WOULD YOU BUY THIS MULTIFAMILY? 7 Unit Building

[Cassidy Burns]

Good Morning BP,

Just wanted to run a deal by you to see if it is something you would purchase: 

-7 Unit Building: Blue collar town of 2,000 people.  Surrounding town is 30,000 population. 

-List Price: $259,900 (going into foreclosure so very likely for cheaper purchase price but for #s sake lets use this $$$)

-Units Spread over 3 Building:

-Building 1: 4- 2 Bedroom/ 1 Bathroom 800 sq ft units ($560/month)

-Building 2: 2- 3 Bedroom/ 2 Bathroom 900 Sq ft Units ($650/month)

-Building 3: 1- Oversized 1 Bedroom/ 1 Bathroom Unit upstairs. ($620/month)  Downstairs Commercial space that was used as laundry (not currently up and running)

Gross Potential Income of : $4,160/month

Expenses:

-Landlord Pays for all Water...... (this is the value add here) Quoted $2,500 to get separately metered.

-Landlord Pays for Trash ($60/month)

-I am underwriting at 50% expenses (still waiting for final P&L)

The value add items here are : 

-Water Separately Metered

-Laundromat up an running again

-Rents are pretty much up to market rents right now and for this area, will not increase significantly.  

So question is, is this a deal that you pursue?  Cash flow is nice.  Appreciation will be low to stagnant. Rents are to market.  But Value add for laundromat and/or water.  PLUS, I do think I can get this property for around the $200,000 mark.

Would love to hear people's opinions.  If you need anymore info please let me know.

Happy Tuesday.

[Keith J.]

Numbers look pretty good.  

One downside is a blue collar town of 2000 likely relies on a few big manufacturers for most of the jobs in town.  That's a lot of eggs in 1 basket if one of those companies goes out of business.  

[Jaysen Medhurst]

@Cassidy Burns, at $260k you're buying at almost a 10 Cap. What's the Cap Rate locally?

There's definitely opportunity to force appreciation by getting the commercial space rented and sub-metering water. What do you think those will bring in/save each month?

I share @Keith J.'s concerns about the small town. What's the vacancy typically in the town? Will you be able to rend the commercial space? Look around the town, are there a lot of empty store-fronts? If so, that's a red flag.

Why is this property going into foreclosure? It should be cashflowing, right? Hopefully, it was simple mismanagement or some other problem of the owner. You really need to focus on your due diligence to make sure there isn't a fundamental flaw.

Finally, the fact that it's spread over 3 buildings would give me pause. You're going to get very few efficiencies of scale. This could actually be the Achilles heal of the property. 7 units with 3 sets of mechanicals? That might be killing the maintenance / CapEx budgets and making the whole property economically unfeasible.

Any opportunity to split the lot up into three, hold onto the most profitable one, and sell of the other two?

[Bjorn Ahlblad]

@Cassidy Burns you have to look past the numbers on this one as others have said. Why is an investor allowing this potential cash cow to languish? Could be a lot of maintenance and capex issues here. In my market these only exist if they are potential horror stories so maybe I am just envious? Lots of due diligence on this project and all the best!

[Jason D.]

@Cassidy Burns numbers look very good, so why is it a foreclosure? Like others have said 50% expenses may be low considering its 3 buildings, and the small town could make vacanys a little higher than normal. Is the property turnkey and currently occupied? If so, it's worth a look, for sure

[Cassidy Burns]

@Jaysen Medhurst very great points.  I'm still in the very very beginning stages of due diligence.  My agent just sent to me this morning with this info so i'll have a better understanding of expenses and the past income of the laundromat.  According to agent, property i going in foreclosure due to the mismanagement (hints why there are not a good tracking of expenses/income/etc.)  Personally, my biggest concern is the small blue collar town.  I own 14 units currently 30 miles away which is why it was sent to me.  Never thought about the 3 buildings.  Will look into subdividing and selling off, that could be a great alternative.

@Keith J. Yes the numbers look good which is why i'm torn.  We always talk about "CASH FLOW IS KING" but certain assets may not be to par and/or worth it in the long run (headache).  

So let me ask you both this, would you rather purchase this asset at $259,900 which Gross potential income is $4,160 (lets ignore commercial) but is in an area that has some risks , little appreciation.  

OR

Would you rather purchase a Single family/Duplex in a stronger market for the same purchase price $259,900 , that may see a little more appreciation/better job growth and/or security , and better tenants.  But only rents for $2,600/monthly???

Love these type of convos.

Best,

[Ellis Hammond]

@Cassidy Burns whats your exit on this property? How will you get the return of your initial capital? Can it come through a refinance? Will you be able to sell this property once stabilized? 

