Should we close on this 4 unit?

Should we close on this 4 unit?

Real Estate Agent · Bakersfield, CA · Member since 2016 · 41 posts · 6 votes

We are under contract for a 4 unit apartment complex in Taft for $170k.

Each unit rents for $575. Currently, there is 50% vacancy. It was advertised as fully occupied. I talked with one of the tenants who has lived there for 10 years. She says it has been vacant since October, although sellers financials say it has only been vacant for one month. She only speaks Spanish, so I could've misinterpreted her but I'm 90% sure that's what she said. She also said the other units on the block are cheaper and do not require a deposit. She said that the current owner would sometimes take 20 days to respond to maintenance requests (she is the acting property manager) and at one point they didn't have hot water for a month. So there is definitely room for us to do a better job landlording. 

They are all farm workers, so the work is seasonal and I'm concerned with the drought we are facing now in California we will be seeing a slow down of farm development and thus a loss of farm worker jobs. Taft is a town of 10,000 oil/ag workers, but it also has a community college and a prison. 

Accounting for 10% vacancy, prop management (10% of income), insurance (.5%/year), prop tax (1.34%), maintenance (1%), water, garbage, sewer ($250 per month) in our analysis originally we have monthly CF per door of $125 with cap rate 7.58% and Cash ROI 11.76%. If we lowered the rents to $535, monthly CF per door is $92.50 and cap rate is 6.70% and cash ROI is 8.71%. But with the vacancy rate at 50% currently, we are going to ask for a reduction in the purchase price. Any advice/ thoughts/ insights would be extremely helpful as this is our first deal and we don't want to TOTALLY screw up!

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Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes
10y

Maybe I'm the strange one here, but when I see things like high vacancy rates and deferred maintenance on a building, I think MONEY! Our job as real estate investors is to add value by solving problems others are too lazy/scared/uncreative/etc. to take care of themselves, so when I see problems, I don't think whether or not I should do a deal, I think "what do I need to make this deal work?" It sounds like you're thinking the same way by looking at ways to fill your vacancy. 

That said, with the info you're giving, the deal seems slim. What I would do is a bit of market research (call the for rent signs and find out their vacancy and what their rental rates are, if you have a realtor, pull MLS comps for both sales and rents, gather demographic data, etc). Armed with that you can give them an educated counter-offer with an explanation of your numbers. Should they shoot you down, it sounds like there are likely a lot of other motivated sellers in the community that would jump at an unsolicited offer from you.

My first deal was worse than what you're looking at, and I would never consider it now, but it gave me a lot of education and I've been able to turn it around into a better-than-mediocre investment. Be cautious and conservative, but don't be afraid to make mistakes. 

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  • Jo-Ann LapinPro Member
    Loan Officer · Tustin, CA · Member since 2015 · 3k+ posts · 713 votes
    10y

    Check out the vacancy factor and rents in the area over the last couple years. That usually is tell, tell sign

  • Real Estate Agent · Bakersfield, CA · Member since 2016 · 41 posts · 6 votes
    10y

    @Jo-Ann Lapin How can I find the vacancy factor for the area? Doing a walk through of the neighborhood there were quite a few "For Rent" signs out front, at least one every other building. Rents have been steady the past ten years around $550.

  • Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Allison Escovedo:

    @Jo-Ann Lapin How can I find the vacancy factor for the area? Doing a walk through of the neighborhood there were quite a few "For Rent" signs out front, at least one every other building. Rents have been steady the past ten years around $550.

    Why is this NBHD/building attractive to you?

  • Jo-Ann LapinPro Member
    Loan Officer · Tustin, CA · Member since 2015 · 3k+ posts · 713 votes
    10y

    Yes and that area they usually are however vacancy can be a real factor because of the type of employment in Taft and Bakersfield. Call the rental signs you see and fish around.

  • Real Estate Agent · Bakersfield, CA · Member since 2016 · 41 posts · 6 votes
    10y

    @Account Closed it's hard to find units that cash flow here in California, so the financials definitely appeal to me. I also like the idea of room for improvement from the landlord perspective. The tenant class also doesn't worry me, and since we will be managing it ourselves that is a positive. The neighborhood has some SFR and while there's not much "pride in ownership", it's not "run down".

  • Real Estate Agent · Bakersfield, CA · Member since 2016 · 41 posts · 6 votes
    10y

    @Jo-Ann Lapin thank you for your comments! The vacancy definitely concerns me. Should I be concerned he "lied" on his financials? 

  • Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y

    Vacancy and turnover are cash flow killers.  How's the cash flow if you can only keep the property 75% occupied?  50%?  Can YOU change that or is it only going to get worse.  Real estate is about supply and demand.  Seems there is more supply than demand. 

