About to make an offer on my first Multifamily house hack

10 Replies

Hi Everyone, I'm very new to all of this and need a little bit of advice.

I am currently working with a real estate agent that I know personally, I will be her first multi family purchase shes new to real estate but has a mentor at her company that has been doing it for decades and provides a lot of assistance though she isn't available very often so we are sometimes on our own and learning as we go.

I have been renting the same place for the past 10 years and the owner is selling so now I have to find another place to live, instead of renting for over 1k/month I decided to purchase a multi family, at first I was looking for duplexes but then came across a 3 unit the asking price is 180k, it is two 3 bedrooms and one 2 bedroom, it has a 2 car attached garage, washer & dryer hookups in each unit, newer heating systems tenants pay all their own utilities except sewer and water which is roughly 2k per year the house also has 3 seperate large storage areas above the garage, and it also has a decent sized back yard. 2 tenants have been there for over a decade in the 3 bedroom units and 1 tenant has been in the 2 bedroom for about 6 months. I would live in the 2 bedroom with just my daughter and I.

All 3 units are on a month to month basis and renting for only...... $160/week so the 2 bedroom is paying the same amount as the 3 bedrooms,the owner has included the garages and storage for free with all the tenants rents. looking in the area we are finding no 3 bedrooms available and 1 and 2 bedrooms renting for $750-1200/month with no washer N dryer hook ups and no storage. My agent is confident we can get the property for around 165k due to local comps and how long its been on the market (half a year). My mortgage will be roughly $1500/mo and at the current well below market rents I will not cover the mortgage, so they must be raised I am confident I could ask $1k/mo per unit or add an additional $70/week to the current rents, But i also want to try to find a way to remove the storage and garage bays from the tenants so I can rent them out and make additional income. These people have had it made for so long I hope they are expecting changes. How would you guys go about this? gradually increasing rents? or just rip off the band aid and do it all right away?

any advice on this situation is greatly appreciated!

@Jeremy G.

First question should be does it cash flow? If you are going to live in one unit, it will have to cash flow with the other rents.

Bigger Pockets has a video showing how to do rental property analysis very quickly:

https://www.youtube.com/watch?v=T_7vhsSBi7c

Hello @Jeremy G.

I would be honest with your current tenants. With a new landlord and increasing rents, they may move out and that’s ok. You will find great tenants that can afford the new rents plus the storage fees.

Does each unit have individual laundry units? There could potential for more income if they don’t.

Also could interview tenants and see if there is a common pain point that you can solve and charge for.

If you need help feel free to message me!

Hey @Jeremy G. Congrats on finding the deal. Are you using FHA financing? Either way, if you plan on living in one unit, you should require one unit to be vacant upon closing so you can make any renovations and/or move in.

You have a couple options with the residents. Given the spring timing, consider just not renewing the leases and starting fresh. However, if you like the residents and want them to stay you can let them know the rents are below market and work with them to get it up. I would do one unit at a time so you're not in a situation where there is no income.

Thanks for the replies!

I am going to owner occupy the 2 bedroom unit and that will be in the purchase agreement for it to be vacant upon closing, I am using FHA financing, The current seller loves the 2 tenants renting the 3 bedrooms and was very relieved when he heard I wanted the 2 bedroom vacant, I'm hoping the current long term tenants have done there research and expect the rents to be raised because they have been there for 10 years and 20 years, Each unit just has separate washer N dryer hook ups, one of the 3 bedrooms has a garage bay and storage included in the rent (640-690/month) and the other 3 bedroom has a large storage unit included in the rent (640-690/mo) I would like to get at least 1k/mo per unit which would make the place cashflow, mortgage will be 1400-1500/mo which includes everything insurance, pmi, taxes etc. I feel like a slow monthly increase would be a good way to raise the rent but I dont know if thats a normal thing in this business like for example unit A 3 bedroom current rent 160/week for the first month of my owner ship it will stay the same, 2nd and 3rd month rent will increase to 170/week, 4th and 5th month rent will increase to 180/week and so on and so forth until I get to the fair market rent. On my way to work so I'll end it there for now

Thanks again for the replies!

And yes It will cash flow once I raise the rents, but at the current rent it would be negative cash flow.

@Jeremy G. I just purchased my first duplex, and am following the advice of @John Casmon in renovating one of the units, moving in, then finishing it off before I put it back on the market at significantly higher rents in the next 6 months. 

My thoughts/advice on your situation are:

  • A triplex at $180K, and after a discount at $165K sounds great.

An option to consider:

  1. Being that it doesn't cash flow at current rents, have you thought of 'making' the deal work, meaning you reduce your offering price and then you could possibly cash flow.

