C Class 6-Plex. Good starting property?

Question

Hey BP,

I found a 6 plex property near me that the numbers look good in terms of cash flow. It was built in 1965, 4 2bed/1bath & 2 1bed/1bath. They are asking for $313,000 for sales price with rents at $3200. Doesn't need much renovation for each unit. The schools are good BUT it is about 1 to 2 miles away from a medium crime area (based on trulia). Is that something that is too close to the property to consider? I don't want a property that is going to be a constant worry or attract a lower quality tenant. Also, is there a way to fund the down payment since I don't have 60k to put down? I am trying to figure out a way that makes sense and still allows me to cash flow.

Thanks so much for any help!

Dan Handford · Answer

@Javier Arbelaez I agree with @Peter M., @Thomas S., and @Anthony Dooley that this property does not seem like the best option for you as your first investment.

However, depending on the motivations of the seller, you may find a way to carry some seller financing if you use a local bank or something of that nature. You could also bring on an equity partner if you know someone that could help you with extra cash.

Keep looking and something better will present itself soon enough.

Anthony Dooley · Answer

@Javier Arbelaez What you are describing is a typical C class property. The CAP rate, based on your numbers is 7%. It should be more like 9-10%. The crime rate is included in the C class as well as the$500 rents. "Low Quality tenants" live in C class property, generally speaking. Just because someone is poor doesn't make them low quality, but if they could afford $800, they would live somewhere else. It's not terrible, but certainly not a home run. I guess it has been on the market a while, which means nobody else wants it either. The problem isn't the cap rate, the price, or the crime rate. You need about $80K in cash to buy this thing, unless the seller will carry some or all of the financing. The other problem is that you probably cannot increase the rents very much in the future without spending a lot of money on rehab, which still may not get you over $600 per unit on a good day. Unfortunately, there isn't much on the market these days, but that is no reason to over pay.

Javier Arbelaez · Answer

Thanks for the feedback. I agree, this doesn't seem like a great deal for my first multi-family.

Thomas S. · Answer

This is not a good choice for your first property. C class is very high risk and management intensive. $3200 rent on a 300K C class property is way too low.

As for the DP if you do not have th ecash to invest you are not ready to invest. It takes cash and until you have it there is no short cut to investing. Adjust your life style and start saving. Clear all other debt and push your credit score as high as you can. If you are in a low paying job concentrate on increasing your income.

Investing in real estate is not suitable for most that do not have cash.

Peter M. · Answer

Doesn't seem like that great a deal for 6 units that rent in the 500s. You will have high expenses on something that old and that low of rent. 1-2 miles makes a big difference most of the time. I wouldn't be too concerned but why are you calling it C-class? If you don't have the DP, it really going to be a tight deal.