Due Diligence for Entire Apartment Bulding?

[TEG]

Hi,

What would be the DD required before purchasing an entire apartment building?
The building is a 15-unit strata-titled residential building. (all units are 2 Br units, bldg is 26 yrs old)

The goal is to purchase under or at market value, renovate all 15 units, rent the units out at a higher rent than before renovation, and of course increase the value of the building.

Renovation would include installation of suspended gyprock ceilings over existing vermiculite ceilings, new carpets, new kitchens, new lighting (downlights), built-in wardrobes, new bathrooms, new paint.

Replace/repair damage to roof area.

Is this sufficient:

- Building/strata/pest reports
- Solicitor to check contract
- Structural Engineer(?) to inspect building for any structural problems (cracks, etc?)
- Valuer to do a valuation for entire building

- In terms of finance, would lenders treat this purchase as residential or commercial lending?
- Would a 20% deposit be needed, or would a lender accept a smaller deposit (i.e 5%)
- The purchase would be made as a joint venture bye, say, three parties.


- Is council permission needed to undertake renovation work?



Has anyone done anything similar? What were your experiences?

Thanks for reading this and i look forward to the responses

 

[BayView]

If they're strata titled, then that means they are all individually owned, so you would have to do a separate purchase for each unit, with separate stamp duties etc.

Do all the owners want to sell?

Anything over 4 units is treated as commercial lending.

Always good to check with Council on renos, but other than the roof, all the renos you mentioned are cosmetic and shouldn't need Council approval.

 

[soyabean]

"In terms of finance, would lenders treat this purchase as residential or commercial lending?

Just bought group of 6 stratta with an additional commercal part on usage of land and it was resi loan.
Re renovation, if you are not adding anything new then council approval is not required. But remember to cater for the rental loss during renovation.

 

[Michael Yardney]

TEG
the concept works well and definately adds great value.

We've done it ourselves with 2 apartment buildings this year and we've bought 14 apartment buildings in the last year or so for clients who have done similar things to what you are suggesting, so the concept is proven.

The challenges:

1. In the past you often bought the whole block of apartments at a discount. As the market has moved on there is little if any discount given for buying the whole block - they are so scarce. The last one I bought for myslef I paid above the asking price - doesn't matter - bought a great irreplacebale property in a prime position.

2. When the blocks of aprtments come on to the market - if a private sale - they are snapped up quickly - within days - so you need to have everything in place to act quickly.

If sold at auction there is usually strong competition, pushing up the prices.

3. Banks will lend you less on the whole block than they will on an individual apartment - they see it as a concentration of risk in the one area and call it a commercial loan - usually lend 70%. If the loan is for a joint venture - you will have to be joint and severally liable - guarantee each other.

4. For maximal efficiency, it's great to renovate the whole block at once - coordinating getting all the tenants out can be difficult - esp with leases ending at different times.

5. Budgeting the renovations may be difficult for you if you are not experienced in this.

6. Getting a fixed price quote for the works will be very difficult - lots of unknowns.

7. Allow a big contingency in your budgets - then double it.

8. Council permission should not be necessary is no structural work is undertaken

9. It's a big project if you've never done this before. Maybe you should consider a smaller one to start with and learn you lessons on that.

Good luck with your project

 

[TEG]

If they're strata titled, then that means they are all individually owned, so you would have to do a separate purchase for each unit, with separate stamp duties etc.

Do all the owners want to sell?

HI L.AAussie,

Yes, the 15 units are strata-titled, but one owner owns all the units and is now selling the entire building.

 

[TEG]

TEG
the concept works well and definately adds great value.

We've done it ourselves with 2 apartment buildings this year and we've bought 14 apartment buildings in the last year or so for clients who have done similar things to what you are suggesting, so the concept is proven.

Thanks Michael for your detailed reply. It was much appreciated

Could you possibly give me a rough estimate of the costs involved for :

- Valuation of entire building by licensed valuer.
- Building report(s) - I noticed some cracks in the building. Will the building report address all structural issues OR should I get an independent structural engineer(?) to examine the building and advise if the building is in good structural shape, apart from getting a building report?

The challanges:

9. It's a big project if you've never done this before. Maybe you should consider a smaller one to start with and learn you lessons on that.

Good luck with your project

I know that it is a very ambitious project, especially since we have never attempted anything this big before. However, the parties involved in this purchase have a lot of building experience and would be able to do a lot of the reno work themselves. They also know good reliable electricians,plumbers, and other tradesmen that would do a good job and would quote a fair price for the job. This is the reason why I am optimistic this project would be profitable and that we could pull it off.

I would have liked to do something like this on a smaller scale first, to learn the lessons, but it's not often opportunities to buy whole apartment blocks come on the market, and I see good potential in this project. Of course I will do all DD and my sums beforehand.

 

[Michael Yardney]

The valuation could cost between $2,500 to $3,000

Building reports depend upon how detailed you want them and who does them. Sorry I can't even give you an estimate for this as we do our own due dilligence in house