I found a great multi-family deal (four quadplexes that meet the 2% rule) and after some research, they could cashflow over $200/door easily. What questions should I ask the seller? The property is held by an investment company that promises return in 2-5 years, and they have held this for 4. I am reasonably sure they are selling in order to meet their fund objectives not because they need work, even though this is a amazing buy and hold property. Any help?
Rental Property Investor · Houston, TX · Member since 2015 · 454 posts · 273 votes
6y
If it's been on the market during a very very good market recently, I question why it didn't sell. Were the sellers just listing it out there with no intention of selling? Are they asking too much?
Why is this submarket a slow market? High crime? Bad schools? Flood zone? No traffic? No amenities? Are the neighboring properties well kept? Bad tenant profile in the submarket?
Some questions in today's market not all for seller:
What were March and April collections? What are the sellers expectations for May collections?
How many tenants incomes have been affected by COVID-19?
Can you obtain commercial financing in today's market?
What is your exit strategy? If they could not sell it in a very very good market, what tactics will you implement to make this property sell quickly?
Will a property management company take this property over?
I found a great multi-family deal (four quadplexes that meet the 2% rule) and after some research, they could cashflow over $200/door easily. What questions should I ask the seller? The property is held by an investment company that promises return in 2-5 years, and they have held this for 4. I am reasonably sure they are selling in order to meet their fund objectives not because they need work, even though this is a amazing buy and hold property. Any help?
Have they had the property on the market before and if so when? Is the title clear? Are there code enforcement liens, expired permits, unsatisfied development or easement obligations, or unpaid municipal liens that may create potential legal liability for you, as the owner? Is there a detailed record of operating expenses and other financial records pertaining to the property? Is there a rent roll? Are there any major issues with the building? Are there any environmental concerns? Are there any issues relating to the property that could impact the purchase, inspection, or marketing? If so get the detail. Why did they purchase the property?
It sounds like you have performed your initial due diligence but once you have it under LOI you can start working through your due diligence checklist. I would never assume that there is no deferred maintenance. If they are short term owners and have performed some CAPEX in order to raise rents there are also a number of capital expenditures that they could have saved on which do not increase rents such as; mechanicals, roofs etc.
Thank you @Guifre and @Charles. Those are excellent questions to ask. They bought the properties in 2016, and then started trying to sell them in 2018 with no price changes since then. It appears to be a very slow market, which is why both of the listings they are selling (the 4 quadplexes and another 2 quadplexes) have stayed on the market for almost 2 years. I don't expect them to have done all maintenance, but when running the numbers to make the deal NOT work I have to finance 100% of the loan, fix something for ~30% of the loan value (taking out another loan to do so), and also have slashed rents to 60% of market value. Even with all of this, the property breaks even and doesn't cost money.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
Commercial multi family is a bit different than SFH. The big question is how much NOI does this throw off? That is the basic place to start... then look at why have they not sold?? are there large capex items that need replacing? Etc etc etc.
Rental Property Investor · Houston, TX · Member since 2015 · 454 posts · 273 votes
6y
If it's been on the market during a very very good market recently, I question why it didn't sell. Were the sellers just listing it out there with no intention of selling? Are they asking too much?
Why is this submarket a slow market? High crime? Bad schools? Flood zone? No traffic? No amenities? Are the neighboring properties well kept? Bad tenant profile in the submarket?
Some questions in today's market not all for seller:
What were March and April collections? What are the sellers expectations for May collections?
How many tenants incomes have been affected by COVID-19?
Can you obtain commercial financing in today's market?
What is your exit strategy? If they could not sell it in a very very good market, what tactics will you implement to make this property sell quickly?
Will a property management company take this property over?
@Michael Dang I've asked and am waiting on a response, I expect the answers to the first questions to revolve around the fact that this is a market driven by college student housing, and these are sold in groupings of fourplexes and so they are priced out of the "parents buying a property to let their kid live in" market. I also believe they are underperforming the market (which typically rents by the room, however the rent roll I was sent shows these are currently rented by the entire unit), so I believe I would be able to increase the NOI by fixing this oversight.
The properties are right next to the campus, so crime, schools, traffic and amenities are not much of a factor. Since it is student housing, (and knowing the university's response) I don't think rent collection would be an issue (since most would be paying with student loans/parent funds). I am looking to buy and hold, so I am not looking at more near-term exit strategies. I believe the location relative to the school means the student market will effectively never dry up, and the university is expanding and being backed by the state (TX) to expand the facilities it provides to technology companies across the nation as a research institution.
@Mary M. I have mainly been researching multi family residential (original plan was to house hack), so the quadplex is something I have an (academic) understanding of. The wrinkle here comes that there are two quadplexes on the same lot and that they are currently held by an investment company, so (I believe) both of these things mean they would fall more into a commercial deal than I am familiar with. The rent roll shows their current rents totaling $4425, with one unit vacant (so full occupancy would be around $5k).
I am currently waiting to see if he will send me more specifics on the operating expenses of the properties since he has held them to more accurately determine NOI and CapEx/potential CapEx.
Lender · Chicago, IL · Member since 2016 · 653 posts · 313 votes
6y
Rent roll, P&L 12 months AND year to date (sometimes it looks different you want to find discrepancies if any). Find out any work order history as well. That's a good sign of what they've actually done to the building (rather than claimed)
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
If this property is right on campus it has probably seen hard use.... usually these type of properties are not well kept up... so there may be a lot of work to be done.
Also, if they rent by the room be aware that means you will be managing the rental by room so it will be more managment intensive.
Student housing can be great - but it also can be not so great. Right on campus will require work... good luck!