Would You Buy This Multifamily? - Tacoma, WA

11 Replies

Hey BP'ers! 

I've spent a lot of time looking for good multifamily deals in my area, with limited success. However, there is a 3-building property that has kind of stuck in my head. If you'll all indulge me, I'd like to provide some basic info, current financials, photos, and potential seller financing loan terms that my husband and I have talked about. This is all very preliminary, I haven't been inside the property or spoken to the owner yet, but I wanted some outside opinions to tell me if I'm totally off my rocker before I spend too much time and effort on this particular property. Any feedback would be super helpful!

For starters:

-3 buildings on three separate parcels: 2 four-plexes @ 800 sq. ft/unit and 1 tri-plex @ 650 sq. ft/unit for a total of 11 units, each 2br/1ba. 

- The numbers provided here have NOT been independently verified by me; these are from the listing information and have just been rough estimates I've worked off of. Triplex has monthly income of $1,950; one fourplex has monthly income of $2,600; the other has a monthly income of $2,445, for a total income of $6,995/month. Expenses vary a bit between the buildings, but taxes, WSG, and insurance appear to add up to $1,895/mo. 

- Seller has has them listed separately on the MLS for the better part of 3.5 years with no apparent offers, at least nothing that has gone under contract. He's been asking $227k for the triplex and $297k for each fourplex. Obviously he is insane.

These units are located on the eastside of Tacoma; not the most upscale neighborhood in town, but definitely not a "war zone" either. I've researched market rents in the immediate neighborhood and between $800-$850 seems to be what comparable units in slightly better condition are renting for. I feel that the average rent/unit of $635 for this property is more a reflection of the condition of the units and poor/tired management. These buildings and units just look...sad. Here are some photos. 

SO! Now for the good stuff. 

After much discussion, my husband and I have come up with the idea of approaching the owner and offering $600,000 for all 11 units, if he can finance them. I can't find any indication that the owner is in financial distress; he's probably underwater since he bought these units with one more 4-unit building for $1.2million at the height of the bubble(!), but he can clearly handle whatever his payments are, and doesn't appear to need cash immediately. So I would imagine he would welcome the passive income without having to actually deal with these units anymore. Loan terms we've considered would be in the ballpark of: 1 year's worth of monthly income as a down payment, 6% interest, and a balloon payment in 10 years. That way he knows we're serious, has his passive income, and gets a sweet payoff in 10 years when he's ready to retire. 

Regarding our investment, obviously we'd be holding these units for the long haul, and our goal would be to upgrade them one or two at a time to bring them up to market standard so we can demand market rent. Since these are smaller units, and providing all utilities are in good repair (otherwise we'll run in the other direction), I've estimated conservatively that we could rehab each unit for (probably less than) $2.5k. Without having gone inside, I can tell that some sturdy laminate flooring, a new coat of paint, and slightly upgraded appliances (with perhaps a cabinet upgrade here and there) would probably bring the units up to standard. I could only find two photos of kitchens in the unit; one looks alright, the other looks pretty sketchy. If all the kitchens are sketchy looking, that will change the conversation. 

So, if we were to do seller financing for $600,000, with a down payment around $25,000, our monthly payment would be just under $3,500. With the current expenses at $1,895 and current income at $6,995, that leaves $1,600 to account for vacancies, maintenance, and profit. Not super, I know. But, a few years down the road, if we are able to spend perhaps another $25,000 to rehab all the units, bringing the monthly income to between $8,800 and 9,350, we start looking a little better...

I go back and forth about the actual value of cap rates and calculating cash on cash return- some people swear by them, others never use them. Will those calculations be valuable for a property like this?

And now that I've basically written a novel - what does everyone think? Am I dreaming thinking that this is a worthwhile buy and hold investment? Should we offer lower? Who can offer some advice about structuring seller financing deals? I've read as much as I can on the forums, and it seems fairly straightforward, though I've never dealt with seller financing before. Give us some feedback! Thanks in advance, everyone!

@Kate Kedenburg  A couple of preliminary thoughts and questions for you:  1.  The expenses seem very low for the amount of income.  Would expect something closer to 50-60% of income.  Hopefully, he's including labor costs for work orders, management fee, materials cost, marketing costs, landscaping costs, licenses/permits, office supplies, bookkeeping and accounting costs, etc.

2. You mentioned some of the neighboring rents, which is helpful, but what are the cap rates for recent sales in the area? It's not always instructive for a smaller property such as this one, but if the NOI is correct, he asking for a 7.5% cap rate, which is low for my area, but may not be for yours.

3.  A $165 to $215 gap in rents is exciting, but you'll need to likely do some renovation and curb appeal to the exterior also - have you thought about that?  I typically get outside financing and roll the rehab costs into that financing.  That leads me to...

4.  Why are you thinking seller financing?  Do you think you might not qualify otherwise?  Or that the property might not qualify?  Or is it about the down payment/equity cost?

In general you want to look at the numbers in the other direction:

GSI (Gross Scheduled Income): $6,995

Less Vacancy:    $700 (Generally assumed 10%)

Less 50% Rule (since we are doing a rough evaluation without real numbers): $3,200

NOI (Net Operating Income): $3,095

Your NOI is what you use to pay for your debt service (mortgage). $3095 - $3500 = -$415/mo

A Big question to ask is what part of tacoma are you in?  If you are in North Town, Old Town or University Place, you are going to have a higher class of tenant.  If you are going south the tenant class gets lower and lower and lower and your expenses are going to start spiraling up.  (Durh.  There it is.  East Side, so not the worst part of town, but not the best part either.)

Another thought, if these are neighboring properties, owned by one person, why is a the monthly rents on one 4 plex $150 less?  Did he recently lease up and found he needed to discount rent?  Did he recently lease up and be able to increase the rent? 

