Trying to evaluate a Multi Family with a 50% vacancy

6 Replies

Hi everyone! New member and first time poster here! I recently bought my 1st SFH, rented it out and have jumped right into looking at a multi family 4-plex.

I am in a relatively small-mid sized area in central Illinois of about 20k population. The property I am looking at is listed at $60k. 2 units (#3 & #4) are currently rented at $325 and $250 ($575/mo). Unit #1, the tenants are moving out, and unit #2 is in the process of being renovated. 

As it stands, my monthly cashflow would be -$168/mo with a -10.27% CoC ROI.

If fully occupied (with an average rental of $350 per unit/mo x 4 Units) we are looking at $1400 a month, cashflow at $517/mo and a 31% CoC ROI.

My question is, how do you all factor in vacancy at time of purchase? How do you use vacancy in your equation for writing an offer? 

I have a rehab budget of $5k as the property itself is in pretty good shape, needing mostly cosmetic stuff (to the best of my knowledge). 

Even in the fully rented spreadsheet, with a 25% vacancy and an increased repair and maintenance and CapX amounts, the property still cashflows at $167/mo with a 10% CoC ROI. I know that comes in under the $100/door metric, but...

Do you like the deal? 

Seems like a good multi-family to get me in the game, but I am a stone cold rookie. I read BRRRR, did a flip, made $15k profit with a partner ($7.5k/ea), bought a SFH that is cash flowing $200/mo with a 7% CoC ROI (pre-refinance), listened to 15 of the bigger pockets podcast while I work my 12 hr shift in a frozen -10 degree warehouse, and am looking to hopefully make an offer on my 1st multi-family. This has all happened in about a month!

Am I moving too fast? Am I forgetting to factor other aspects into the multi family formula? 

Any help or opinions will be appreciated! 

Thanks! 

Jon

@Jon Campbell I don't know how it is possible to have rents that low here in Illinois. I would guess your baseline rents would be at least $550-600 per month for an apartment. Also, I am in Illinois so I can guess a few potential areas you might be in, and I just can't figure out how anyone can possibly rent their property for that little lol. 

At the same time, repairs cost what they cost regardless of percentages. A toilet costs $109 whether you are in Chicago or the country. You still will have to pay a guy roughly $50-100 to install it whether your rents are $300 or $3000 a month. 

I would build your team locally and focus on getting a great agent on your side. A good agent can do a rental analysis and tell you what market rents are, what the going cap rate is, and what kind of vacancy you can expect. 

Jon, I agree with @John Warren . I don't know how the units could rent for so little, anywhere in Illinois, unless they're studio's. Even then, the rents seem extremely low. 

You didn't specifically mention what needs to be rehabbed. I can tell you this, $5k can go very quickly! Based on your spreadsheet, it looks as though the tenants pay their own electric and gas. If there is a "common" area, you will have to pay that electric bill. What about snow removal and lawn maintenance? What about property management? That's typically 8% to 10% of the total rents. Have you had the property inspected? I'm assuming there's separate furnaces, since the tenants pay the gas. Is that correct? 

My concern is with the rents that low, if you have 1 mechanical failure, like a furnace go out, that could cost you anywhere from $2000 to $5000. Your entire profit for the year is gone! 

I would take a very hard look at the rents in the area, for the same square footage of your units. I think you'll find that you can raise them substantially. Best of luck. 

Jon, @John Warren is absolutely correct. I live in southern Illinois in an area with a population of just 3,000 people and even a duplex in terrible shape will rent for $350 per unit, with higher end units going up into the $600 - 700 range. If i were you I'd do some more investigating into the market rents for the area. It's possible the previous owner didn't have a mortgage to pay and simply didn't ever see the need to increase his rents with the market.

Thanks everyone, I appreciate all of the good advice. I live in the town of the unit and plan to do the landscaping and managing of the property. We don’t have a property management company in our town. The rents are low, and the $1,400 is what the current owners income has been at full capacity. But, there are only 2 units rented right now (for $325 & $250)/mo. Unit 1 ($450)has a tenant being evicted and unit 2 ($350)is vacant and in a rehab phase. My contractor can finish unit 2 and have it rent ready in a month for $2500. Once the tenant is out of #1, I can rehab it for about $5500. I was goin to up the rents for unit 1 & 2. Unit 1 from $450 to $525 and Unit 2 from $350 to $425. I will have spent about $8k on paint, flooring and labor for the two units. The two upstairs tenants can stay in their apt at their current rate. Once they move out we can rehab each one for about $5000, which covers windows, flooring in the small kitchen and bathroom upgrades. I just put my offer in, so wish me luck! Thanks again for the words of wisdom!

@Jon Campbell I don't know your market but I have to think that rents that low are going to be in a very rough area, especially with a price of $60K for a 4-plex. Multi families and cash flow well but not in that asset class, You're better off buying a SFR in a higher asset class than a MF in a low end area.