20 unit complex analysis- 45% occupancy

12 Replies

I have been in discussions about purchasing a 20 unit apartment complex and have some questions. 

Property details

Price- $350k

20 units- all 2/1.5 townhome style apartments

Rents- $500 per unit 

Taxes- $9k per yr (per financials provided)

Insurance- $11k (per financials provided)

Utilities(water & sewer)- $12k

Market rates are $625-$675. HUD fair market rent is $757 for 2 bedrooms in my county.

16 units do need some updating which I would do a few units per month until complete. 4 have been recently updated. 

Not a terrible area, there are definitely worse in town.  2 complexes next door have hurricane damage and are condemned.  I talked to the city and the local housing authority is taking them over and updating both complexes which should help my property value.

Problem 

Only 9 of the 20 units are currently rented.  The owner doesn't accept Section 8 because "it's a hassle."  This area would be mostly Section 8 tenants so they are eliminating their biggest costumer. 

Background of property

The complex is owned /managed by a local family that owns a 15+ complexes but the owners are older and don't seem to be taking care of business like they did at one time.  A few of their properties are for sale so it seems they are downsizing.

No advertising is done at all.  The only place to find info on the property is on their family website(which looks like it was designed by a 8th grader) or driving by the property and calling the number on the sign. 

At current occupancy I could pay my note with not much room for error.  I do think with marketing, accepting section 8, updating, and raising rents that I could make this a workable deal.

Questions

This would be my first property marketed towards Section 8, so I am kind of leery of the deal to start with.  I went to the housing authority today and they were no help.  They told me to go to their website and wait for people to apply then come back once I had an interested renter.

How do I find out if there is a need for Section 8 in that area? 

Is there a surplus/shortage of places that accept Section 8 in the city?

I was originally excited about the city taking over the eyesore next door, but now I'm worried that I would be competing directly with them for renters.  Can the housing authority push renters towards certain properties?

I would be buying the property based on the assumption I could increase occupancy and rent rates, which is risky.  Any thoughts on this kind of speculative purchase? 

Any other thoughts on this property fill free to share...

Do you really want to invest where there are Hurricanes?  That's kind of a red flag for me.  The numbers looked decent but I didn't analyze them.  Max capacity income is between 10k-15k a month but why is capacity so low?  That's kind of a red flag too.  I would want to know WHY I wanted to be in a that market.  What in the area is attracting tenants to move there?  College?  Industry?  There is soooo much I could say about this but I'd like to read from some of the more experienced BP members.

Originally posted by @Drew Mim Mack :

Do you really want to invest where there are Hurricanes?  That's kind of a red flag for me.  The numbers looked decent but I didn't analyze them.  Max capacity income is between 10k-15k a month but why is capacity so low?  That's kind of a red flag too.  I would want to know WHY I wanted to be in a that market.  What in the area is attracting tenants to move there?  College?  Industry?  There is soooo much I could say about this but I'd like to read from some of the more experienced BP members.

This is a quote from a quick Google search,

"Over 45% of total U.S. petroleum refining capacity is located along the Gulf coast, as well as 51% of total U.S. natural gas processing plant capacity."

In other words the job market here is very good.  The housing bust never happened in this area because the job market is so stable with all of the refineries being the major employers including the largest refinery in the country.  That Keystone Pipeline that our president keeps vetoing ends in my backyard. 

As for hurricanes, that's part of life in this area but it isn't any different that other natural disasters that occur across the county.  Earthquakes, tornados, mudslides, flooding, blizzards etc all cause property damage, but at least I know a hurricane is coming and can get the heck out of town.  We do have to carry Windstorm insurance which does cost more than most parts of the country.  

It sounds like I should be investing in Texas!  I'd wait to hear from more experienced investors but I think your numbers are decent.  Good luck!  Use the BP Analysis tools at www.biggerpockets.com/analysis that should shed some light on your deal.

As long as you are "hands on" and realize this will be very "management intensive" type of property, by all means, look into it!

However, Section 8 is also more "management intensive", and personally wouldn't touch it if that is what you are basing everything on.

The most important element in this game is desirability - your tenants must want to be there in order for you to achieve stability and desired growth.

The next step is to qualify what kind of tenant you are shooting for. Do you think that a property which is able to only attract tenants who have no other option but Sec 8 is the winning formula for you?

I have Sec 8 tenants; I put them next door to market rate tenants. Point being - people who have options, money, financial stability are attracted to my buildings - not just Sec 8. This means that I can hike rents as time goes, and do the other things which are necessary t succeed in this...

