10-unit building deal

11 Replies

Alright, so here goes. My maiden post on BP! I've been interested in real estate investing for some time now but have been focused on my primary residence. I purchased it in 2011 for $115k from a bankruptcy. It was built in the 1980s and the structure was good, it just needed some TLC inside and out. I renovated it for $30k. Total investment $145k. It is worth about $175k. I have about $90k in equity in the property. Great, you say, but what does this have to do with a 10-unit deal?  Well...

I'd like to use the equity in my primary home to fund the down payment on an investment property. I've been looking for about 2 months. Mostly at duplexes and triplexes. I really haven't felt good about anything.

Today I looked at a 10-unit building. Asking price is $70,000 but negotiable. Super solid brick building. It has 2 studios and 8 1-bedroom apartments. All are furnished. About half are updated within 5 years. The other half are fine but could use some updates. New roof 3 years ago, new hot water tanks within 4 years, most windows replaced, gas lines just inspected, new boiler pump. There is also a storefront which could easily be made into two more apartments if the demand is there. Currently used for storage.

One efficiency rents for $200 and the tenant is the unofficial manager. He cleans the halls, shovels the walks, unlocks the trash bins, etc. Been there for 42 years.

The second efficiency rents for $300. The rest of the one bedrooms rent for $450. Four of the eight are occupied. Two long-term tenants just died recently and they haven't filled due to wanting to renovate. They put one renovated unit on the market for $500 and had 10 responses in 24 hours but then had a death in the family so they took it off the market. The current owners have owned the building since 1965. They are retiring and moving south. As the husband told me, "I've made my money, time to enjoy it."

Here is my analysis of the deal. PLEASE look it over. I would pay all utilities. Gas is budgeted. Taxes, insurance, and utilities are figures from the current owners' books. I would initially manage the property so the cash flow would really be about $2,000 until I used a PM firm. 

I like the deal. I've seen 60% cash-on-cash with some duplexes but never anything in the 3-digit range. Thoughts?

The numbers look good and but just realize this is a "hands-on" investment.  After a while, I think managing 10 tenants who pay $200-$450/month is a lot more work than people think.  One eviction or semi-major repair to a unit and you probably won't make a profit on that unit for the entire year.

Why is the Seller selling it so cheap?  What do other similar buildings sell for?  How is he marketing it?  

Can you refinance your entire primary residence and buy this building cash?  That would be my first choice.  

By the looks if it, it looks like a nice deal. I am assuming for $6000 a unit that it is in a "D" area and possibly a "D" building.

Interesting deal, but the thing that would worry me is the efficiency rental for $200.  I am not sure what the laws are there, but I would look into the potential of that person being considered an employee...  The unit is renting for $100 less then the other efficiency rental and as stated he is doing working on the apartment as the "unofficial manager".  The state could see him as an employee stating that he is being compensated $100 per month for the work he is doing.  This could potentially open up legality issues, like workers comp if he gets hurt on the job, which I personally try to stay away from.  I know you have stated that you are thinking about doing the management of the building yourself, does that mean you are going to stop using this person as the "unofficial manager" and increase his rent.  You can probably see where I am going with this... Like I said, I don't know the employment laws in your area, but I would at least run this past somebody who does.

Originally posted by @Arlen Chou:

Interesting deal, but the thing that would worry me is the efficiency rental for $200.  I am not sure what the laws are there, but I would look into the potential of that person being considered an employee...  The unit is renting for $100 less then the other efficiency rental and as stated he is doing working on the apartment as the "unofficial manager".  The state could see him as an employee stating that he is being compensated $100 per month for the work he is doing.  This could potentially open up legality issues, like workers comp if he gets hurt on the job, which I personally try to stay away from.  I know you have stated that you are thinking about doing the management of the building yourself, does that mean you are going to stop using this person as the "unofficial manager" and increase his rent.  You can probably see where I am going with this... Like I said, I don't know the employment laws in your area, but I would at least run this past somebody who does.

 Fantastic thought. This didn't even cross my mind. I understand exactly where you're coming from. Certainly something to clarify if this moves forward.

Originally posted by @Steve L.:

The numbers look good and but just realize this is a "hands-on" investment.  After a while, I think managing 10 tenants who pay $200-$450/month is a lot more work than people think.  One eviction or semi-major repair to a unit and you probably won't make a profit on that unit for the entire year.

