Updated about 12 years ago on . Most recent reply
Decisions: $190k or $3.3M property
Hello BiggerPockets, long time reader, first time posting-at least in a long time.
I have the opportunity to purchase a couple of multifamily properties that are in the same North Texas Town, but are very different from each other. I have $50k in the bank after selling my first renovation/flip (took 30 months to sell, but made some good rent in the mean time).
Property 1 is class D with 16 units (all efficiencies) located in old downtown, near the hospital and in the medical center of the town. The building is old, but appears to be well maintained, and the downtown area has been slowly, but surely getting revitalized. I haven't gotten any actual data, but preliminary proforma suggests the property is under priced significantly based on the popular rules of thumb abounding on this forum, and has significant upside potential-nowhere to go but up really. Asking price is $190,000. I could easily get the local banks to finance this property with the amount I have to put down. I do not yet know how much renovation, if any, is required.
Property 2 is a class A property with 126 units ranging from 1 bd/1bath to 3bd/3bath units. It is a well known, centrally located, desirable complex. My wife lived there while we were dating, and it is really a great piece of property. Asking on that is $3.3 million dollars! The cash flow numbers work well, but the challenge is raising the capital to finance the property. Additionally it is in such good shape, and has low vacancy, therefore forcing appreciation would be very difficult.
My background: I've owned 2 rentals, 1 SFR, and 1 Duplex. I still own the Duplex. I've self managed for several years, but now I have an awesome property manager who has lots of experience managing everything from SFR to large multifamily, and other commercial real estate. The plan would be to have her, and her associates manage the property. I am no longer local to the north texas region, but I have excellent connections in the area, and know the market quite well based on previous experience living there. My goals are to eventually be financially independent based solely on passive income.
I'm looking for ya'lls thoughts on which deal you would do, and why. Purchasing neither deal is also an option. Thanking you!
Most Popular Reply
I'd suggest you pass on both, Will.
Class-D properties can be difficult in terms of occupancy and collections. Turnover costs can be high and that will be magnified by them being all efficiencies. These factors aren't the end of the world, you can price that into the deal, but you said that it appears to be well priced using "popular rules of thumb". Those rules of thumb are likely to be way off on 16 class D efficiency units. I'd suggest that you evaluate the historical financial performance of the property and use that actual performance to create your financial model, and then see if you still think it's a great deal.
If the 126 unit was built 30 years ago, it's probably class C or perhaps a B at best. Just like with the smaller project, you would need to look at the actual historical performance to build your model. Having an experienced manager gives you a leg up, but financing this one will be an uphill battle for you due to limited experience and your balance sheet. Raising money from investors is the only way to make this one happen. You will have the best chance if you have the relationships already, such as friends and family. Investors that are new to you will want to see your track record in Multifamily and that could be an obstacle. It's probably too early to make this leap.
A large Multifamily project is in your future...build up to it by doing more SFR flips (which builds both capital and track record), acquire some smaller multis to build your experience and track record, then go for it!