A decade ago I read a few books on multifamily real estate and set off determined to buy my first apartment building. Saying I was green is a real understatement. I made a lot of mistakes with that first purchase, but I did do a few things right.
I purchased in a great submarket in close proximity to a major university and a large community college. The nearly 50,000 students in the area really drove apartment demand. The properties had some deferred maintenance which allowed me to pick it up at a really good price.
The seller purchased them for an even better price. He put on new roofs and new siding and was flipping it for a quick profit. They were two 4-plexes separated by a common circular drive.
I remember it like it was yesterday.
The circular driveway between the two multifamily quads was the oddest thing. It was a DIRT driveway. This homage to the horse and buggy era stood out like a sore thumb in the middle of a highly populated, urban metropolitan area.
To make matters worse, it was riddled with potholes. In fact, as soon as you turned off the street into the driveway, you came face-to-face with the Grand Canyon of potholes. What a first impression. I could only imagine what prospective renters thought when driving the property. Let’s face it, you shouldn’t have to buy a dune buggy just to live at a property.
Something had to be done. If I didn’t fix this driveway, I’d have to offer a free monthly wheel alignment as a concession to the renters.
This was going to be a large capital improvement and I thought it would be prudent to get multiple bids. After calling several asphalt companies I asked for four bids. The bids came in at $4,900, $5,100, $5,300, and $16,000. Yikes! If I had only requested the one bid, I might have paid $16,000 for a $5,000 driveway. I certainly have no problem with a company making a reasonable profit off of me. However, I had no interest in putting this person’s kid through college.
Clearly I threw out the high bid, but I still had to differentiate between the other three. At this point it was very helpful to get references from previous clients, see examples of their work, and check Better Business Bureau records. I ultimately chose the $5,100 bid as they had been in business for years and had no complaints with the Better Business Bureau. They had a long list of happy customers and their work was impeccable.
In the end, I ended up with a beautiful driveway that still looks great today. In fact, the mother of all potholes – that Grand Canyon sized chasm that stood between me and a profitable multifamily investment is just a distant memory that I am memorializing today.
I was reminded of this story recently when I decided to put on a new roof on one of my multifamily quads. While I had amassed a stockpile of residential 4-plex apartment buildings in my early years as a real estate investor, I have been slowly selling them off and investing fractionally in the safer, more profitable, larger commercial multifamily space.
I wanted to put this property on the market, but it needs a new roof. I no longer live in the area, so I asked my friend in the business to get me some bids. After a week, he sent me back a bid for $6,800. This came from a roofing company that I am familiar with and have used from time to time for repairs.
However, this was going to be a big expense and I had no idea what the going rate was for a tar and gravel flat roof in this market. Consequently, I hit the internet and found several roofers and started making calls. I arranged for three other companies to come out, inspect the roof, and give me bids for the new roof. The bids came in at: $5,055, $8,008, and $16,314.
Apparently, that crazy high gouger asphalt company has branched out and expanded its business to roofs. I refused to put their kid through college a decade ago. I’m certainly not going to pay for the kid’s wedding now.
There is an old Russian proverb that says, “Trust but verify.” This is very good advice. With multifamily real estate whether residential or commercial, the best way to do this is to get multiple bids on big ticket items. After all, if you have to backfill the Grand Canyon, you might as well pay as little as possible for quality work.
To Your Wealth!
Dennis Bethel, M.D.
P.S. Capital expenses are just a normal part of multifamily real estate investing. Wise property and asset managers get multiple bids to ensure that quality work gets done for the least amount possible therefore maximizing their return on investment.