First Multi-Unit

24 Replies

Hi. New to the BP site and appreciate all the good advice and experiences shared here. I am looking purchasing my first multi-unit and would like to know if the numbers make any sense to an experienced investor. This is a 3 unit residential property, 1 one bed., 1 two bed. and 1 three bed. On-site parking and laundry hook ups in each unit. Property is located in central Maine and is in pretty good shape with only some minor cosmetic repairs needed. Here they are:

Purchase price: $84,000

Total of current rents: $1,775. Gross annual $21,300

Expenses as reported: $8,360. annual

Debt service: $5,217. annual

5% vacancy allowance: $1,065.

Cash after Debt: $6,163. annual

Hope I covered everything to give you enough information. If not, please let me know what I am missing. Thank you so much for looking at this.

Mike

Hi Mike,

The expenses seem low since it must be oil heat. Verify with the oil, water, sewer, garbage collection, and electric companies. Get an estimate for plowing. Verify the income by asking the tenants what they pay and what's included. If the building is on the route of the new natural gas line, you might consider changing over - it has saved me thousands in Auburn! Don't forget to allow some for maintenance, since I'm guessing it's a pretty old building if it's in Waterville. Overall, it's a reasonable price, but you probably won't make quite as much as you're estimating.

Thanks for the response Amy. Still have to verify all expenses but these are from the seller.

Oil - $3,900 annual which did seem a little low to me as well.

Electricity is paid by tenants.

Water and Sewer $1,000 annual

Snow removal $280. This is shared with neighbor on shared driveway.

The one bedroom is $400/mo. (pays month to month)

The two bedroom is $700/mo (just remodeled and leased)

The three bedroom is $675/mo but the seller had is listed at $850 as a projected rental amount. They pay month to month but may be moving out shortly.

Don't believe NG will be available for a while but would consider it when it became available.

Thanks for your input. Appreciate it.

Mike

Mike

I'm in same town as you. Can you tell me which prop it is? I have a spreadsheet I can share with you as well that you mght find interesting. For oil, I'm guessing a 3 unit like that will use about 1,500 gallons. (I have 2 four units on Pleasant St that use 1,800 and 2,000 respectively). I have 2 seven units that use 2,500 each BUT that is after going through every efficiency Maine program there is! My email is [email protected] by the way, Mike.

Mike, also, bounce your projections up agains the "50% rule" (expenses will equal 50% of gross income, NOT INCLUDING debt service). I promise you will be close. If you're inexperienced, figure 55% and add a chunk for "up front" repairs you "discover".

I find it aggravating when sellers base their price on a rent increase that they're too lazy or afraid to do themselves. If raising the rent is such a good idea, why haven't they done it? Why do they expect you to pay them as if they had done it? I think $850 is too high for that market, maybe $750 if it's fixed up. Ken would know.

Also, you are required by law to have a landlord electric meter for the common area lights, boiler. etc. If there isn't one, you either have to pay the electric bill or pay to have one installed. I was about to have a landlord meter installed in Lewiston and it would have cost me about $1000, but code enforcement indicated that he could go through the entire building and make me upgrade everything. I decided it was easier to pay the electric bill for the unit that the common area electric was on and raise his rent a little bit to cover the electricity that he thought he'd be paying for anyway. You might want to talk to code enforcement in Waterville (don't give the address) to see what their philosophy is.

Some landlords do get away with having common area items on tenants' meters, but you are not that guy. You will be an ethical landlord (said in the voice of your mother or minister, haha!)

Mike, also, bounce your projections up agains the "50% rule" (expenses will equal 50% of gross income, NOT INCLUDING debt service). I promise you will be close. If you're inexperienced, figure 55% and add a chunk for "up front" repairs you "discover".

Mike,

I concur with Miss Amy. $850 is possible, but not likely. It would need to be all utilities included OR a higher end type rental in good neighborhood with laundry hookups, dishwasher, etc. I have two HUGE nicely renovated 3 BR's at 17 Boutelle Ave in Waterville that I get 750 and 795 respectively for. I think using 725 as a conservative number would work. On the other hand, the 1BR is super low. Most of my 1BR are 495 (building or apartment has challenges or no amenities) to $670 (all inclusive, nice neighborhood, private laundry room, double parlor, fireplace, etc.). I think you'd be safe estimating 475-495 there too.

