Analyzing a 5 unit building

12 Replies

I am looking at a 5 unit property that is fully leased, near a local college. It is an old house that was split into 5 units, and rents for about $3,600 mo gross. And has expenses around $12,000 a year (common heat, taxes, lawn care, snow removal, mgmt and maintenance (which seem low). The building needs some upgrades down the road, but seems like it could be left alone for the time being and just hold reserves if anything comes up. The building has 1 long term tenant, 3 college tenants, and 1 tenant we didn't meet.

I am trying to figure out what factors to take into account with the fact that it is an older building and will need some deferred maintenance items repaired down the road.

Seems like there could be room for a deal, the property has been listed for over 150 days, its an estate situation, and they've had no offers. 

Any input or advice is appreciated.

5 units are tricky to finance. You have to get a commercial loan because there are more than 4 units, which is more expensive and includes interest rate risk. In my experience commercial loans don't usually make sense until you get to about 8 units - unless of course you get a screaming deal on the purchase price.

Older inherited properties - bought a couple.  Just love the disclosure statement where every item from foundation to roof is marked 'Don't Know'.  The heirs know nothing about the property and have already spent their found money in most cases. 

Factor that in, potential title issues from a hasty probate, multiple decision makers (sibling/multiple heirs) and obtaining commercial financing.   Better be an awesome value play @Terry Royce !  

There is another issue that may or may not show.   Was the property properly permitted for the conversion and is it zoned for the 5 units?  Are you going to run into significant permit headaches when you go try to pull permits to do the work in the future?  Be careful on the big house conversions they can burn you when you have to sacrifice a unit to rehab the property.  It is not always grandfathered.

@Terry Royce Is it in Baltimore City? If it is, the taxes could really kill the deal. I was actually looking at a 5 unit in Baltimore not that long ago (I wonder if it was the same property) and when I ran my numbers, my cash on cash was looking at like 2% and the cap rate was like 5% or something like that.  Obviously I didnt feel like I could get it at a price that would would.

@Terry Royce One other quick thought....I had a family member that converted a 5 unit property into a 4 unit. They combined two of the units together, and this actually significantly increased the value of the property since they could then sell it to someone using a Fannie/Freddie loan.  Once it goes down to a 4 unit property it will trade like a residential property and not a commercial property.

I really like the fact that its 5 unit as opposed to 4 just for the fact that you can now get a commercial loan on the property.  This is especially true if its a value add deal.   

Being that its a commercial loan there is much more emphasis on the income/expenses as opposed to what other properties are selling for in the area.  So, your property would appraise for more if you raised rents/cut expenses whereas a 4 unit properties value would hardly change at all. 

You can force appreciation!!!

@Terry Royce my guess is the expenses are low. Without real expenses I estimate 50% and some even go 60% on multi-family. 

Keep in mind since it is a commercial property with 5 units you closing/acquisition costs will be higher. The lender may require things like phase one environmental and commercial appraisals are much more expensive. I like @Russell Brazil 's idea of making it a 4 unit. I think there demand outstrips supply of properties someone could owner occupy and rent the other units. 

Terry, ensuring the property is actually zoned for "5 units" is key. Contact BC zoning. I was looking at a multi-unit in BCity the wholesaler was selling as "4 units" only to learn from Zoning that it was zoned for 3. Getting it to 4 would require going before the Zoning Board--timely and costly.  Other important issues to consider: 1) Metering -- are all units separately metered?, 2) Leases-- month-to-month or annual?, 3) lead cert/s, etc? 

@Terry Royce

Hi terry 

The first question to ask is how are you going to create value with this acquisition

Is it am expense play, are the rents low, is it a management play. If you can buy the property and solve one of these problems, then continue to do your due diligence

Look at market comps and see what properties are selling for.  If you are unsure of deferred maintenance or age, get a contractor out there to give you an estimate of repairs and show to seller.  You can use to negotiate

Make sure it hits your cash on cash and cap rate criteria.  

Good luck

Gino

Build currents needed repairs into costs and ask owner to fund it so you don't come out of pocket yourself. Carefully estimate any future repairs to negotiate lower sales price and insure this value built in for realistic ROI forecast.