Evaluating my 1st Multifamily Deal

[Ryan Brown]

Hi All,

I am nearing an offer on my first multi-family deal in Riverton, Wyoming. I am doing my best to be thorough in my property evaluation and approach this as a business rather than a hobby, but recognize I offer no personal experience in this arena. I live out of state (California), have a buy and hold long term strategy, and plan to go the property management company route. The property is an 8-plex built in 1961 in moderate condition, all 8 units are currently rented. It is not on the market to my advantage so I am doing my due diligence to see if this is a good cash flow investment opportunity. I would like to do the deal through an LLC. Here are some specs:

List Price: $425,000

Estimated Annual Income with a 10% Vacancy: $54,996

Annual Expenses (include 10% property management, gas/electric/water/sewer/trash, taxes, insurance, maintenance [$100 unit/month = $800/monthly]): $22,550

NOI: $32,446

Cap Rate 7.6% with opportunity to increase current rent rates as multiple units appear 25% below market rates

Any advice/feedback is greatly appreciated as I am doing this entirely via ambition, reading books, and listening to podcasts (biggerpockets and wheelbarrow profits). Especially interested in major pitfalls to be aware of and lending opportunities for rural areas. For those questioning why I would invest in WY, I have family in the area that connected me with this property and the prices are not even comparable to the sky-high prices in California. Thanks!

[Steve K.]

Things I would consider:

1. Location. Check out the city data on Riverton. Population growth looks flat. Median income/median home values are lower than state averages. Crime and unemployment are higher than state averages. No major industry. Only one major employer outside of the public sector which is Brunton, the rest of the jobs are in education and services. There aren't any international airports, major metros, economic developments, etc. nearby that would attract people to this area. Average rent is very low and significant rent increases over time are unlikely with these demographics. I would expect higher than average vacancy, problem tenants, turnover/evictions, property damage and all the issues inherent in owning low-income rental property in an area experiencing economic decline. I would say real estate prices are low here for a reason. Personally I like to invest in growth markets.

2. Physical Condition/expenses. Without knowing the specific property I can't offer definitive advice here, but from owning a few buildings of similar vintage including an 8 plex that is comparable to this property, I'd be worried that the gross rental income is too low to cover expenses. If the whole building is completely renovated, your expenses may be reasonable. However if it isn't updated inside and out, your expenses are low. Maintenance looks reasonable but Capex is the area of concern. Here's how I would calculate Capex: total up all the big-ticket items that haven't been recently addressed (roof, plumbing, electrical, HVAC systems, sewer line, kitchens and baths/in-unit upgrades/appliances, parking area/driveway, landscaping/exterior, etc.). Estimate what each of these is likely to cost and divide that number by the number of months in your anticipated hold period. That will give you an estimate of what you should be budgeting monthly for Capex.

 A property this age will have increasingly high expenses as it approaches physical obsolescence. If rents aren't also increasing enough to cover those expenses, that's a concern. Keep in mind seller's expenses are often fudged. In this case they look too low. Just to compare, the expenses on my 8 plex that I mentioned earlier are about $35k/year (with me doing much of the work). We've had a few capex events that cost tens of thousands. Our gross rental income is 3x what you're looking at here. I would want gross rents to be a lot higher for this deal to be attractive.  

3. Liquidity issues. A rural town of ~11,000 people with a stagnant population and poor underlying fundamentals might not be an easy place to offload an aged multifamily property quickly if/when you need to. Appreciation (or lack thereof) should also be a concern.

For these reasons, this deal would be a pass for me personally.