Amy, a little-known Maine law actually does allow you to have tenant pay his own elec. bill EVEN if common area lights, etc. are hooked in, as long as there is stated in the lease a reduction in rent because of it. I do find it easier though to just pay it but also put a limit in the tenant's lease.

I guess the bottom line is that as long as you have an honest conversation with the tenant about the electricity, and get it in writing, that you're ok. As for the 1 bedroom, is it actually an efficiency? I see efficiencies marketed as 1 bedroom all the time because the MLS doesn't have that as an option.

Your Realtor should be helping you out with this as well.

assumptions: 8% vacancy, 8% repairs, 8% self paid management fee (always include mgmt. as expense even if you're doing it yourself. This is what you get paid to "do the work" while your cash flow or ROI is what you make on your money. VERY important I think, to separate them. It also allows you to see if you can AFFORD to have someone manage it if you get tired of it. 8% is MUCH better rate I think to use because it allows a little padding for an eviction here or there, etc. I used 8% for repairs because that's the "generallly accepted" but in my own analysis I use 10-15% depending on building. On a couple of larger units (8 plex in Winslow) I used 12% for vacancy, 15% for repairs because the building had some challenges and I wanted to be DAMNED sure it worked out "worst case".

try this one..the other didn't seem to take....

@Kenneth LaVoie I was under the impression that the lower unit properties (anything under 5) don't necessarily follow the 50% rule. Can you give me a little more insight on this.

I do know that with commercial MFU properties, OE should never be lower than 40%, and buying closer to 50% gives you some leeway for increasing your NOI by decreasing your OE.

Amy, Thanks for the insight on the electric meters. I have looked at several properties and none of them had a landlord meter. Sooo, either the landlord is paying the electric for the unit consuming common areas electricity or they are giving the unit a reduction in rent or they are unscrupulous landlords. I will have to find out how this is handled at this property. No, I am not that guy. That's one reason I have not jumped in earlier. I need to own a nice property in good shape with tenants that care about where they live. I know, living in a dream world. Mike

Hi Ken, Nice to have someone who knows the local market. The property is at 96 Summer Street, Waterville. Link: http://www.zillow.com/homedetails/96-Summer-St-Waterville-ME-04901/84971756_zpid/

So, what you think might be more like 1500 gallons in oil consumption will certainly change the numbers around. Anywho, take a look and let me know what you think. Landlord pays for heat and hot water, W & S utilities, taxes obviously. There are W&D hookups in all units and the 3 bedroom unit has a dishwasher. The tenant in the 3 bedroom unit may be moving out in June or so so that would allow me to do some upgrading so that may increase the rental value.


Amy: the 1 bedroom is actually in the basement and has a separate kitchen area, small living room and separate bedroom. Unfortunately the furnace and oil tank are in the front of this unit. I have checked with the Codes office and they confirmed it was a valid 3 unit.

Thanks all.

try this one..the other didn't seem to take....

Mike. Nice to meet you!!

This is on the "good end" of Summer St. (As you may already know, anything this was of the store or Notre Dame church is ok) though it is still Summer St.

Those pictures are beautiful. I'm jealous. My buildings are a bit older and very few have the newer cabinets that these pictures show. For Waterville, the quality I see is "top 20%" so you should have NO trouble keeping these rented unless there's something the pictures aren't showing.

If those first pics are the 3 BR I'd actually think about leaning toward the $800 ish range. Maybe install a dishwasher if there's room...

@Michael Moikeha I was not aware of the 1-4's not adhering to the 50% rule. I had heard that SFH's tended to be more in the 40-45% range though. My plan was to aggrsively fix up my properties (acquired 49 units in 4 years) so my repairs expense has been in the 30-40% range alone!!! (because we're renovating as we go) but I expect to be in the 45% range once done.