  • Jo-Ann LapinPro Member
    Loan Officer · Tustin, CA · Member since 2015 · 3k+ posts · 713 votes
    10y

    Yes I would be. Typically of some one is doing that from the onset you have assume there would be other issues

  • Realtor · Dubai, UAE · Member since 2015 · 45 posts · 30 votes
    10y
    I tend to stay away from any rental property below 15% ROI. I learnt very early on that even when you have 15%, you have all these costs that come up and you could be left with 10%. Which is what's happening here. If you haven't paid the deposit yet, maybe you could still look for a property with higher ROI that appeals to you in your neighborhood.
  • Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
    10y

    @Allison Escovedo

    It looks like you are looking for cash-flow, but this property doesn't look like a home-run on cash-flow and has some other issues with vacancy and area. I would walk away. If you are willing to buy out-of-state and are willing to be in C class properties, you should be able to get over $3000 a month in rent for your $170,000. Basically these types of properties tend to have more maintanence, vacancy and turn-over, so you want to have higher rents to give yourself a bit of a buffer.

    In southern Colorado I have a similar 4-plex that brings in about $2000 a month in rent. But I only paid $85,000 for it. So my debt service is a lot lower and I have more margin. That property has worked out quite well for me.

    Mike

  • Investor · Madras, OR · Member since 2016 · 3 posts · 1 vote
    10y
    Without knowing all the factors such as, what part of town it in, how much property it comes with, and so on, I can not say for sure but I would get all the rental info you can from the owner and ask for a discount or ask for them to make up the difference till you fill all of the units. The other thing is can you make them more desirable then the others in the town? Find out what the other places offer and offer something better for the same price? Such as free wifi or cable.
  • Real Estate Agent · Bakersfield, CA · Member since 2016 · 41 posts · 6 votes
    10y

    @Michael Wentzel Thank you for your comment! We are definitely looking to cash flow. We are just nervous about buying our first property in another state/ not driving distance. I see you live in North Africa and invest in the US. Would you provide some insight into how you invest? Did you already have a team built in southern Colorado? 

  • Real Estate Agent · Bakersfield, CA · Member since 2016 · 41 posts · 6 votes
    10y
    Originally posted by @Account Closed:

    Vacancy and turnover are cash flow killers.  How's the cash flow if you can only keep the property 75% occupied?  50%?  Can YOU change that or is it only going to get worse.  Real estate is about supply and demand.  Seems there is more supply than demand. 

     Cash flow at 50% occupied is zero! We can change part of it, by being more responsive landlords, or offering incentives to current tenants to fill the vacancies. I think having only one demographic as a tenant (migrant farm workers) is too risky especially when they don't stay in one place particularly long. We are leaning towards walking away from this deal. Just going to wait til current owner provides bank statements for the last 8 years to determine actual vacancy. Thank you for your comments!! 

  • Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
    10y

    @Allison Escovedo

    I did live in Colorado Springs previously. As the market came back there after the crash, I was priced out of low-priced rentals and wandered down to Pueblo, Colorado. It was about a 40-minute drive. So I did have the benefit of being nearby and building a team in Pueblo over the last few years. I do plan to continue acquiring properties in Pueblo now that I'm overseas and am also researching markets in Ohio as well.

    It would be hard to go out-of-state on your first rental, but I don't want you to get into C-class properties where the margins are too slim. If you get into C-class, do it where the rent-to-purchase price ratio are healthy (around 2%) and have a good property manager. 

    Mike

  • Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
    10y

    accidental double post

  • Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes
    10y

    Maybe I'm the strange one here, but when I see things like high vacancy rates and deferred maintenance on a building, I think MONEY! Our job as real estate investors is to add value by solving problems others are too lazy/scared/uncreative/etc. to take care of themselves, so when I see problems, I don't think whether or not I should do a deal, I think "what do I need to make this deal work?" It sounds like you're thinking the same way by looking at ways to fill your vacancy. 

    That said, with the info you're giving, the deal seems slim. What I would do is a bit of market research (call the for rent signs and find out their vacancy and what their rental rates are, if you have a realtor, pull MLS comps for both sales and rents, gather demographic data, etc). Armed with that you can give them an educated counter-offer with an explanation of your numbers. Should they shoot you down, it sounds like there are likely a lot of other motivated sellers in the community that would jump at an unsolicited offer from you.

    My first deal was worse than what you're looking at, and I would never consider it now, but it gave me a lot of education and I've been able to turn it around into a better-than-mediocre investment. Be cautious and conservative, but don't be afraid to make mistakes. 

  • Real Estate Agent · Bakersfield, CA · Member since 2016 · 41 posts · 6 votes
    10y
    Originally posted by @Michael Wentzel:

    @Allison Escovedo

    I did live in Colorado Springs previously. As the market came back there after the crash, I was priced out of low-priced rentals and wandered down to Pueblo, Colorado. It was about a 40-minute drive. So I did have the benefit of being nearby and building a team in Pueblo over the last few years. I do plan to continue acquiring properties in Pueblo now that I'm overseas and am also researching markets in Ohio as well.

    It would be hard to go out-of-state on your first rental, but I don't want you to get into C-class properties where the margins are too slim. If you get into C-class, do it where the rent-to-purchase price ratio are healthy (around 2%) and have a good property manager. 

