Buying Multifamily 2 -4 Unit At A Discount?

Question

SFH and multifamily housing in my backyard in the northwest suburbs of chicago are signicantly high, im talking some are almost at $400,000 just for a duplex in some areas witch is crazy to me, the only way to cashflow would to be buying full in cash. so this brings me to my question. How do you feel about buying multifamily housing at a discount? Obviosly id love to do that. in my opinion i look at multifamily as a buisness, the asking price is irrelivent and it should be bought on how the property operates as opposed to SFH where the home is sold at market value. What is your opinion on how i should go about offering a price at operational value with FHA financing?

Thanks

Zachary Ware · Answer

Hey Nolan,

Here in Austin, a lot of the duplexes are up to $800k or even $1 million. At this price, many do not cash-flow with high leverage and as you said, you need to basically buy them cash or at least put down a large down payment. Personally, I will start my analysis with the sale price if I am looking on MLS and work the number down until the property meets my investment criteria. Since you are looking to live there you can also analyze the property a little differently. Look at how much you would be coming out of pocket to buy the property and live there, and compare this to what you are paying in rent. If you are putting less money towards the mortgage than you are in renting, you can see this as a win! Using different strategies such as buying an under-market property in need of heavy rehab can also make help the property CF once you stabilize but you are not likely able to use an FHA loan is there is heavy rehab required. With property values where they are, these properties are tough to pencil out and you have to get creative.

John Warren · Answer

@Nolan Mahoney I wouldn't call the Chicago suburban market stagnate at all. Everything that is listed correctly flies off the shelf. That doesn't make these deals "make sense" for an investor, but they are selling. The market for 2-4 units is mostly made up of homeowners, which is something missed by most of the folks on BP looking to house hack. Home owners are worried about monthly payments, yard sizes and where to place Christmas trees, not what the COC returns might be.

John Warren · Answer

@Nolan Mahoney I think values are relative, and a 400k duplex may or may not make sense for an investor depending on the income. What if both units are three bedrooms and command 2k per month? Maybe then it makes sense! If they are both 1 bedroom units then probably not. Like everything with investing, it takes time to get to know the market and to understand what makes sense.

When I was shopping for my first property back in 2012, 2013 and 2014, everything was too expensive. Believe it or not, there were articles here on BP about how real estate was going to crash again and the run up was not sustainable. Needless to say, I should have purchased a lot more real estate back then. Rents have gone up substantially, and prices have too.

Julien Jeannot · Answer

All great answers.

I like to focus on client on a crystal clear goal, decide on a strategy and work it backwards to their current situation. Keep the long term in mind.

My market is mostly appreciation plays and the cash flow follows. Run the math 5 years out with modest rent increases and historical appreciation.

Crystal Smith · Answer

Keying on your comment- "I look at multifamily as a business"  All successful businesses have financial goals and specific strategies. Those goals/strategies drive how their business is executed. Many investor strategies are looking for appreciation with a little cash flow, while others are not betting on appreciation and want a ton of cash flow. The business strategy and operational goals would then drive what kind of financing and/or cash is required to meet your goal; which then drives how much you should offer on a property.  So it's kind of up to you to define that.

While defining your goals you also have to be realistic and examine what's going on with your competition. In the state of Illinois, there is a public record for every property sold, whether listed or off-market. You can do the research on your own or if you are working with a Realtor they can provide you with Comparative Market analyses. You can use that analysis to guide whether the market says your offer is realistic of unrealistic.

Jonathan Klemm · Answer

Hey there @Nolan Mahoney - First off, there has never been a more difficult time to buy multifamily using an FHA, so just be aware of that.  If you can make something work now it will turn into a home run later.

I'd suggest having your realtor search from properties over 100+ days and have them reach out to the agent to let them know a low anchor offer is coming.  Then just start sending offers where the numbers work and bring data to the sellers to explain.

Are there specific Chicago suburbs you are looking for in the NW?

Eudith Vacio · Answer

Hey @Nolan Mahoney 👋🏽

Prices have gone up, but so have rents as @John Warren mentioned. Definitely advise to purchase a property at a discount but most of them that are negotiable need work. Keep in mind that you can offer whatever price you think its worth but the sellers may not accept your offer. It's a numbers game, but the deals are DEFINITELY out there!

Evan Polaski · Answer

@Nolan Mahoney, 2-4 unit properties can often command a higher premium, in a relative sense, than a single family.  Of course this is property and market dependent.  The reason I say this, in high cost of living areas (typically around major metros) there is more demand for 2-4 family properties, because the buyer is NOT an investor.  They are an owner-occupant and are making a buying decision based on what they have the down payment for, what their monthly mortgage cost will be, and netting in some level of what rent they will get from the other units.

From a technical sense, there is no such thing as a "discount" to market value. As Paul noted, you may get a discount to the list price, but the market value is what someone is willing to pay for it.  If you buy a property, you have just paid the market value for the property in its current condition.

As for off-market deals, this can be a route, but takes a lot of leg work and often some real capital invested.  Knocking on doors, sending direct mailers, etc, you are taking both time and money in the hopes you find someone to sell you their home without taking it to market. And if you are in a reasonably high-demand neighborhood, I will just warn you that there are likely already a lot of other people trying to find the same deals, so this does not guarantee there will not be competition.

Personally, as a part-time investor who values my time, I typically look at deals that are sitting stale on the MLS and meet my buying criteria.  My time is too valuable to spend it and cash on sourcing off-market deals.  On the MLS, you at least can assume you have a willing seller.

Paul De Luca · Answer

@Nolan Mahoney

$400k for a duplex isn't that expensive honestly but it depends on the specific area you're looking in. Context matters.

Obviously it's preferable to buy properties at a discount (making money when you buy) and your ability to get a discount depends on a few factors, such as condition of the property, seller motivation, days on market, and what terms you're offering.

You're much more likely to get a discount on a property that has been on the market for 6 months and needs a decent amount of work than you are with a property that has only been on the market for a few days & is in move in ready condition. A discount is also somewhat a matter of perception.

Properties are frequently listed above their market value and as a result sit on the market. Then they rack up days on market and the seller has to drop the price multiple times before they can get some interest. If you eventually submitted an offer and got it under contract, you may think you got it for a discount but in reality it took multiple price drops and many days on market to land in the actual market value range. Finding the actual market range is just a matter of analyzing the comps.

Unless you're using FHA 203k financing, you're unlikely to get much of a discount off the purchase price. This is because FHA has minimum property standards as part of their appraisal process and if the property is in poor condition it's unlikely to be approved by the lender.

If you use an FHA 203k loan, you can target properties that need work and wrap the cost of renovations into the loan. This way you can go after properties that are less desirable and have been sitting on the market for a while. This can increase your chances of getting an actual discount.

Nolan Mahoney · Answer

Not a specific suburb yet. from what i can tell is the chicago suburbs are pretty staginate right now so i am open to look around diferent suburbs. Thanks for the advice!

Buying Multifamily 2 -4 Unit At A Discount?

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