Has anyone had a Not-So-Successful Multi-Family Deal?

9 Replies

Just was curious, has anyone had a not-so-sucessful duplex, triplex, multi-family deal? Was it your first deal in real estate, and what went wrong? How bad was it?

Just wanted to know the real deal behind buying multi-family units and honest truths behind it.

I have owned a duplex for 3 years and have broke even - it was in a c neighborhood - had one eviction and no Tennant has stayed over a year so refix every year - I would do one ina better neighborhood

Mine is not really a bad deal but I own a property with 4 individual homes in one lot (so I guess it's still four plex but no common walls?)

The problem was repairs and some tenants in a so-so low income neighborhood. 

1. Repairs / Maintenance - Have some expectation of the cost but expectations can be off by a little bit or by a lot.

 The seller paid for replacing of wood rotting, termite removal, mold removal, and re-painting of the affected areas before the escrow closed. The seller paid around ~25k in the fix/repair/temporary tenant relocation.  Since there were multiple owners and they have owned the unit for a very very long time (30+ years) with very little to no upgrades/maintaining the property in a good condition.... the property needed some TLC. Since there were long term tenants in place, the tenants maintained/fix small things in their house/unit. I did some raw calculation based on visual inspection and based on home inspection through a company during the escrow. I was expecting to pay 25-45k (ranging from worst case scenarios to areas that needed less immediate attention and fix as it goes).  I was "slightly" off. But I was okay with the cost since I purchased the 4-plex way below CA market price.....it was such a good deal that I could not miss out. I felt like it was year 2008-10 house price.  When things that are health/safety/necessity hazard like mold, broken tile floor, broken window or door, water heater replacement, electrical..... you require hard cash to fix them. I can't leave some stuff for next year because they require immediate attention or your tenant can be injured or your home can be destroyed if not properly maintained. So expect to have some cash to repair stuff after escrow closes if it needs some or a lot of work. 

In addition, more units mean more tenants. More tenants means more repairs or more expense cost to be reserved in case some "emergency" happens. Eight months into the purchase, one of the unit required window and front door replaced (I should have inspected it better). Another unit required a water heater replacement (labor + water heater costed me ~$900). Another unit that keeps having mold problem needed mold removal and repaint. This unit for some reason keeps getting mold in the bathroom. I asked her to please dry and soak up the water after using the restroom to prevent moisture and mold build up.... tenant said "nobody has time for that".  I thought the mold was mainly due to seller's negligence in up-keeping of the property but I think it is now caused by the tenant because no other units have problem with mold except this one!   

*** Also when buying multi unit property another to think about is tenant relocation during repair. Does the unit require for the tenant to move out or can you do little by little here and there without the tenant needing to move out? The seller had to pay all four units  for temporary relocation to live in a hotel for almost 2 weeks for repairs. Luckily for me, I was able to do one room at a time over the span of few months, working the most immediate repairs first. The seller tried to do repair cost credit of $10k but my RE agent told me don't do it. I am glad I didn't take the offer because it turned out to be a lot more than the cost credit that the seller would have given me (different of almost ~$15k). And it would have been a headache dealing with all that. Downside of this was that the escrow closing date had to be amended 2 times by keep extending the closing date. 

2. Tenants  -  Low income area high cap rate but "bad" tenants

So aside from how tenants live their units (aka the mold causing tenant)... the property is located in low income area. The tenants were paying below market rent and as a new owner I raised the rent to the market price. They were paying $500 - 850 in rent for an entire home in California. The sellers were family friends or relatives to the tenants. Even though the property is located in an okay-ish low income neighborhood, the rent for a single family home of 1000-1200 sq ft home is about $1300-1900 depending on the condition, location, and size. All four units ganged up and try to "scare" me by saying that they talked to a lawyer. I wrote them a certified mail letter saying either sign the new lease contract under new ownership - either pay or move out. Thankfully I have acquired a property manager that took care of most of that. The previous owners have also paid for some of the utilities as well but each units are individually metered and is an individual home so I also had the tenant start paying for their own gas, trash, etc. They told me that they have spoken to a lawyer and that I am required to still pay for their utilities.... but I was very firm with each tenant paying their own utilities. I was not required to pay for any of the unit's utility.

3. Other information

- Due to low income neighborhood... I had tenants pay rent late by 10-15 days few times. So be ready to deal with personal grief stories almost every other month for not being able to pay rent. It is happening less now that I just mail them certified pay or quit notice and other things to enforce rent payment. 

- If I were to purchase another multi unit in the future, I think I will purchase it in a better area since more units, more tenants to deal with in one place and I prefer less headache with tenants that can pay rent on time and gives no trouble.

- Try to avoid or re-think about repair cost credit unless it is a good deal. The 10k repair cost credit  vs. 25k actual cost to fix. I listened to my RE agent and I am glad I did.

- Since the tenants were friends or relatives of the sellers, the seller was very firm with keeping the current rent for 3 months after escrow closes so that the tenants can be "prepared" for rent increase to the market price. So watch out for seller's condition of selling. 

This is just from my personal experience in CA. Hope this helps or give some insight.

@Randal Remon The obvious answer is yes. Lots of people have bought bad deals both in Muti family and SFHs. 

Despite what you hear real estate is one of the riskiest investments you can make. It is one of the few investments that you can lose significantly more than your original investment. That said the risk is proportional to your knowledge. 

