12 Unit Multi-Family - What are the things to consider?

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12 Unit Multi-Family - What are the things to consider?

Michelle ShriverPro Member
Rental Property Investor · York Haven, PA · Member since 2018 · 49 posts · 39 votes

The seller is asking $749,000 for this property, the tax assessor has it at $627,100,  I've analyzed it at $600,000.  It needs some exterior work, and what appears to be a minimal amount of interior work.  I've only been in 4 units, of course I'd need to see all 12 and have the appropriate inspections.

Though I've analyzed it as a cash deal, I would get financing for it, 65-75% of the price up to 7.5% interest rate, though hopefully lower.  

I don't think it will appreciate much, my primary interest has been cash flow which I don't think I'll get much of after financing.

Any thoughts or additional things I should consider I would love to hear!

Monthly Income: Monthly Expenses: Monthly Cash Flow: Pro Forma Cap Rate:
$12,833.00            $8,050.05 $4,782.95                    9.15%
NOI Total Cash Needed Cash on Cash ROI Purchase Cap Rate
$57,395.44            $638,400.00 8.99%                           9.57%

Property Information

Purchase Price:  $600,000 

Estimated Repair Costs:  $30,000 

Total Cost of Project:  $630,000

After Repair Value:  ??  

Property Description:  12 - 3 bedroom 1 1/2 bath, Section 8

Rent Total:  $12,833.00

Vacancy - $1,283.30 (10%)

Repairs - $1,026.64 (8%)

CapEx - $1,026.64 (8%)

Water & Sewer - $355.00 (3%)

Electricity - $180.00 (1%)

Garbage - $210.00 (2%)

Insurance - $1,208.00 (9%)

Property Taxes - $805.17 (6%)

Flood Insurance - $447.00 (3%)

Lawn - $150.00 (1%)

Termite Contract - $75.00 (1%)

Management - $1,283.30 (10%) 

Total - $8,050.05 (63%)

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Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
7y

make sure you run the taxes based on the new purchase price/new assessment not the current rate

insurance seems low, is that a quote? You want lots of liability (umbrella)

How is the upside on the rents? parking? etc.

Is the 30K an actual item or just an estimate. If, say, its the roof, be prepared for peeling it off and finding more than you bargained for, etc. I might add on a good chunk of reserves for something like this in addition to the accounted for expenses

lead certificates?

I think you are likely low on repairs

Flood insurance? Oy, do check the updated fema maps and make sure you aren't about to get whacked with a change in risk.

good luck!

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  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    7y

    make sure you run the taxes based on the new purchase price/new assessment not the current rate

    insurance seems low, is that a quote? You want lots of liability (umbrella)

    How is the upside on the rents? parking? etc.

    Is the 30K an actual item or just an estimate. If, say, its the roof, be prepared for peeling it off and finding more than you bargained for, etc. I might add on a good chunk of reserves for something like this in addition to the accounted for expenses

    lead certificates?

    I think you are likely low on repairs

    Flood insurance? Oy, do check the updated fema maps and make sure you aren't about to get whacked with a change in risk.

    good luck!

    2Reply
  • Michelle ShriverPro Member
    OP
    Rental Property Investor · York Haven, PA · Member since 2018 · 49 posts · 39 votes
    7y

    Thanks @Jonathan R McLaughlin

    The current owner purchased it in 2012 for $165,000 plus negotiated a mechanics lien from $60K down to $30K, so we will just call it $200,000.  The owner from whom he purchased it paid an eye-popping $848,000 in 2007!  I'm guessing that he got himself in trouble by overpaying, and while the demand for apartments is traditionally high, I'm guessing rents went down as more rental stock opened up.  There had been a shortage of housing due to a hurricane in 2005.   

    The property was distressed and maybe only one unit rented when the current owner bought it.  He let it sit for the better part of 2012 before he began to work on it.  

    Within the last 5 years he has done a new roof, actually built a peaked roof onto a flat roof, all new HVACs, new water heaters, fully renovated 4 units, flooring, cabinets, doors, bathrooms, etc.  The other 8 he did what was needed, paint, repairs, flooring, appliances.

    The assessor updated the value just last year, so I don't expect it to change too quickly.

    The insurance amount is from the current owner, I need to check with my own agent.

    How much liability do you think would be wise?

    With regards to flood insurance, I checked the FEMA maps myself. Flood insurance is not required but it's close to areas that flood so I think flood insurance is a must.

    No real upside on the rents as it is Section 8 and 1 other program.  Don't see it doing as well on the open market.  Parking lot for the tenants, but no opportunity for extra income there.

    Building was built in 1979.  I agree we are low on repairs.  There are always oddball leaks and repairs that one doesn't notice.

    About 5K of what I allotted is for the termite treatment.   The immediate things that I see are new soffits (13,000 sqft rectangular building), some brickwork in two areas (some loose bricks and settling), a hole in the parking lot, new outdoor lighting, painting the exterior doors and architectural arch-like things on the upper windows of one side of the building and the faux balcony things (including railings) at the upper windows of the opposite side of the building.  Maybe another $10K?

    Thanks!

    0Reply
  • Tchaka Owen
    Real Estate Agent · Merritt Island, FL · Member since 2017 · 974 posts · 1k+ votes
    7y

    @Michelle Shriver - Everything you've written makes sense and I get why you may have some hesitation. Three numbers I'd massage (and see if that sways you one way or the other).

    1. Termite. I'm guessing you really mean Pest, because I doubt York Haven, PA has a major termite issue. You'll probably pay and they come around once a month and help keep critters away. My guess is that $150/mo is more realistic.