Why is the Seller selling it so cheap?  What do other similar buildings sell for?  How is he marketing it?  

Can you refinance your entire primary residence and buy this building cash?  That would be my first choice.  

He has owned the building since 1965 and, from the sounds of it, he wants a hassle-free sale. He doesn't want to use a realtor. I posted an ad on Craigslist that I was "buying multi-family properties" and his wife responded. I wouldn't even consider it to be on the market. There are few other comps. A similar 6-unit building of 2 bedroom units in the next city is listed on the MLS for $130,000. That's the closest comp I can find.

Just curious, why would you buy it in cash? I have the cash on hand to do so but I wanted to make the deal without touching cash/investments/etc. I thought that using the "sweat equity" I have in my primary home was the best idea. I certainly want to hear you out, though.

Are these section 8 tenants?  Based on cost and rents it sounds like they could be or that you could increase the rents if they were.  I know every market is different but in my town I get $550 for 1 bedrooms and can get $400-$450 on efficiencies.  Admittedly section 8 is a higher maintenance project in general, but I do not think it will be any higher maintenance than $300/mo tenants. You might at least consider it to see if you can dramatically increase your gross income.  I did this exact thing with 2 fourplexes.  Each unit was a 3/2.  When we bought it, the rents of the other 4 plexes on the street were $600 to $650.  With section 8 we were able to get $750 for upstair units and $800 for down stairs units.  We bought them out of foreclosure, fixed them up, leased then up and seasoned them for about 18 months and sold them. Worked out well for us. Something to consider. Good luck!

Medium bc bKatie Neason, Renovation Wranglers | [email protected]

It looks like it could be a great way to get into a multifamily with out a lot of money out of pocket.

Here are some thoughts/concerns that come up for me:

Get independent insurance quotes. I can almost guarantee that you will not get as good a rate as the former owner, unfortunately. Also call the utility companies and confirm costs. I hate owner paid utilities. Everything else about the deal would have to be extraordinary for me to buy a place with owner paid utilities, but that's just me :)

Furnished units, especially furnished efficiencies will have probably have a LOT of turnover. That's a transient demographic. People are renting like that either because they don't want to stay long or because they're one step from homeless. You might consider renting the apartments as unfurnished. Or at least make it an option to have the furniture gone...

Actual management fee percentage increases dramatically the lower the rents are. I would look at 13-15%.

Make sure you base your rent projections on what's really happening in your market. I just did a quick glance at Wheeling on Craigslist and there are a lot of sub $400 units available. So you probably won't be able to raise rents unless your property has something special in the way of location or something. Maybe call a few local property managers and ask about their estimates of local vacancy rates too.

good luck, let us know if you decide to do it!

Medium team zen logo vJean Bolger, 33 Zen Lane | http://www.solidrealestateadvice.com

Looks to me like you are planning on a 40% expense ratio.  Overall, I would be surprised if the expense ratio is less than 55% before mortgage, closer to 60% is more like it if you are paying all utilities.  If you cannot increase your rents on this, i would consider adding some sort of utility surcharge.  

I would also think on a commercial property your interest rate would be at least 5.5%,maybe higher-check with your local bank on this.

Good luck!

Originally posted by @Nick Janovich:

Just curious, why would you buy it in cash? I have the cash on hand to do so but I wanted to make the deal without touching cash/investments/etc. I thought that using the "sweat equity" I have in my primary home was the best idea. I certainly want to hear you out, though.

 I would pay cash (using equity in your house).  Once you have this new investment performing you can refinance it pretty easily get cash out and buy your next property.  Performing, stabilized multi-family is the asset class all banks are really excited about lending on in my area.

Originally posted by @Jean Bolger:

Furnished units, especially furnished efficiencies will have probably have a LOT of turnover. That's a transient demographic.

This. Very much so. Efficiencies and 1BD are NOT my target unit mix.

I much prefer 1s and 2s or even better 1s, 2s and a few 3s.

How bad is the neighborhood if you can get it for 7K a door?

Expenses might be 10% higher if it's a D class, and a lot more work than you might anticipate including much more frequent evictions