Houston 14 Unit Multi-Family Close 2 Weeks Ago
Hi all,
Wanted to recap my first multi-family purchase experience. For my previous success story check out my other post on 5 SFR we currently own. My business partner and I have been looking at multifamily units since April of this year trying to find a deal where the numbers worked.
We ran into some common issues on properties we had to pass on
- Rents were pro-forma based on "market"
- Expenses were under stated, did not include management, and did not reflect accurate costs
- Property condition was overstated
Our general requirements were to find a property in a good rental area of Houston with a solid rental base. Property had to pass inspection AND cap rate needed to be at 7% or above. This is uncommon for properties of this size and to say our criteria was strict is an overstatement.
The property is on Enid street in Houston which is considered part of the Greater Heights. It was listed as a 12 efficiency unit on the MLS and we are familiar with the area. We had actually looked at a property down the street, offered, and pulled out because there were foundation issues and the seller wanted to sell for land about 170k more than the land was worth. We were already familiar with the area and knew our comps.
The property was posted on August 5th on the MLS and we offered on August 6th. We had a pre-approval letter and an offer in within 24 hours. This is all due to the quick actions of ourselves and @Sharon Tzib.
It is very important you select the right team around you. They need to know how to do their jobs and what role YOU want them to play. Let me explain to you our team:
- Investors- Analyze the property, pull the deal on offers, determine cap rates, etc.
- Agent- Make the offer in a timely manner, know due diligence requirements, get sellers/bankers all the documentation quickly and accurately. You need to trust this person to follow through on getting all your information.
- Bankers- Provide financing, give pre-approval letters
- Inspector- Pull apart the property and find every little issue. This is an important job and in our limited relationship we have already saved over 40k with our inspector.
We have a saying internally, "It's our job (myself and business partner) to find the no." We pull apart every deal and want to get out of it. Once we say "yes" we want our team to follow up on that yes quickly. Again out of the four agents we have worked with on other projects, Sharon did things faster and more professionally then other realtors. In fact it was a reason our deal, at a lower buy price, was accepted. The property was listed at 627K now let me go in to why yes on this property:
- The units listed on HAR was 12 yet when we inquired with the seller the number of units was actually 14. There was an error made in the posting.
- The property needed some work, but it appeared to be all exterior as the seller told us he had repaired the foundation recently. Obviously we would need to inspect.
- And for the all caps homerun. THE PROPERTY WAS AT A 7-7.5% CAP WITH TWO UNITS BEING OCCUPIED BY MANAGERS AT 0 RENT. The owner was 71 and just wanted to steady income with 0 hassle. This is why the property was listed at 12 units.
All of this is why we offered on the property within 24 hours at 70k below asking expecting to negotiate up. Offering for us means the property is worth looking in to. So far we have offered on 3 multi-families and only closed on 1. We have reviewed probably about 25 in detail and viewed every multi-listing in our farm area. The seller accepted the offer by the weekend because of our package again full credit to Sharon here.
Our first challenge was getting financing. We had developed a relationship with a banker since April, found on bigger pockets, and expected a smooth transaction as we had spoken about our plans in detail. Long story short the bank pulled out despite the HCAD (houston city tax body) website valuing the land at just 160k less than the buy price on the property. The note carried by the bank would be fully covered just by the land (the private inspector gave a higher value). I want to stress something. Be absolutely certain the bank you are dealing with deals regularly in the property class you want to deal in. Long story short the bank we worked with focuses in SFR and does not have an appetite for multifamily unless you are already established in the space (then why do you need them?). Again Sharon helped us and within a couple of days days we had 3-4 banks offer to do the deal for us.
The inspection came out MUCH better than expected. The units have natural hardwood as the property was built in 1925 (consistent with the entire Heights area). With a property this old you expect a few bumps. The roof was 10 years old needing repair in the next 5-10 years (completely fine) and a few bathrooms had warped wood. Some of the appliances were in rough shape as well. 2 of the tenants did not keep clean interiors. We will address these units with time. Exterior needs some paint and new siding. The foundation was to quote our inspector "Excellent for this area, and the repair work done was top notch." We asked for some help from the seller and he took off an additional 1500. This put the property within 23k of an 8 cap with TWO UNITS LIVING RENT FREE.
Sharon then became a bulldog for us and got the seller to include EVERY utility bill for the last two years, provide estoppels for all rent (was month to month again common in the area), and verify every single detail in the financials. I can't stress how great this was for us. We verified the financials AND the seller had included all costs to the dollar. This is the first time I have reviewed financials that are 100% accurate. At this point we knew we had hit a home run.
The units that are rented were under market in some cases by as much as $100 a unit. Vacancies were only being listed with a sign on the exterior and filling up within a week or two. The seller had almost no vacancy and was not even advertising online for vacancies.
Without going into more boring details we closed on the property two weeks ago. We are currently in the process of renting one of the units and gave one of the managers a 30 day notice that we no longer need his services. We have turned the fact that the units are efficiencies into a victory for us. There is no competing property and therefore being the floor in the market we can actually list properties above their current market value. The demand is high. In one week we have roughly 15 leads on the unit.
Our plan is to slowly update the property and build value. Our estimate is a 2-3 year timeframe to build about 500k in value (the cap rate for this area is 6% so we won at close and the rents are below market with two live in managers) which seems insane, but that is how much upside we see.
Lessons:
- Don't budge on your criteria it will come
- Move fast when you see a good deal
- Have a great team that finds the yes in your deals
- As you farm an area you develop a feel for what is out there. If something seems unordinary ask questions quickly. You get a gut feeling on the gems that are out there with enough experience.
I will answer your questions, but cutting it off here as this post is already quite long!