multi family in low rents market

10 Replies

need some help from experts here.up to now I have invested in market where the rents are $750+ per unit. now I am considering one opportunity where rents are like $ 400 it is solid c class. rents are low because that's what area support. this is in town Huntsville Alabama metro area there is a town called Decatur we are looking at a building around 50+ units. in my mind concerns are 1. maintenance will kill the deal because I have to maintain same unit for lower rents. the counter argument is labour cost is much cheaper and hard to believe but so the material cost as well.i am still keeping 60% for expenses. there actual also look like on the same range. it could be optimized but not relying on that 2. hard to raise rents. as of now some units which are below market. raising $25 or Soo seems to be possible with some upgrades I apologise if it is very vague question.as always thanks a lot for your help.

Hi @Rahul Bhatt .  I'm looking at Huntsville, AL as a potential investment market myself.  Living in San Diego, the appreciation is great but finding properties that cash flow is more difficult.  I wish you luck!

Yes is is great Thoughts about Decatur? do you have something there how was your experience so far? lets connect off line

@Rahul Bhatt I don't know this market at all but I have a hard time believing that $400/mth market rent is a solid C class area. What are rents in D class neighborhoods? However, whether it is truly C class is irrelevant. It's hard for these low rent units to cash flow. As you correctly pointed out, your maintenance expenses will kill your cash flow. It costs just as much to fix a leaky pipe or replace a furnace in a $400 rental unit that it does in a $700 unit. Your maintenance and CAP Ex expenses will be a much higher percent of your gross rent.

@Rahul Bhatt I've, personally, steered away from the $400/month areas and buildings but I don't know Huntsville from a whole in the ground.  What I'd be concerned with (in your shoes) are what similar units in other building rent for.  If your 2/1 units are renting for $400 and 3 blocks over there's an apartment that's renting for $300 you're probably not getting bottom-of-the-barrel tenants.  Which is great, but if there are $300/month rents you're likely in a "D" area, not a "C" area.  If the building 3 blocks over is renting for $500 you'll arguably have bigger issues.  Why?  You're probably getting the tenants that don't qualify anywhere else.  Which means that all of your "vacancy" assumptions go out the window.  There are eviction issues, partial rent payment issues, etc. and it just requires a lot more handholding.  And you'll be trying to hold those hands (even with a PM firm) from California.  Now if you were living in Decatur and thinking about Huntsville and you knew you could keep a close eye on it, that's one thing.  But sitting in California and visiting twice a year for a $400/month apartment?  Ouch.  I forsee pain, lots of pain.  

And with 50 units you have major, major expenses when it comes time to reroof or reseal the shared parking area.  Going back to simple math, if you were renting units for $600 vs. $400 that's a 50% change in rent.  If you use a % of rent for cap-ex holdback (imperfect but quick way to do it) you'll theoretically have 50% more dollars (renting at $600) going towards that pile of money used for that roof replacement.  Do you think labor is 50% more in a market with $600/month rents?  Do you think shingles cost 50% more in a market with $600/month rents?  

So if you know what you're getting yourself into, go for it!  But do some quick math on free-cash-flow and how many months of that free-cash-flow will be needed to cover a roof replacement (or pick another cap-ex item).  Then look at how many years of like that roof (or anything else) has left in it.     

Thanks for the input,Yes I agree with you but I think it is very hard to just say that one area is D class because rents are low

there are a lot of other things goes there why rents are low because income is low?

the population is low people are scared to live in there?

or it is too much crime?

The area I am talking about there average income is 39K or so that is like 1% paying 1% of the rent if one think it that way it does not looks bad

I agree with all the concerns that you mention above but I have seen cost of things changes a lot when you move to cheaper area so the human power. I really want to get input why people are facing who are doing deals in the marketOriginally posted by @Andrew Johnson :

@Rahul Bhatt I've, personally, steered away from the $400/month areas and buildings but I don't know Huntsville from a whole in the ground.  What I'd be concerned with (in your shoes) are what similar units in other building rent for.  If your 2/1 units are renting for $400 and 3 blocks over there's an apartment that's renting for $300 you're probably not getting bottom-of-the-barrel tenants.  Which is great, but if there are $300/month rents you're likely in a "D" area, not a "C" area.  If the building 3 blocks over is renting for $500 you'll arguably have bigger issues.  Why?  You're probably getting the tenants that don't qualify anywhere else.  Which means that all of your "vacancy" assumptions go out the window.  There are eviction issues, partial rent payment issues, etc. and it just requires a lot more handholding.  And you'll be trying to hold those hands (even with a PM firm) from California.  Now if you were living in Decatur and thinking about Huntsville and you knew you could keep a close eye on it, that's one thing.  But sitting in California and visiting twice a year for a $400/month apartment?  Ouch.  I forsee pain, lots of pain.  

And with 50 units you have major, major expenses when it comes time to reroof or reseal the shared parking area.  Going back to simple math, if you were renting units for $600 vs. $400 that's a 50% change in rent.  If you use a % of rent for cap-ex holdback (imperfect but quick way to do it) you'll theoretically have 50% more dollars (renting at $600) going towards that pile of money used for that roof replacement.  Do you think labor is 50% more in a market with $600/month rents?  Do you think shingles cost 50% more in a market with $600/month rents?  