Of course, you are also asking him to take a 25% haircut to sell his properties to you, and even then at current rent levels the property doesn't look like it would be generating any profits.

What do you think @Zach Schwarzmiller  ?

Hi Kate!

When we bought our first property it was full of roaches, in need of new carpet and a paint job, and looking sad.  This week we finally got rid of a nightmare tenant.  The house, gorgeous at their move in, is now full of roaches, in need of new carpet and a paint job, and looking sad.

My point is that this property may look like this due to the tenants, not a tired landlord.  Fixing it up a little and trying to raise the rent probably won't really change the class of folks in your applicant pool.  Improving them one at a time doesn't really raise the bar, just makes them easier to rent quickly if they look shinier.

If I had investors looking to buy my properties, I would consider a big price drop or seller financing, but not both.  We lost the first property we made an offer on due to being unrealistic on what the bottom was, and they refused to engage any further with us.  It's OK to try it, but you probably won't get it.  And that might be a blessing.

Good luck regardless!

It's taken me a little bit to get some time to sit down and read through this. I think everyone's input is spot on for area/location/quality - only other thing I didn't see was factoring in reserve replacements (probably $550/unit/year). Owner financing can be great, especially if you don't have a pre-payment penalty and could pay these off and get individual mortgages with 30 year fixed rates on them (assuming you want to hold for the long haul. Fix them up, get everyone on 1 year leases, bump rents, refinance into conventional with 30 year fixed. That's what I would do anyways. Return on $ in area's like Tacoma is way better than King County @ the moment and the rental laws are more relaxed. 

You guys ROCK! BiggerPockets is quickly becoming my favorite place on the Internet:)

Thanks so much for all the really helpful info, I've realized that for as much information that I provided in the original post, there's an equal or greater amount of real solid info I would need before being able to analyze this further...

@Lee Reeves  - Having dug a little bit deeper, I think you are correct that the expenses seem low, and if a correct, higher number gets factored into the math that @Troy Fisher provided, that drags the NOI even lower, however Troy also raised an excellent point about rent discrepancy...why is one four-plex making so much more than the other? That's a question I'll only be able to answer by talking with the owner.

And in terms of location/property condition, as @Michele Fischer  commented, there's the possibility that the type of tenants who are in the units right now, paying $600/mo, have had an impact on the property's condition. I did a drive by of the property and the neighborhoods - the location seems nice enough, and the neighboring multi-family properties are definitely in better condition than the subject property...so one thing that got me thinking was, in a situation such as this, where a property has potentially been "dragging down" the neighborhood, how do you approach getting over the stigma that might be attached to that property? If everyone in the area knows that that's where low-class people live and it's dirty and run down...can you just kick everyone out, fix the property up, and people just forget about what it used to be like? Is it best to do it lock, stock, and barrel all at once - or if we were looking at taking a longer-term approach at rehabbing and getting better tenants in, is the stigma harder to overcome? 

In terms of being attracted to the idea of seller financing; it's my understanding that the portfolio/commercial lenders who would be financing a purchase like this generally look for down payments of 25% to keep their LTV at 75%, and for a $600k purchase, we unfortunately do not have $150k cash available. If I have totally misunderstood something or anyone has advice about creative solutions to this problem, I'd love to hear!

Thanks for all the advice so far, everyone!!

Are you insane?  Why do you think this seller would be motivated to owner finance to you for $600, 000 when it seems like he probably has $900, 000 in them?  Seems you're just tilting at windmills.  

@Bob Bowling -- There's a lot of reason that people would sell for less then what a property is worth.  Seems to me that's how most of us are trying to buy equity. And while I appreciate that you are trying to drive your point home, that perhaps this not a deal.  Responding with "Are you insane?" is a little harsh for someone who is asking us to evaluate a deal.

Originally posted by @Troy Fisher:

@Bob Bowling -- There's a lot of reason that people would sell for less then what a property is worth.  Seems to me that's how most of us are trying to buy equity. And while I appreciate that you are trying to drive your point home, that perhaps this not a deal.  Responding with "Are you insane?" is a little harsh for someone who is asking us to evaluate a deal.

Read the post before you start making accusations.  She stated the seller was insane and asked if she was "off her rocker".  I replied.  No worries tho.  We all a little crazy. 

@Troy Fisher  When, if I decide to sell my properties I will put them on the market 4 years before I want to sell at double market price so I'll create a frenzy of newbie investors that I will sell to at 50% over market.  Nothing says motivated buyer like being on the market for 42 months!  Geez, I learn so much investor psychology here!

Kate, chin up about the not so sweet posts.  We all get in the line of fire from time to time.

I have not encountered this situations.  We try to get our units to a notch above the competition at move in, but they rarely stay looking that nice, and don't really attract a better tenant.  In your case  would want to get it completely empty and start again with better tenants.  You could step shift the move outs, but you'd need to be willing to keep them empty longer, which would be tough.  As people see you working on them, the exterior improving, and no riff-raff as neighbors, they will probably be willing to give it a try.

Opportunity to create some real value, but also an opportunity to lose your shirt, since everything takes longer than expected.

Originally posted by @Bob Bowling:

@Troy Fisher When, if I decide to sell my properties I will put them on the market 4 years before I want to sell at double market price so I'll create a frenzy of newbie investors that I will sell to at 50% over market.  Nothing says motivated buyer like being on the market for 42 months!  Geez, I learn so much investor psychology here!

 I like that idea!  Be the top of the market, and just wait for a newbie to come along and try and pick up my properties! Heck I'll even owner carry half of it.  ;)

That's all right I'm looking at a property right now that has a DOM of 2558!

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