    Mike

    Thank you Mike, I think we are going to offer 70k and see what the owner says. If he's desperate enough, he will take it. Our max will be 90k, as that is a much healthier rent-to-purchase price ratio. I doubt he will take it, but we are remaining hopeful to find our first property nearby! Thanks for your input and advice!!  

  • Real Estate Agent · Bakersfield, CA · Member since 2016 · 41 posts · 6 votes
    10y
    Originally posted by @Jacob Pereira:

    Maybe I'm the strange one here, but when I see things like high vacancy rates and deferred maintenance on a building, I think MONEY! Our job as real estate investors is to add value by solving problems others are too lazy/scared/uncreative/etc. to take care of themselves, so when I see problems, I don't think whether or not I should do a deal, I think "what do I need to make this deal work?" It sounds like you're thinking the same way by looking at ways to fill your vacancy. 

    That said, with the info you're giving, the deal seems slim. What I would do is a bit of market research (call the for rent signs and find out their vacancy and what their rental rates are, if you have a realtor, pull MLS comps for both sales and rents, gather demographic data, etc). Armed with that you can give them an educated counter-offer with an explanation of your numbers. Should they shoot you down, it sounds like there are likely a lot of other motivated sellers in the community that would jump at an unsolicited offer from you.

    My first deal was worse than what you're looking at, and I would never consider it now, but it gave me a lot of education and I've been able to turn it around into a better-than-mediocre investment. Be cautious and conservative, but don't be afraid to make mistakes. 

     Thank you Jacob. I like your philosophy of not being afraid to make mistakes! Given this is our first deal, making a huge mistake is definitely a fear of ours. I'm going to go out and call the for rent signs and see their vacancies to accurately give a counteroffer- we are thinking of counteroffering A LOT lower (like 100k lower) and just seeing what he says... "Learning by fire" is one of the best ways to learn, although scary, it is necessary to take calculated risks! I've already learned so much just offering and going under contract. Thank you again for your advice and input!!  

  • Investor · Bakersfield, CA · Member since 2015 · 1 post · 0 votes
    10y

    Hello Allison, I came across your post.

    I see you have an interest in purchasing rental property here in Kern County. I do a lot of buy and hold here in Bakersfield, due to population in neighboring cities I don't recommend you purchasing in Taft.

    at a $170,000 you can purchase something similar here in Bakersfield but will ultimately be cheaper maintenance, management, etc since most of the kern population is situated in Bakersfield meaning handy mans and other repair services wont bump up there prices due to travel. 

    also being in Bakersfield you may use a local property management company that may perform an exceptional service due to the distance of the property rather than having to travel.

    I hope this information helps

  • Rental Property Investor · San Ramon, CA · Member since 2016 · 28 posts · 5 votes
    9y

    @Allison Escovedo Did you ever wind up finding a deal in Bakersfield.

  • Panorama City, CA · Member since 2016 · 3 posts · 0 votes
    9y

    I'm just starting to do research on investing in real estate myself and not experienced, but I am wondering why would you not bump the rent up instead of lowering it down? If the property can create more value for potential renters (properly maintained, etc) I would think ppl wont care as much about paying an extra $50 or whatever if it means not having their hot water go out for a month. In my experience from running a small business, cheap prices attract cheap clientele. Is there a market in the area for other than seasonal workers? 

  • Investor · Los Angeles, CA · Member since 2016 · 18 posts · 8 votes
    9y

    @Allison Escovedo - did you end up going through with the deal? Thanks!

  • Investor · Yorba Linda, CA · Member since 2016 · 114 posts · 32 votes
    9y

    I have just recently moved to Bakersfield and would love to purchase some buy and hold properties as well. @Allison Escovedo What was the outcome of your research? Does anyone else have any advice on where to invest in Bakersfield. Does anyone want to get a local meet up started? Would love to connect with some local investors. 

  • Lender · Orlando, FL · Member since 2016 · 340 posts · 115 votes
    9y
    "You can't do good business with bad people" When anyone lies about anything in a transaction that is a major red flag to me. What else are they not disclosing? I'd push to leverage that dishonesty in the negotiation and try to buy it as cheap as possible.
  • Bakersfield, CA · Member since 2015 · 45 posts · 9 votes
    9y
    Hey everyone. I'm Allison's fiancé. We didn't end up purchasing this property. We attempted to leverage the vacancy to get a better price but they were unwilling to come down any further. That and the lack of ability to communicate with potential tenants and a lack of an available PM (the two I called wouldn't manage it) we stayed away. I'm still searching for one. I've spent the last several months working on researching wholesaling and finding off market deals. I've pounded he MLS and had trouble finding anything that meets our criteria. So that naturally lead me down that path. Haven't found one yet but still chipping away at it. Jorge Barboza Jr. not sure if you already found the investor meet up. There is one on the third Thursday at rustys on white on and a fibi meeting you can find on meetup. Also feel free to contact me directly. I'm always looking for people to network with and learn together.
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