So if you know what you're getting yourself into, go for it!  But do some quick math on free-cash-flow and how many months of that free-cash-flow will be needed to cover a roof replacement (or pick another cap-ex item).  Then look at how many years of like that roof (or anything else) has left in it.     

@Rahul Bhatt Actually, I would argue far more people make the mistake of assuming that something is "C" instead of "D" because they don't hear gunshots and the crime heatmap isn't glaringly red.  Where I invest the city is pretty nice but, believe me, everyone knows which apartment buildings are a little more dicey, which streets aren't the best, and...guess what...the rents are lower.  And guess what areas get the leftover tenants with eviction histories and the worst credit scores?  The "average income" folks where I invest don't live in those areas and I hope to heck they wouldn't live in the $400/month apartments.  

That said, there are two very different schools of thought when you have out-of-state investors looking at property, one is...

1.) Hey, the rents lower than the should be because it's awful mom and pop management.  I can get a new PM, make some improvements, turn this place around, raise rents, and wooooooosh we're off to the cash-flow races!  Now you're not making that argument exactly because you're want to raise rents from $400 to $425 instead of a crazy number like $600.  I usually end up in the second camp...

2.) Ummmmmm...there's probably reason rents are $400/month.  And it's really hard to maintain a property or improve it at $400 per month.  The actual owners or PM that see the tenants, attempt to attract the tenants, etc. haven't even raised rents to $415.  Maybe they know something about the neighborhood, block, street, etc. that I don't know.

The bottom line is that we all have our biases and I try to be pretty transparent about mine.  I'm biased in that I believe that $400/month rentals are REALLY hard to make work when you factor in repairs, cap-ex, etc.  I'm biased in that I believe if you're the low watermark for rental price (i.e. are other units going $500 and not $300) you'll get bottom-of-the-barrel tenants that come with issues.  Heck, I'm biased in believing that if a neighborhood has a lot of $35K - $50K properties then...well...it's a bad neighborhood.  And I'm biased in believing that in 90%+ of all cases the free market is pretty darn efficient.  If the rents are the lowest you get the leftover tenants, the "D" tenants, because other renters can afford a nicer apartment for $425, $450, $475, etc. per month.  

Now would I have all of these biases towards a low-rent area of Huntsville if I lived in Huntsville?  Maybe.  Maybe not.  It's impossible to say because I haven't lived there for the last 6 months.  Maybe you've visited Huntsville 10 times in the last 3 months and have gotten far more comfortable with the area that I ever could sitting down here in ol' San Diego.  I have no clue.

Let me put it another way.  If someone was sitting at their office looking at listings in the Bay Area would they really know the difference between Palo Alto and East Palo Alto?   I mean one just has "East" in front of it, how big could the difference be?  You live in Fremont so I'm guessing you know exactly how different it is :-)  And you know that looking at the average income for San Francisco or the Bay Area or Silicon Valley doesn't really translate to East Palo Alto.  So if other rents in surrounding apartments, towns, streets is $600 vs. $400 I'd think to myself: "Maybe there's a lil East Palo Alto in this deal..."

Or I'm wrong...one of two...

Thanks You are right but as you said everyplace has dynamics and the reason I posted this question here because I wanted to get an opinion from people who know that particular huntsville or decatur AL. 

As far as Palo alto or East is concerned one can look at thr crime. and income to know what class area it is you will get hang of it.I can keep growing and proove for investment prespective which is better and which is not but that is not the point of this post :) 

Again I am not hung up on C or D. the reason I posted this question is so that I can know what people/investor  in the area think and make it work

Thanks for your help 


Originally posted by @Andrew Johnson:

@Rahul Bhatt 

Hey @Rahul Bhatt ,

I don't personally invest in Decatur, but I have met some others that do and have gotten mixed reviews about it. Also, and I may be reading this wrong, but Decatur is not a part of the Huntsville metro area in my opinion; it requires driving out of our county and thought the one next to us and across the river, there's a lot of empty space in between. I've always felt bad for the people that commute to Huntsville from there, since they are driving into the sun both ways. I am sure you can find some better deals in the area, I rarely run into anything that rents that low (in Huntsville). Then again, I haven't done any large multifamily deals like a 50 unit. Reach out anytime, I'm always glad to help out any way I can. 

Best of Luck,

Yes but it seems like in all hunstvile rents arae pretty low I could get apartment in decent condition for 450 for 2 Bd. Lets connect I would love to learn more abot the market from you.

Originally posted by @Zachary C. :

Hey @Rahul Bhatt,

I don't personally invest in Decatur, but I have met some others that do and have gotten mixed reviews about it. Also, and I may be reading this wrong, but Decatur is not a part of the Huntsville metro area in my opinion; it requires driving out of our county and thought the one next to us and across the river, there's a lot of empty space in between. I've always felt bad for the people that commute to Huntsville from there, since they are driving into the sun both ways. I am sure you can find some better deals in the area, I rarely run into anything that rents that low (in Huntsville). Then again, I haven't done any large multifamily deals like a 50 unit. Reach out anytime, I'm always glad to help out any way I can. 

Best of Luck,

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