I don't discriminate against someone on Sec 8, if their income combines with subsidy qualifies more my rent. But, I won't put myself in a situation whereby the only people willing to make the choice to live in my buildings are Sec 8 folks...

Think about that :)

Been there. Done that. Never again.

My question to you is how much time do you have in your life?? This will be a daily grind to turn it around. Low income tenants come with lot's of social and life issues which you have to constantly corral to keep them focused on saving up for and paying the rent each month.

You haven't mentioned if the landlord pays water and sewer or if it is separate and paid directly to the utility company. Even with no leaks when water/sewer is included in rent the tenants will consume about 30% more. They will also usually be slow to report leaks as it is not on their dime. The leaks will cause ongoing mold and damage left unreported and the wetness will attract termites, carpenter ants, and breed roaches, vermin etc.

If I had to do things over again I would use an OPTION and a property such as this. You control it, spend time on it, and see how hard it will be to turn around. If things go south you have minimal investment in and can walk away with no to limited recourse. The last thing you want to do is buy with a 5 to 10 year commitment and find out it is a money pit taking up all your time and resources. If this seller does not have  a mortgage that opens up more finance options. I wouldn't count higher rents to justify making the deal work.   

Originally posted by @Drew Mim Mack :

Do you really want to invest where there are Hurricanes?  

Really now? Really?

Oh lordy lordy what do us stupid southerners on the Gulf do when a hurricane comes in.....

I work with larger properties all along the gulf coast. The kicker on hurricane damage, or any 'named storm' is the deductible is a percentage of the property value, not the damage. A couple of years ago, I negotiated a $2.7 million claim, with a $1 million deductible. Even so, the property in the end benefited from the renovation. All hurricanes do not devastate the entire area, and they are few and far between.

The management company I am with, deal with lots of low income deals. If you go with Section 8, my advice is don't put up with the riff-raff, enforce your rules, and evict disorderly or destructive tenants. Make your property desirable.

Advertise on Craigslist several times per week. The applicants will come. One of the biggest problems in the industry is keeping the vacants ready to lease. The applicant gets a voucher and can choose where they use it. Good management can usually stabilize a property, if you aren't in a war zone. With Section 8, you will have to jump through a few more hoops, to make sure you comply with certain standards. They have pet-peeves about where smoke detectors are located and such. They will inspect the unit; give you a list of items to repair; re-inspect. On the initial inspection, if you fail 3 times for the same item you will lose the prospective tenant. If its on an occupied unit and you fail the 2nd inspection, they abate rent. If you pass on the 3rd inspection you can recover abated rent. Fail the 3rd inspection you lose abated rent and the voucher. You will be responsible for pest control even if the tenant doesn't keep food put away. Just some examples to prepare you for the housing authority. The positive is you receive payment from the housing authority, not the tenant.

@Mack McPhatter

Great advise from everyone above.  Section 8 is a program with lots of rules and more management activities.  There are plenty of property owners who do well with Section 8, but also a lot of horror stories.  If this property is suited mostly for Section 8 tenants, you have to ask yourself if you are willing to invest the time to learn from those who do well with Section 8 tenants and further to invest the additional time to manage the property properly.  If you have a 9-5 and are looking for this to be a passive investment, you're better off finding something else; regardless of how good the numbers look here.  

Another concern of mine is that the local housing authority has acquired the adjacent properties.  Local housing authorities are usually the worst neighbors you can imagine.  They are great at creating crime ridden slums, because they can't manage the properties like an owner.  

Proceed with caution!

Originally posted by @Joel Owens

If I had to do things over again I would use an OPTION and a property such as this. You control it, spend time on it, and see how hard it will be to turn around.

Never thought about this, but I guess it is a possibility to buy an Option on the property. Would it be similar to a Lease/Option like a SFH?

How amenable are MFH owners to this?

I have a 50 unit complex with over 1/2 of the tenants being Section 8 tenants. I have had a very good experience with Section 8. I don't feel they have very strict rules. As long as you maintain the property you will have no issues. I like the fact that a large portion of your rent is "guaranteed" and these tenants are very motivated to pay you because they do not want to lose the assistance. Section 8 has a very good screening process also and in most cases if they pass their screening I never find anything when doing my own background check. I am to the point now that when a non-Section 8 tenant moves out we are trying to get a Section 8 tenant to replace them. 

@James DeRoest

 Hahahahahahahahahahahaha!!!  I guess that comment was a little judgmental.  FYI-I'm not planning on investing in tornado alley either :)