I also think what you're proposing is reasonable, but the rent increases need to be incremental and sensible. Going from $690 to $1000 may cause them to leave, which could impact you via vacancy expenses if those units aren't capable of demanding $1000. I'd suggest (take this with a grain of salt as I'm also a newbie):

  • Get in, raise rents to $800 immediately, then $900 in 1 year, and $1000 in 2 years. Stick to this. 
  • Live somewhat subsidized until it cash flows

Also, if this doesn't work - no sweat, there's always other deals. I've started to accept that, and I think most experienced investors would agree that it's wise to stick to your criteria, and rarely waver. If cash flow is an issue here, be patient and find one that makes you comfortable and does cash flow. Sure, it will take time, but could be worth the wait!

Just my two cents, hope it helps!

Theses are long term tenants. Let them know you're going to be increasing rents and give them time to either agree to the new market level rents or find a new home. 

This is a value add play, which incorporates a bit of a flip strategy, but still allows you to have income while you implement your plan. If you are confident you can increase rents $300+ per unit/month with little upgrades, you may have a strong deal on your hands. 

thanks everyone for the replies.

we think we could raise the rent by $70/week or 400/mo incrementally at that point the property will have positive cash flow, I did another walk through today and handed in an offer, asking price is 180, my offer was 160k with 10k being refunded at closing to cover all closing costs, it is only going to cost me $1,000 out of pocket to close on this property with an FHA loan and a down payment grant of 3.5%. Both the seller and his agent know that the rents are ridiculously low and im positive all the tenants are expecting rent increases, I think increasing by $10/week every couple of months will ease the pain for them, I dont mind covering some of the mortgage for the first 6 months or so, even if the tenants decide they want to move, they will start looking at current rental rates in the area and they will be sadly disappointed and will most likely end up staying anyway especially if i entice them with updates on their units like newer flooring and appliances because some of the stuff is out dated. I also received the sellers schedule C today and he makes 24k year from the 3 units 14k in expenses and 10k profit, thats with the rents being so low, I could make the same exact income while living in the 2 bedroom and raising the rents to $1k/mo on the 3 bedrooms.

Does anyone have an opinion on the storage and garages? DO i let the tenants keeps them with the rental increase or should I remove the storage from the tenants, charge extra for storage or rent storage to other outside folks? The storage areas and garage bays are large and absolutely worth considering making additional income on them, again im new and i have no clue how to go about pricing storage and garages.

Originally posted by @Jeremy G. :

thanks everyone for the replies.

we think we could raise the rent by $70/week or 400/mo incrementally at that point the property will have positive cash flow, I did another walk through today and handed in an offer, asking price is 180, my offer was 160k with 10k being refunded at closing to cover all closing costs, it is only going to cost me $1,000 out of pocket to close on this property with an FHA loan and a down payment grant of 3.5%. Both the seller and his agent know that the rents are ridiculously low and im positive all the tenants are expecting rent increases, I think increasing by $10/week every couple of months will ease the pain for them, I dont mind covering some of the mortgage for the first 6 months or so, even if the tenants decide they want to move, they will start looking at current rental rates in the area and they will be sadly disappointed and will most likely end up staying anyway especially if i entice them with updates on their units like newer flooring and appliances because some of the stuff is out dated. I also received the sellers schedule C today and he makes 24k year from the 3 units 14k in expenses and 10k profit, thats with the rents being so low, I could make the same exact income while living in the 2 bedroom and raising the rents to $1k/mo on the 3 bedrooms.

Does anyone have an opinion on the storage and garages? DO i let the tenants keeps them with the rental increase or should I remove the storage from the tenants, charge extra for storage or rent storage to other outside folks? The storage areas and garage bays are large and absolutely worth considering making additional income on them, again im new and i have no clue how to go about pricing storage and garages.

Congrats on making the offer! For market rents that you'll be raising up to, do they include storage/garage? If yes, let them keep it. If no, charge them for it or rent it out to others. If you do start charging I would give the tenants first choice to keep it for a discount. So if I was going to rent them for $50/month to Joe Schmo, I'd give the tenants priority to keep the storage at $40/month... Encourages them to keep it and start paying for it, now you won't have to find someone to rent the space.

Thanks! 

the market rents in the area do not include storage, garages or washer n dryer hook ups, these are unique money making units, the average storage unit at a self storage place is around $125/mo I figure I could charge 100/mo per garage bay and 75/mo for the storage units, 3 very large storage units and 2 garage bays, I would keep a garage bay for myself. offering a discount to the current tenants seems like a smart idea.

I was thinking later down the line, either refinancing for 2nd property, or trying to get the permits to turn the finished attic into a 4th apartment and turning the 2.5 story garage into a 5th apartment(townhouse style), then I'd have 5 doors on 1 property, seems appealing though I have not even bother researching this yet because I'm trying to take it one step at a time.

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