I like the cash flow as well which makes this property appealing but in a small town like this you may have trouble exiting. 

[Tyron McDaniel]

Cash flow is fair the challenge for me on this deal is there is little catalyst for appreciation growth and in my opinion you aren't getting a good enough price to warrant the work and risk involved. 

As for your 2nd question about buying a duplex/sfr in a better area I wouldn't buy that one either at that price!

I like deep discounted properties in need of repairs that allow for forced appreciation. 

[Jaysen Medhurst]

@Cassidy Burns, yes, cashflow is king and with a commercial property it is also total value and appreciation, so you have to be that much more sure of your numbers.

Regarding your either-or question...I don't like either. I've shared my concerns with the commercial property already. I'm even more skeptical if they haven't been keeping good financial records.

I don't like your 2nd option because:

1. It's very unlikely you'll get a property that sells for/rents for those numbers. In a town where a SFH sells for that that little, it will never rent for that much. If a person can afford a $2600 rent payment, they can afford a $260k house all day long.
2. Duplexes rarely pencil out in my experience (there are exceptions). The trouble is that there just aren't enough units across which to spread the expenses.

I'd look for 4-unit properties in solid C+ or B-class neighborhoods where there are opportunities to value-add. Maybe you'll even stumble upon a few 5+ properties.

[Chris Grenzig]

@Cassidy Burns I think the 7 unit could be an interesting option if you can verify any deferred maintenance items and you are close enough that you can mitigate any future expense issues by doing some or a lot of the work yourself. If not, then I would avoid.

As far as comparing that vs the duplex, duplexes are treated very similar on valuation as SFR in that it's based on sale comps, not necessarily cap rates. I would say go with the duplex if you feel you can add value and increase rents and you're at a discount to the current market for duplexes. Otherwise I don't think it's a great option.

[Curtis Rouse Jr]

@Cassidy Burns As others have mentioned, the numbers looks good, but on the other hand the market should be a main driver of your decision making to deploy your capital or investors. With it being blue collar and only 2,000 people scares me because it goes against my factors for choosing a market which are job growth, population growth, job diversification, business friendly, landlord friendly, familiarity, rising market. I hope this helps and Best of Luck!

[Cassidy Burns]

@Ellis Hammond Exit strategy would be a refinance in 5-7 years and/or selling, BUT, like I said , won't be much appreciation, and/or increase in rents and the cap rates are typically 9% in this area.  So the upside is definitely the cash flow.  On the flip side, my investment strategy is not to ever sell, so personally I would hold forever.  

@Tyron McDaniel I do think the price will be lower on the purchase, I just used the list price for numbers sake. I agree with the Duplex/SFR I just wanted to see what people would choose on an either or basis.

@Jaysen Medhurst very true , but then again, every market is different as well.

@Chris Grenzig yeah I was only sent this deal today and haven't gotten all of past expenses or even income, just the info above.  Still waiting on those and will update everyone once I receive.  

@Curtis Rouse Jr agree 100% on the population issues.  That is my #1 concern as well.  Essentially what I am asking is, are investors passing on a property with good cash flow like this one, and has potential for at least a little value add if the exit strategy and/or appreciation play isn't as sturdy?  

Obviously this depends on what my plan with the property is.  

Hold Forever vs. Sell/Refinance in 5-7 years (who knows where the multifamily market will be at this time)

[Russell Brazil]

Population is too small. You get a vacancy and you never know how long it will take to fill it. 

[Johnny Pineyro]

This seems like a vintage property.  What year was it built?  Opportunity zone?

[Dennis M.]

your going to pay 28 grand per unit and get 560$ . In my neck of the woods that’s nothing to get excited about . I could buy a 28-32k duplex and get 1000-1100 in rents a month . As long as it’s within 15 minutes of a decent sized city I wouldn’t sweat vacancy .

[David Bailey]

@Jaysen Medhurst awesome response! Also please be advised, my Wife is a residential / commercial CASH BUYER AND SELLER within the New Haven, CT. area. Therefore if you have any advice for her, it'll greatly be appreciated...

[Cassidy Burns]

@Russell Brazil That seems to be the general consensus of most!

@Johnny Pineyro Built in 1987.

@Dennis M. Wish I lived in your area!  But as we know, every market is different and i'm still not 100% comfortable investing out of state.

Thanks again for everyones feedback.

[Account Closed]

Stabilize. List on BP as 7-unit "Turn-Key" at ARV+25%. You will have bidding war.

[Stephanie P.]

To answer your question, no.

The population is too small making the pool of rental applicants even smaller.

As others have said, the numbers look good (and as you said, they're preliminary), but I bet as you dig in, you'll realize the reason it went to foreclosure had something to do with the recession driving down the rental numbers, etc...

Good luck

Stephanie