Would You Buy This Multifamily? - Tacoma, WA
Hey BP'ers!
I've spent a lot of time looking for good multifamily deals in my area, with limited success. However, there is a 3-building property that has kind of stuck in my head. If you'll all indulge me, I'd like to provide some basic info, current financials, photos, and potential seller financing loan terms that my husband and I have talked about. This is all very preliminary, I haven't been inside the property or spoken to the owner yet, but I wanted some outside opinions to tell me if I'm totally off my rocker before I spend too much time and effort on this particular property. Any feedback would be super helpful!
For starters:
-3 buildings on three separate parcels: 2 four-plexes @ 800 sq. ft/unit and 1 tri-plex @ 650 sq. ft/unit for a total of 11 units, each 2br/1ba.
- The numbers provided here have NOT been independently verified by me; these are from the listing information and have just been rough estimates I've worked off of. Triplex has monthly income of $1,950; one fourplex has monthly income of $2,600; the other has a monthly income of $2,445, for a total income of $6,995/month. Expenses vary a bit between the buildings, but taxes, WSG, and insurance appear to add up to $1,895/mo.
- Seller has has them listed separately on the MLS for the better part of 3.5 years with no apparent offers, at least nothing that has gone under contract. He's been asking $227k for the triplex and $297k for each fourplex. Obviously he is insane.
These units are located on the eastside of Tacoma; not the most upscale neighborhood in town, but definitely not a "war zone" either. I've researched market rents in the immediate neighborhood and between $800-$850 seems to be what comparable units in slightly better condition are renting for. I feel that the average rent/unit of $635 for this property is more a reflection of the condition of the units and poor/tired management. These buildings and units just look...sad. Here are some photos.
SO! Now for the good stuff.
After much discussion, my husband and I have come up with the idea of approaching the owner and offering $600,000 for all 11 units, if he can finance them. I can't find any indication that the owner is in financial distress; he's probably underwater since he bought these units with one more 4-unit building for $1.2million at the height of the bubble(!), but he can clearly handle whatever his payments are, and doesn't appear to need cash immediately. So I would imagine he would welcome the passive income without having to actually deal with these units anymore. Loan terms we've considered would be in the ballpark of: 1 year's worth of monthly income as a down payment, 6% interest, and a balloon payment in 10 years. That way he knows we're serious, has his passive income, and gets a sweet payoff in 10 years when he's ready to retire.
Regarding our investment, obviously we'd be holding these units for the long haul, and our goal would be to upgrade them one or two at a time to bring them up to market standard so we can demand market rent. Since these are smaller units, and providing all utilities are in good repair (otherwise we'll run in the other direction), I've estimated conservatively that we could rehab each unit for (probably less than) $2.5k. Without having gone inside, I can tell that some sturdy laminate flooring, a new coat of paint, and slightly upgraded appliances (with perhaps a cabinet upgrade here and there) would probably bring the units up to standard. I could only find two photos of kitchens in the unit; one looks alright, the other looks pretty sketchy. If all the kitchens are sketchy looking, that will change the conversation.
So, if we were to do seller financing for $600,000, with a down payment around $25,000, our monthly payment would be just under $3,500. With the current expenses at $1,895 and current income at $6,995, that leaves $1,600 to account for vacancies, maintenance, and profit. Not super, I know. But, a few years down the road, if we are able to spend perhaps another $25,000 to rehab all the units, bringing the monthly income to between $8,800 and 9,350, we start looking a little better...
I go back and forth about the actual value of cap rates and calculating cash on cash return- some people swear by them, others never use them. Will those calculations be valuable for a property like this?
And now that I've basically written a novel - what does everyone think? Am I dreaming thinking that this is a worthwhile buy and hold investment? Should we offer lower? Who can offer some advice about structuring seller financing deals? I've read as much as I can on the forums, and it seems fairly straightforward, though I've never dealt with seller financing before. Give us some feedback! Thanks in advance, everyone!