Multi-family deal seems too good, what should I be looking for?

39 Replies

Hi everyone,

I am starting out in BP and real-estate investing in general. I am looking to get involved in my first property. 

I ran across the following posting and it seemed to me to be non-comparable to other sale properties in the location. 

What flagged me was that this was a 27 unit building for $269K. Granted this property is in Detroit (though not in the worst neighborhood), but they claim 81% occupancy. Other properties with this many units are selling for much more.

I know the maxim of "you get what you pay for," so can you please advise - what should I be looking out for if I invest in this property? I feel like there must be something obvious I may not know about as a new investor that would cause the price to be what it is.

I would appreciate all advise.

Thank you!

-Ilya

Sometimes, you spend so much time looking for a problem that doesn't exist, that you lose out on  great deal.  Does this deal meet your requirements for buying and holding?  Can you buy it financially?  Do you have access to the rent roll and list of repairs or services done within the last 5 years (especially the last 21)?

It has been my experience, that if you spend your time looking for problems that you can't find, and because you favor the words "too good to be true", over actually finding out if you should be using the words "too goo to pass up", you will end up with a lot of deals that just make it.

The numbers don't lie.  Don't argue with them...especially don't start an argument with them for no good reason.

Thanks, @Joe Villeneuve  , I found this property over the weekend, so I haven't had a chance to reach the broker yet about rent rolls and repair history. The numbers seem like they are there. Since I am new, I want to make sure I am not just jumping at my first deal while doing something stupid. I appreciate your feedback. What do you think of the deal as a fellow Michigander who would be more familiar with the area?

With a lot of Multi-family there are AGAINT CODE constructions and additions without permit - Be aware of codes & zone.

 This is Detroit prices :) and for my opinion is NOT too good to be true.
Profit about 12%
It's will take you 8 years to payoff your investment.

I would recommend you to proceed with the purchase ONLY if you planing to hold it as an income producing property. 

what type of tenants are you looking to rent to?

Is management on site?

Are all units rentable or do some need rehab to get ready for rent.

Also this is a rough area but if you get it cheap enough it could be good.

Look at all the multi's in Detroit.  They seem to sit on the market for some time.

You could buy 7-8 SF's in the burbs that could cash flow 250 a month on each one. 

Hi @Didi Siani  , could you explain what you mean by profit being 12%?

Doing some quick math, I see rentometer is showing ~$525 average rent for this property. 

$525 x 22 units (81% of 27, assuming current occupancy) x 12 months = 140,000. If you assume 50% for expenses, it still comes to 70,000, which is about 26% of the $269k price. 

What am I missing? 

@Scott K.  ,@Joe Villeneuve  , help me understand - based on my math from above, it is still better to purchase this property rather than going to SFs. Am I not getting something?

Originally posted by @Ilya V. :

@Scott K. ,@Joe Villeneuve  , help me understand - based on my math from above, it is still better to purchase this property rather than going to SFs. Am I not getting something?

  Well the math says it looks like a winner.

Have you driven past this property?

You didn't answer the questions that I asked?

Sometimes even good math will lie to you. 

Hi @Scott K.  , I don't have all the answers yet, I am just doing so preliminary exploring. I did drive past the area just now and I saw things I didn't like like houses with collapsed roofs and other unsightly landmarks, so it could explain the price a bit. From the map, I thought the neighborhood would be better because it was farther away from downtown. 

Originally posted by @Ilya V. :

Hi @Scott K. , I don't have all the answers yet, I am just doing so preliminary exploring. I did drive past the area just now and I saw things I didn't like like houses with collapsed roofs and other unsightly landmarks, so it could explain the price a bit. From the map, I thought the neighborhood would be better because it was farther away from downtown. 

Oh boy.  I strongly suggest you get a better understanding of Detroit before you start buying.

There is no good neighborhood near Davison Ave.  You need to get closer to downtown as you can.

So just go find another property not in a crackland warzone.

"I thought the neighborhood would be better because it was farther away from downtown."

This is not how the city works.

Originally posted by @Ray Foley :

"I thought the neighborhood would be better because it was farther away from downtown."

