Leery, but should I be? First time multifamily opportunity.

5 Replies

I am looking at a potential investment property which would be #2 for me, but my first multifamily. It has a good cap rate. The property needs some work and certainly isn't up to my standard of living, however there have been VA tenants living in the property for years who seem to be ok with it as-is, or so I'm told. What questions should I be asking? Seller is offering financing but at 13%. How would you finance? Owner bought it earlier this year for almost 60% less than what it's listed for. Since VA tenants rents are subsidized by the VA, are there property standards it would need to meet like when a VA borrower buys? Does anyone have any experience with VA tenants; good/bad or indifferent? Any constructive comments/advice is welcome. TIA.

I would never assume that you would leave a property that needs work as is even if the tenant is okay with it.  I would not take that owner financing if possible, I don't know about your market but that interest rate is double a good cap rate in CA and more than most hard money lenders would charge.  I would also be very suspicious of someone selling a property that they bought less than 6 months ago.

Thanks Aaron, I agree. I'm not considering the owner financing at all. Tenants are all in place, but ok with the property as-is. Not sure why or how the owners purchased for so cheap, or why they're selling. Certainly a question I should ask. 

Dave,

I would say 100% no on the rate. I would think that if the buyer is flipping the property to you for 60% more than you are paying retail. Personally I would try to find a deal like what he bought. Not what he is selling it for. Be patient. My dad always told me that “some of the best deals I have ever had were the ones I didn’t buy”. I would keep looking.

Originally posted by @Dave Kansagor :
I am looking at a potential investment property which would be #2 for me, but my first multifamily. It has a good cap rate. The property needs some work and certainly isn't up to my standard of living, however there have been VA tenants living in the property for years who seem to be ok with it as-is, or so I'm told.

What questions should I be asking? Seller is offering financing but at 13%. How would you finance? Owner bought it earlier this year for almost 60% less than what it's listed for. Since VA tenants rents are subsidized by the VA, are there property standards it would need to meet like when a VA borrower buys? Does anyone have any experience with VA tenants; good/bad or indifferent? Any constructive comments/advice is welcome. TIA.

If you want this house (that's the first question) and it has some cosmetic deficiencies and it's in a great neighborhood, I would offer him a lower sales price (like 30% lower if that's more in line with what the property will appraise for), take his financing if:

  • there is no prepayment penalty and it's 
  • 100% financing 
  • the cash flow is acceptable

and then refinance it with a lower rate product with no seasoning on title or wait out the conventional seasoning period and refinance it with a Fannie Mae loan.  Money is cheap right now, but good deals are getting more scarce as inventory gets tighter.

The idea is to control the property with someone else's money (100% financing) and get cash flow.  Just because the seller is making a substantial profit, doesn't mean it's wrong.  In truth, that's his business.  Maybe he got a great deal from a friend's Dad who he cared for while he was sick or he cut some old lady's lawn for free when he was little and she paid him back by giving him a break on the house.  Maybe he beat somebody down on the price because of the cosmetic challenges and they were stupid enough to sell or maybe they were desperate and he took advantage of them.  Who knows; there are lots of reasons why people are able to pick up properties cheap. 

If the numbers don't work, of course you walk away.

Vets make great tenants.

One girl's opinion

Stephanie

@Dave Kansagor Like you, having owned a SFH Rental already, I am also looking at MFH now. The way I look at these deals are, first and foremost, what are current rents compared to the market? Can I raise rents immediately or should I rehab to a certain degree to justify the rent increase. Since the owner bought it in the same year, he likely has the rents maxed out. How many doors on the property? If it is 5 or more, then it is a true MFH so you should ask for the rent roll as well as the T12 (or what he does have of it) to gauge the expenses. Since you are inheriting tenants you will want to know if they are consistently late or behind on rent. Good Luck!