There are may hidden costs in real estate. The more you understand them the lower your risk. In multi family you income can easily go down early in your ownership as you remove bad tenants and replace them with better tenants.Hidden cost include things like closing costs, points on a loan, leasing fees, vacancy rates, turnover costs, capital expenses, management costs, administrative costs like accounting and legal costs. 

Right now multi family has had a strong run upwards. Right now cap rates are historically low. This means prices are historically high for the income they produce.  I believe it is close to the top and that means the risk of a downturn is high. 

Full disclosure I own a total of 1 multi unit property. It is a two unit building. You can take that to mean I have no experience to be credible or I am smart enough not to buy an overpriced asset.

I've been lucky with one duplex in Los Angeles and have had some nightmares with 3 triplexes in Los Angeles, Philadelphia and Oakland, CA. I still own the good duplex and am slogging through the FHA 203k triplex in Oakland to finish this year.

I cut my losses and ditched the triplexes in Los Angeles and Philadelphia. Lost money on Philly, got out just in time on the LA triplex, both of which involved partners who didn’t have the appetite for risk and the ability to make hard decisions that I have. 

It’s been an interesting journey and I’ve learned a lot. There’s no simple formula and life throws you curveballs. If you have the appetite for it. No magic, just hard work and patience. 

Originally posted by @Eliza Pelham Randall :

I've been lucky with one duplex in Los Angeles and have had some nightmares with 3 triplexes in Los Angeles, Philadelphia and Oakland, CA. I still own the good duplex and am slogging through the FHA 203k triplex in Oakland to finish this year.

I cut my losses and ditched the triplexes in Los Angeles and Philadelphia. Lost money on Philly, got out just in time on the LA triplex, both of which involved partners who didn’t have the appetite for risk and the ability to make hard decisions that I have. 

It’s been an interesting journey and I’ve learned a lot. There’s no simple formula and life throws you curveballs. If you have the appetite for it. No magic, just hard work and patience. 

 Could you tell more about the triplex in Philadelphia? What was the goal of buying it and what went wrong? 

Multi family purchased with family member!

I bought a Philly triplex in Germantown with my sister in 2006. The goal was to invest in a community I really like - having gone to school outside Philadelphia- and to partner with my sister and give her a leg up, so to speak. I put in the money and she was going to manage it, and she did until her wife and she decided to move out of state to Albany, NY.

Issues:

- we overpaid right before the market crashed

- triplex was not fully subdivided (utilities remained combined and owner responsibility). Only the physical units were separated. Large utility bills were one of the ongoing issues.

- my sister and I have very different tolerances (or lack thereof) for risk 🤨

- my sister is extremely conflict averse, which was an unwelcome surprise that I learned through partnering with her😫

- Philadelphia management company was awful and uncommunicative. Worse they didn’t actually seem to see long term maintenance as part of their scope of responsibility. When I called them to task my sister became upset at how direct my communications were. The mgmt lead learned that she could cry to my sister about how “mean” I was being and my sister took the bait and derailed any constructive communication and worse, maintenance of the property. They played us and basically avoided having to do most of the work except for rent collection and bill payment including their cut.

- the rental market slowed and what had been a marginally positive cash flow was diminished until we had to add funds regularly to keep the property afloat

- my sister was indecisive and froze, refusing to make decisions (or to allow me to make decisions even though as the 70% owner I should have overridden her and fired the mgmt company and / or sold the property years earlier.)

- 10 years in I quitclaim the property to my sister and washed my hands of it in utter frustration.

- I lost about 100k, the  70k original down payment and at least 30k in all the years of ********.

Lessons learned:

- don’t go into business with family EVER. Emotions are enormously complicating.

- if you do,  clearly define the plan, goals and chain of command - who gets to be the front person responsible for what, who, etc.

It was an enormously frustrating and heart breaking experience for me. I learned that I am the only family member who has any risk tolerance or a head/heart for numbers and real estate.

I’m moving forward as a solo operator for now for my own financial and mental wellbeing.

Sorry to hear all this! It often ends much better so chin up!

Our recent duplex we purchased last year and now have done some remodels on has not been successful for us.  We are in the process of finally getting it stabilized, but it has been a learning experience to say the least.  I did not estimate the repairs good enough.  Through our inspection process we had to hire an inspector we had not used before, and he failed to spot a LOT of stuff (and i know better).  We also had a termite company come out to check for termites, and the property ended up having termite damage.  Luckily this was our second property, and our first one has been good so far so it has not impacted us too much, but our next one we will be much better at.

I thought id throw in an edit here:  We invested about 28K into this property, and ended up paying 103K for it.  It was renting out at $500 a unit, and I knew we could rent it for at least $700 with upgrades (I estimated 5K more for upgrades).  We ended finding all kinds of extra damage.  We do have the property rented out on both sides for the $700 a month price, but our rehab costs were about triple what I expected (and was totally my fault I knew better).  We will end up having another 15k on top of the down payment total into the property by the end of next month.  Luckily this included a brand new exterior (siding needing replacement due to rats), kitchen cabinets on both sides, new AC on one side, new flooring on both sides, ETC.

Our next property we will be going at this an entirely different way, and I will be networking more as this is a huge weakness of mine.  

I think I'm experiencing one now.  Final walk through on a duplex and it appears the leases aren't being followed, more pets in both units.  I pushed closing and now seller wants to walk.  I've incurred some expenses that I'll have to either walk and eat or pull a few levers and see where that gets me.  Already got a line on another duplex so I'm not sure how much I want to push on it to get some of my costs back.  I'm hopeful that I'd be successful but not sure I want to waste the time chasing it.

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