owners have unrealistic expectations for their applicants. In many B or C class areas it is often unreasonable to set a standard for an applicant’s credit score to be at least 650 or 700. By doing so the owner has greatly reduced the potential resident pool which could lead to a high vacancy rate
Poor maintenance - Tenant turnover is one of the highest expenses in apartment operations and one of the most common reasons for a tenant to move out of an apartment is due to poor maintenance. Not fixing things in a timely manner when they break leads to a bad customer experience which can have a direct impact on that tenants mindset when it comes time to renew their lease or find a new apartment to live in.
Unprofessional leasing agents - Having unprofessional leasing agents is a sure sign that the current operator is not operating the property as a professional business and this can be a detractor for potential tenants.
Deferred Maintenance
Tackling the exterior deferred maintenance can greatly help with existing vacancy problems and can give the current residents an amount of pride in their home that they did not have before. Some things to watch out for are rusty shutters, ugly paint jobs, broken stairs, and potholes in the parking lot. While most of the exterior deferred maintenance are not big dollar items, the curb appeal they bring to a property can lead to huge value being added through decreased vacancy and increased rent
Below Market Rent
Quite a few mom and pop owners are burned out and ready to throw in the towel and the last thing they want to do is risk tenant turnover if they can keep the same tenant for many years. For this reason, they are very hesitant to increase the rent to keep up with the market average and will instead allow the rates to stay stagnant or even fall over time. This goes to our strategy of fixing the units to our standard and raise the rent to the market rate.
Conclusion
Our goal is to buy mom and pop apartments by searching for the common characteristics, identify their motivation for selling, determine the areas of the areas of the operation needing improvement and institute our systems and processes so we can fill the units at market rate and increase the satisfaction of our existing residents.
Image: John Floyd Now Renting (cc)
Image: Lauren Mitchell Vacancy (cc)
Image: A.Davey Deferred Maintenance (cc)
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