@Dennis M. thank you for answering my question and giving me a much needed advice and reality check. Over all, I am still worried about my financial margin of safety, but I would still have that issue with or without tenants. Anyway, thank you again for your perspective on this matter.
Originally posted by @Etim Fisk :
@Cody Ruff that’s precisely what I am worried about. I am not totally comfortable digging into my pockets to cover the monthly expense cost and after paying the down payment and closing cost I will not have much of a margin of safety do all the extra things I want to do to the building. All the units are well maintain and cared for and the building is structurally sound. Maybe, I am thinking way too much about all the things that could potentially go wrong.
It seems logical to not purchase and rent without reserve cash if you do not have tenants lined up. Especially if you don't know why the space is empty. You already want to have some reserves in case of emergencies.
Can you wait for the building improvements you refer to until you have some tenants in place? This might give you some cash reserves?
I’m not going to lie, it is nice to cash flow from day 1. An empty building wouldn’t keep me from purchasing though if it’s a good deal in a good area.
If you buy an empty building you will want to be able to get it rented as soon as possible. Are the units rent ready or do they need work? Can you negotiate that you will handle lease up while you are under contract so you can start showings or at least get ready to show the unit upon closing?
I would suggest (and your lender will require) an operating budget to hold you over while you lease up the building.
Purchasing homes that cash flow with a quality tenant base to choose from should be a major goal for any buy and hold investor. Over time these properties have a great chance to match or exceed their paper numbers.
With that said, pull the trigger on this one.
I totally get it, at the same time if those tenants are not paying not only are you losing out on the rent amount but need to pay to evict, and repair what they damaged. If you can't afford a few weeks to a month of mortgage on the place you may be shooting to high. Look for better ways to lower the down payment.
Originally posted by @Etim Fisk :
@TIm Harstead thank you for answering my question and giving me a different perspective. However, I am still worry about my financial margin of safety, but I would still have those issues with or without tenants.
@Etim Fisk i much, much, much, much prefer a vacant property. i don’t want someone else’s poorly vetted tenants.
How's your financing situation? I would BRRR this if possible, versus going in with a bank loan and a "subject to" appraisal. Non-stabilized Properties are really hard to get financing for, unless your global financial picture is solid. If it's not then I would pass, because it could be a trap.
@Danny Randazzo agreed. You should be very confident in the reason why the building is vacant. It could be for a number of reasons including poor management, mispricing, or just a lack of proper marketing.
Leasing up a property is inherently a riskier activity than maintaining occupancy, hence why investors that use a lease up strategy target higher returns.
Was wondering if you found out why the owner didn't rent out the other two units.
If you have the wherewithal to manage the holding costs while renting it out, it should be good as long as the numbers work. It's still residential, and you could do what the current owner did and "house hack" it if that would work for you. Otherwise, ignore the residential nature and make sure you have the income from rent to pay the building's expenses and debt service.
Think of it this way: you're not buying the property, you're buying the numbers.
You can make any needed repairs and get the tenant that you choose. It's a huge plus, if it's in an appreciating area because it makes money just sitting there. With appreciation plus cashflow it's a win win.
This is a question I get asked all the time!
The main thing I ask is: Does that match your strategy? If not, CAN it?
The main factor of this is how many units and what's a rough opportunity cost for those being vacant? Usually, you get it half-occupied and rehab the vacant units immediately and the occupied ones at turn because extant tenants help curb theft and vandalism. Getting all-vacant will give you issues but issues can be maintained and circumvented with the proper steps and plans in place. It's a solid idea for the reasons others have mentioned, about having full control over the tenants and it's great for a long-term strategy!
@Etim Fisk if it's a nice property and you're confident you can get it filled quickly, then it's not a problem at all. Major asterisks around the word confident.
I had a similar situation with my first rental property. It was a fourplex that had 3 of the 4 apartments rented. 1 of the three tentants was behind on the rent at the time that I looked at the property. When I made the offer one of my stipulations was that the issue with the delinquent tenant would be remedied by the time we closed. This tenant ended up getting evicted (by the previous owner) and I ended up purchasing the property with two occupied and two vacant. My intention going in to the deal was to BRRR the property so the vacancy did not bother me. Being my first property, I had a low operating income so it was nice that I could BURRR the vacant apartments while the property still received income to cover all or a portion of the expenses. I was able to rehab 1 apartment at a time and raise the rents while implementing my own screening standards to ensure I am getting good qualified tenants.
I learned a few lessons from this.
1. BURRRing a multi-family and being able to keep a portion of it occupied helped reduced/eliminate the stress of having the vacant portion of the property and lessened my total cash in the investment by lowering my vacancy cost.
2. Inherited tenants are hit or miss but you can sometimes get a good idea of what to expect based off information you can get from the seller. In my instance, 1 of 2 inherited tenants ended up getting evicted due to non-payment while the other is still a tenant and has been a good renter. The tenant that ended up getting evicted showed red flags of not being a good tenant prior to the purchase.
3. Having the partially rented property allowed me to "phase in" my own screening standards for the property and ensure that I am getting the best most qualified tenants.
I say this as preface to some thoughts on your situation. You say that half of the apartment is occupied by the current owner. Why are they selling and what is their plan after the property is sold? Are they needing/willing to be a short term or long term tenant to allow you to have income on the property while you rehab or fill the other vacancies. While the chances of this may be low (why would they sell then turn around to rent the same property), it is worth looking in too. If that is not an option, is the current owner willing to allow you to show the vacant apartments and have tenants lined up while you are going through the closing process? This could allow you to lessen your vacancy time frame once you own the property.
Overall, I think the answer to your question depends heavily on your individual situation. If you have a low operating balance that can't take the vacancy hit, then that may be a deal breaker for the property. As others have said, you will definitely want to make sure you calculate your expected vacancy time frame and factor this into your numbers. Personally, after my first experience I will lean heavily towards partially rented multi family if I am planning to BURRR the property. If I'm not, then I would want full vacancy (and tenant history and screening verification from the previous owner) unless I feel like I could fill the vacancies and the numbers makes sense with the expected vacancy included.
Thanks for the good question and scenario!
The way I like to look at things like this is it's a barrier to entry that turns away many other potential investors and this should be reflected in the price. If you have the funds to carry the building based on a conservative timeframe for getting the units rented, then you just need to make sure you are being given a discount in price that you think is appropriate for the extra work and risk vs. buying a more turnkey opportunity.
5 of the 6 properties I bought were full when I bought them.
1 was empty and in good shape ready to rent (had bad management)
That 1 property is more profitable than identical properties next to it because I was able to screen my tenants and start them out at market rate or higher rents.
If you're in a decent mark and the deal is right you shouldn't have a problem filling it