This is not how the city works.

It's about halfway between U of D High School (not good area) and Palmer (good area). The specific area is a little (a lot) weak. I wouldn't do it, but I'm also not a multi-family REI guy.


It's about halfway between U of D High School (not good area) and Palmer (good area). The specific area is a little (a lot) weak. I wouldn't do it, but I'm also not a multi-family REI guy.

 I don't think that is the right location, If it was between UofD and Palmer (Woods?), in that 7-mile corridor I would be much more supportive.  The map I have has this at Linwood and Fenkle. It is on the wrong side of the the lodge and a bit too close to Highland Park for my taste.


Oh boy.  I strongly suggest you get a better understanding of Detroit before you start buying.

There is no good neighborhood near Davison Ave.  You need to get closer to downtown as you can.

So just go find another property not in a crackland warzone.

You don't necessarily need to get close to Downtown, though I do think you do need to be close to one of the city's stable neighborhoods. 

Current NET at 81% is about $33k, so rent o meter is certainly off (which gives avg rents for an Area, not a Property), plus owner may be paying all utilities.  A major roof Repair 10 years ago probably means it needs a new roof, and is likely just a dump in a crappy neighborhood.  The rehab costs are likely more than the purchase price.

As you may have noticed from the comments made, if you had to describe the City, it would be as a series of islands...separated by places where you could drown.

Hi Ilyia,

You've gotten a lot of good advice regarding this deal already.  One thing I'd like to add is that you do a thorough inspection of the entire property.  Have a property inspector go through all the systems, see as many of the units as possible, etc.  

The numbers look good assuming you're willing to take on the task of managing a multi-unit building in a low income neighborhood and all of the potential challenges that can accompany a property like that (or are willing to hire a good property manager.)  Just verify the condition of the property.

-Rob  

Hi @Ilya V.  

Just to give you an idea, the average cap right now in metro Detroit is 8.5% and trading at an average of 48k per unit.  This should give you an idea where a deal like this stands.

Realize as well that almost all of the deals you find sitting on LoopNet are garbage because they have been seen my hundreds of eyes before you and they all passed.  

if I were you, I would plug the address into 

www.crimemapping.com ( no, I don't work for this site nor am I associsted eith them in any way)

It's  great because it will tell you exactly how much. Crime has taken place within  2 miles of the property ( or you can zoom in for a shorter mile radius) and  it will tell you not only how much crime has taken place eithin the last tear, but also exactly what type of crimes were committed. It's a great respurce that can help you further qualitatively  analyze a property further when it looks " too good" on paper. Best of all, it's free! Hope this helps :)

Quick analysis here. Should run all the figures before making a decision.

$525 per unit rental income

$20,000 - $40,000 per unit (depending upon age of building primarily) purchase price. 

Hope it helps.

Medium decent properties logo jpeg  1 James Syed, Decent Properties, LLC | [email protected] | 618‑406‑9775 | http://www.decentproperties.com | IL Agent # 471018522

Hi @Nick Keesee , thanks very much. Would you mind elaborating on the numbers a bit so I could understand them? Also, where do you recommend looking if Loopnet is not going to yield good results?

@Account Closed  awesome resource, thank you! I will keep it handy to look for all other deals. 

Originally posted by @Ilya V. :

Hi @Didi Siani  , could you explain what you mean by profit being 12%?

Doing some quick math, I see rentometer is showing ~$525 average rent for this property. 

$525 x 22 units (81% of 27, assuming current occupancy) x 12 months = 140,000. If you assume 50% for expenses, it still comes to 70,000, which is about 26% of the $269k price. 

What am I missing? 

Well, they are only claiming a 33,552 NOI in the listing, so it would be much safer to run your initial numbers using that, rather than your higher estimate. I don't know if this means that the rents are really low, or that the expenses are really high. But it does look to be a 1940's building with owner paid utilities. You can usually call a utility company and get them to tell you what the actual utility charges were (or at least a monthly average). It's wise to do that instead of relying on what the listing broker will tell you :)

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

Go visit the property at duskish, while still light enough to view initially then as it gets dark. Go see it and let us know what you find!