7-Unit Value-Add Deal – Looking for Investor Feedback

[Jose Morales]

Hey everyone, I’m a Realtor in West Michigan and I wanted to get some feedback on a 7-unit multifamily I currently have listed.

7 total units (fully vacant)

Primarily cosmetic updates needed (paint, flooring, general refresh)

No tenant issues – ready for immediate rehab and lease-up

Rent history:(6) 2BR units previously rented $900–$1,100 (1) 3BR unit previously rented around $1,500

Market rents:2BR units: ~$1,500/month 3BR unit: $1,800–$2,000/month

This is being marketed as a light value-add/stabilization play with strong upside in current market rents.

Curious how other investors would underwrite this—would you treat this as a light BRRRR, or more of a reposition/hold?

Happy to share more details if anyone is interested in taking a closer look.

[Greg Scott]

Quote from @Jose Morales:

Quote from @Greg Scott:

This is an apartment, which is valued using the income approach.  Guess what?  It has zero income.  That puts it at severely distressed. Any buyer will see this a a significant risk.  

You also won't be able to get the best financing.  Most lenders will want a personal guarantee and rates and terms will not be ideal.

Another problem is the unknown physical risks.  Why is it vacant?  Is there some issue that is hard to see during a simple tour?  Does it smell really bad when the wind blows a certain direction?   Who knows?  I'd pay more if that same property was fully rented at rents $500 below market.

All that said, at the right price, I would buy it.

 Appreciate the insight, Greg — that’s a great perspective and honestly how I’d expect experienced buyers to look at it.

To clarify a bit, the vacancy is more tied to a transition in ownership/management rather than a single underlying issue, but I agree the lack of income and overall condition definitely puts it into more of a value-add / repositioning category.

It’s not being presented as a turnkey or minimal project — there is some work needed, and the scope will really depend on the investor’s plan. That said, the upside comes from being able to renovate and bring rents up to current market levels without tenant complications.

I'm curious, from your perspective as someone with a lot of experience in Multi-Family properties, at what price point or return would a deal like this start to make sense for you?

The property is located in Wyoming, MI for reference.

I found it.

FWIW, every apartment we've owned / managed has been value add, so I'm not afraid or unfamiliar with that.  Here are more detailed thoughts.

First, I would say it was a bad decision (whomever made it) to try to vacate the building to sell it.  That dramatically takes down the price most buyers would pay.  Why?  If all residents are on 12 month leases, you can renovate one unit per month.  That is palatable for many small owners.  Within 12 months, if needed, I could turn over the entire resident base.  Or, if they want to stay at higher rents, that is fine too.  I'd encourage existing residents to transfer to an upgraded unit if they want to stay.  Meanwhile, the property is bringing in cash so I can cover the mortgage. That reduces risk.

With a vacant property, you are on the clock to renovate as fast as you can.  Many people that own small apartments will not be able to handle the pace the renovation needs to occur, then the need to get it leased up ASAP.  The buyer will need deep pockets. We call it negative carry when you are bleeding cashflow.

From a property physicals perspective, it looks like this was a large home converted to an apartment.  That adds risk because you will need to assess the condition of the conversion.  I can see it needs a new roof and clearly does not have central A/C.

My assumption with a value add property is to bring at least $10K per unit for rehab, although with inflation and needing a new roof, I suspect the rehab needed will be closer to $120K.

All that said, here is where the current asking price tends to fall apart. Small apartments do not operate as efficiently as 100+ unit properties, mostly because you don't have on-site management and maintenance.  (Many small owners would argue differently, but they are often donating their labor for free.) I would expect to buy something like this at least at an 8 cap.  However, since there is no income, we can't know the cap rate.

All our properties are the same vintage as this one. Your market rents are slightly higher but our property certainly would be operating more efficiently.  We also have a pool, gym, playground, central A/C, grilling stations, picnic benches, etc.  For argument, let's assume the per-unit performance is equivalent.  We have one of our properties for sale right now.  Based on BoV we expect to sell for $110K per door.  However, all of our units have been renovated and our roofs are new.  

Using that as a guideline, I would say the value of the property is $770K minus the rehab of $120K minus the risk factor for taking over a vacant property.  My gut feel is this would transact in the range $575-650K.

Now, maybe you could find someone that owns other small apartments in that same submarket and they have the ability to operate it more efficiently.  For them, it may be worth more than that.