Mike, one pic of the furnace shows what appears to be a regular boiler with coil hot water. That might be your first money spent. Change over to "cold start" with boiler mate, OR install 3 hybrid heat pump water heaters so tenants can pay own water ... Not 100% sure what I saw in the pic, but I saw the furnace and no tank so assumed coil.

Ken, thank you so much for looking at this. I am feeling much more comfortable after your comments. Yes, that is a boiler with coil for hot water so that accounts for much of the oil. Once purchased I will have to look at the cost of changing to a cold start with boilermate or another alternative. Not a lot of room though as this is located within the basement apartment.

Yes, those first pics are the 3 bedroom and it actually already has a dishwasher built-in. I am looking forward to owning this and updating the 3 bedroom as soon as it's empty.

Not sure about your spreadsheet. I am not familiar with all the financial terms and calculations. I am only seeing sheet 3 of 7. Am I missing the rest of it?

Thanks

Mike

Mike, if you send me your email address, I'll send you the spreadsheet. The little things up left are COC (cash on cash return), then I have actual cash flow, an amount for management then total return on investment which is simply cash flow PLUS debt reduction, PLUS tax benefit from depreciation PLUS projected appreciation (I plugged in 2% for annual increase in income, expensess and appreciation). Below, what you can't see, is your return each year for 10 years. Interesting stuff. I like this spreadsheet because it gives me just enough info. (I know, it looks like alot, but once you look at it you'll see it's pretty simple)

Ken, thanks. my email is mikensue2006@gmail.com

I'll take a look and let you know if I have any questions which I am sure I will. How long have you been in real estate? I am buying this in my own name. Are there advantages to creating an LLC and holding the property under that and if so, what are they? My bank said I would have to go with a commercial loan if held under an LLC.

Mike

Mike

I just sent the sheet out. My wife Deb and I started with a SFH in 2009 then got a little carried away and 4 years later had 49. (see www.SangelProperties.com ) - We've made many mistakes and learned from them. (I say we, I mean ME! 9 out of 10 mistakes my wife tried to talk me out of before I made them!!) So, not being a lawyer I can't advise on the LLC. But .. here's what I know.

1. LLC's prevent you from getting FNMAE type financing where you can get rate locked in for full term of loan, like 20 or 30 years. ALL my properties are held by LLC and as result, the BEST loan I have is a 20 year loan, locked in 10 years at 6%. (then resets annually after that unless I go in and renew it for something different). Most of my 1-4s are from Kennebec Savings Bank. VERY simple and wonderful to deal with by the way... 20 year, 25% down, 4.375% currently, rates reset every 3 years. Then I have several in between.

2. Advantage is that there is some liability protection. If someone sues your "LLC" they can only tke what's in the LLC .. but ... caveat ... if you personally did whatever action they're suing over, YOU are also on the hook, rendering the LLC worthless. (example, you plow your apartment's driveway and cause an incident). I own a lawn care company (LaVoie's Landscape Mgmt.) and actually HIRE someone else to plow all my apartments.

If I didn't have much to lose, I'd skip the LLC and get the great financing. Then maybe quit claim deed the properties into an LLC later as you acquire more. SOMETIMES the banks will let this slide, other times they won't ...

Bangor savings is great to deal with too, by the way.

By the way Mike, what is your plan? What do you envision for yourself?

Mike, are you a member of the REIC in our area? It meets the ... last Tuesday of every month I think. At the Weathervane (yeah, I know!) But it's very informative and there is also an email list where we bounce around questions and ideas. I can add you if you're not already on it??

Ken, thanks for the info. I'm just getting into this so I need to do a little more research on LLC's and their advantages / disadvantages. As far as my plan, i'm not exactly sure yet. I will see how this property treats me and go from there. I was initially looking for cash flow and long term investment and hoping to get some tax advantages out of it. It may work into owning more properties and supplimenting retirement income. Again, need to do more research down this avenue as well. It only takes time and most of mine is spent working. No i am not a member of REIC. I will let know if this interests me as I move forward with this investment. This is also a great site and the people are very helpful.

Mike

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