Hmm, what do u think?

Question

I have found a multifamily unit that potentially meets the 2% rule at first glance (still waiting on financials).  Is there such a thing as a unit that is to rural for multifamily housing? I am little worried about getting renters. The landlord has currently been renting to more than 1 tenant for the long term (like 14 years), but that being said he doesn't run it like a business and sounds very relaxed to a fault. Which means I could loose all tenants as soon as I buy it and try to be more diligent about running it properly (if no contracts are in place, not sure of this but judging from information that I was told).

Details that I know:

Asking price: 215k

10 unit

100% occupied, tenants are paying like about 440 ea/mo

Landlord pays for all of the untilities (not sure on these numbers yet)

It is an all brick building, and listing agent said she got a quote for 30k to have each unit switched over to have their own electric meter. This building was originally a nursing home and was converted over to a multifamily.

Chris Wood · Answer

@Peter MacKercher I need to take you up on your offer to talk. How is the best way to get a hold of your phone number? I know mine is in the profile, but I am not sure if you can see that or not.

Peter MacKercher · Answer

@ chris wood

Utilities in your name are probably costing you 1000 or more a month. Your call on razing rent v's separate utilities. If i could afford it i would seperate everting will help you so much on appraised value when your done you can sell for a nice profit or take cash out to buy another one. I have purchased a lot of multi families with shared utilities first thing i do is seperate them all even if i keep the rents the same i just made a lot more cashflow a month.   Tenants are happy because they get to control their own temps.

I buy a lot of distress property that is under valued. I like to get right in there and fix everything. I always try to put tenants on my lease ASAP even if that means just writing a new lease with the same terms.

Im guessing this is a  C property in a C neighborhood based on the rents. The Operating Expenses look low. I'm guessing that repairs if they were done are not on there.

Let me know if you need someone to talk to.

Jason Mak · Answer

agree with @Jesse T.   - you need to assume market vacancies and even a period of abnormal vacancy after your purchase to convert this to a regularly operated multifamily so make sure you have enough reserves to get you through this period.  Some tenants may moveout when they stop receiving the special treatment from the old landlord they are used to receiving but as @Peter MacKercher said, if your plan is to come in and make some nice repairs, then this would be an eventful situation for everyone.

One thing with an old landlord running the business in a lax manner is that there could be a lot of ambiguity and false assumptions in the lease terms so with that I would make sure to get a estoppel certificate.  Shouldn't be too hard with 10 units.

good luck

Chris Wood · Answer

General financial info that has to be verified:

• Year 2013
• Scheduled Gross Income $66,840
• Operating Expenses $26,706
• Net Operating Income $40,764
• Pre-Tax Cash Flow $40,764

2013

$66,840

$26,706

$40,764

Chris Wood · Answer

@Peter MacKercher Would you change it over so each unit has their own electric meter or would you leave well enough alone and maybe raise rents a little (after some other repairs that haven't been done, are finished)?   I am kinda thinking about leaving the electric alone for a couple years and then maybe build up some equity or cash and then try to do some of the bigger changes (i.e. electric meters).  Any thoughts?

Peter MacKercher · Answer

From my experience i have found that tenants like their landlord to be run more like a business then a friend. He probably lax on receiving rent and repairs as well.

I would start with a letter explaining to them that you are the new owner and things are going to be more business like. In this letter i would explain to them that some repairs that have push off in the past are going to be taken care of and you would like everyone to make a list of repairs that have not be done in the past. Make sure you follow up and do the repairs as well make sure you spend some time there.

Also in this list i would explain to them what your policies are.

conversion

30K to convert all the utilities to individual sounds about right 3k a unit is the max that i would spend.

Jesse T. · Answer

As you mention a change in ownership style is a risk.  Even though it is rented 100% I would assume a vacancy rate in my calculations.  Since it seems like replacement tenants could be hard to find, I would be very conservative in the allowance for this.