Vacant vs. Occupied: Which is better to buy?

Question

Apologies if this has already been discussed, but just looking to get some different view points on this.

For multi-family rental investment properties, would you rather buy something that's already occupied or something that's vacant? I can see pros and cons to both sides.

Thanks!

Amit Sharan · Answer

@Joshua Heller

@Josane Cumandala is right - it depends a lot on location and state of the market, even the type of neighborhood. But in general, I like to buy small multifamily properties that are either fully or partially occupied.

First, it gives me a perspective of a confirmed current cash flow. I buy properties where I’m happy with the current cash flow. That gives me a possibility of further upside when I increase rents but assures me of a basic minimum cash flow when running my numbers for the deal.

Second, it allows me time to take decisions about the tenants and the property. I can approach each case individually as they approach lease renewal. The preferred option is to get an increase with the existing tenant. That way one can avoid vacancy and turn over expenses. If they leave, I’m only dealing with one vacancy at a time.

Dealing with one vacancy at a time also allows me to experiment. I tend to list for a little higher than the market rent. If I get a tenant at that rate, I know I can get higher rents for other units too when they come up for renewal.

Matt K. · Answer

If it's priced at market rents I either want it full of people paying that OR vacant to find people that will pay that. If the deal was priced at actual rents, then no point in kicking people out unless they were not holding up their end of the bargain etc...

Joshua Heller · Answer

That makes sense @Josane Cumandala ! Thanks for your input. I'm definitely not in the market for something in our neck of the woods, thinking something a bit smaller and cheaper to start, but I know vacancy is a huge concern. Especially in smaller cities with less renters. But I think the majority of the cases to be made are for buying something vacant.

Josane Cumandala · Answer

Hi Joshua!

It really depends on the location and the deal itself. If the property is a small multi-family (4 units or less) in Brooklyn where we are or anywhere in NYC you want that baby vacant. I just appraised a four-family with a rent-controlled tenant in place and it can get ugly. Even with free-market tenants the stipulation out here is pretty much always that the property will be delivered vacant. The reason I say it's about location is because in some states (like ours) it's very difficult and expensive to evict non-performing tenants.

If it's a larger building you won't get it vacant unless you are building new. With commercial properties it all comes down to how the building is performing and what value you think you can add.

So I guess if it's a small building I would rather acquire it vacant and lease it up myself. For larger buildings it doesn't matter as much but if occupancy is low I need to know the reason and be sure it's something I can rectify. Hope that makes sense. :)

Vacant vs. Occupied: Which is better to buy?

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