    2. Vacancy. Often people getting housing assistance will stay put. There are inspections and paperwork that go into getting a place approved and life is easier not having to do all that. Though I'd show 10% on paper, behind the scenes you should be able to get away with 8%.

    3. Management. I'll pay 8% for management. Same thing as before, when negotiating with the seller, my numbers will show 10%.. But you should be able to get it for less.

    This could add up to $400/mo. That's not a big difference, but each dollar counts. Good luck!

    0Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    7y

    What is the going cap rate for this area? 

    0Reply
  • Michelle ShriverPro Member
    OP
    Rental Property Investor · York Haven, PA · Member since 2018 · 49 posts · 39 votes
    7y

    Thanks @Tchaka Owen for your input.  

    1.  I neglected to mention that the property is in New Orleans, not York Haven.  I live there part time and have a rental duplex in addition to a small personal condo.  I actually may need pest control as well, thought we typically handle that on an as needed basis.

    2.  True on the vacancy.  Though the current owner has had it at full occupany, he had to evict a cash paying tenant, at the same time one of his Section 8 tenants just up and moved and he wants to evict one other person.  He has a few that won't be going anywhere for a while.  I don't think he screens well and if I were to end up with the property it would probably take a year and a half to get it nice and stable.

    3.  He just hired a property manager, so that could be another issue that I would have to deal with.  I think 10% is too much when he doesn't need to collect rents, plus I would be involved in screening the tenants.  So there is some possibility there.  

    The thing is, it is close......which is why I've posted it here.  

    Thanks again!

    1Reply
  • Michelle ShriverPro Member
    OP
    Rental Property Investor · York Haven, PA · Member since 2018 · 49 posts · 39 votes
    7y

    @Mary M.

    The typical cap rate for that type of property in that area is about 8%.

    0Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    7y

    @Michelle Shriver at a 8CAP the price will be 718k. 

    Your value add play would be reno add value to increase rents which will increase value of property. 

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  • Michelle ShriverPro Member
    OP
    Rental Property Investor · York Haven, PA · Member since 2018 · 49 posts · 39 votes
    7y

    Hi @Mary M., thanks for your response.  I know how to come up with the cap rate, but how did you back into the price using the cap rate?

    Unfortunately, I don't see a lot of room to increase the rents nor to reduce the expenses.  My best bet would be getting the property at a better price.  Seller is motivated, but there is other interest.  However, I will not overpay, someone else can do that if they want to.

    0Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    7y

    @Michelle Shriver  i calculated the price using the cash flow/cap rate. 

    “ overpaying” is personal. I would jump at a nice 8 cap :). And remember, multi family is not priced or sold the same as single famy 

    0Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    7y

    Also, if an 8 cap is standard for your area paying 717k would be a fair price. So not sure what you mean by overpaying?

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  • Michelle ShriverPro Member
    OP
    Rental Property Investor · York Haven, PA · Member since 2018 · 49 posts · 39 votes
    7y

    @Mary M.

    Hmmmmm, what if you identified up to $40,000 worth of work (mostly exterior, but not major) in order for it to be an optimally functioning property?  Not talking about "pretty", just sound and eliminating deferred maintenance issues.  Soffits, rotting wood trim around doors and some windows, some painting, repair to a couple of small areas where the bricks are coming loose, new outdoor lighting, hole in parking lot......

    0Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    7y

    Doesnt matter. Price is based off current net operating income and local CAP rate. If the property is generating what you listed, and similar properties sell at an 8 cap the price is 717k

    I assume you will increase rent once you do the various improvements ?

    1Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    7y

    I want to add : you may be able to offer a bit less but look at it this way - if those items are not done eventually rent will start decreasing or not keeping up with local rent amounts. 

    But it sounds like other offers are coming in so you might give it a shot and see how it pans out? What does your agent say?

    0Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    7y

    Also, looking at your numbers you list over 1k/ month for insurance. That is over 12,000 a year, is that correct? I pay half that for a property 4x the price.  

    Have you seen the current years expenses to know what they are?

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  • Michelle ShriverPro Member
    OP
    Rental Property Investor · York Haven, PA · Member since 2018 · 49 posts · 39 votes
    7y

    That's the trouble, it will be difficult to increase rents.  I would do the improvements because they need to be done and I believe it's the right thing for the long term viability of the investment.

    They are all Section 8 with 1 under a different program.  There are little things I can do to the interior that could get me an extra $5-$10 a month, but Orleans Parish is not straightforward in how they determine the amount of the voucher.  Just because the max for a 3 bedroom is $1300 doesn't mean I'm gonna get that.  Could be $1100 and part of the variable is how much the tenant has coming in through a job or what she collects on her kids. 

    I don't see it renting on the open market, though he had one tenant in there who worked for UPS who was a cash payer, but was trouble and had to be evicted.

    The building is being "wholesaled" by a fella from the local REIA for another fella from the same REIA. Seller needs to get out because foreign, silent partner/investor is ready to be paid by 1/31/19.

    I haven't spoken with the wholesaler in a couple of days, but put a message out to him today.

    In any case this has been a great conversation as this is the first 5+ multi that I've considered and it has been helpful in understanding how it's priced differently than single family or small multis.

    Thanks.

    @Mary M., @Tchaka Owen

    0Reply
  • Henri Meli
    Investor · Morrisville, NC · Member since 2012 · 1k+ posts · 673 votes
    7y

    @Michelle Shriver . There are other ways to add value without going through rent increase. Remember, you want to find ways to increase income and lower expenses.

    I see you have expenses for water and sewer. Can you implement RUBS?

    You have some electricity expenses, I'm assuming it is common area. Can you switch lights to LEDs? Is there a green program in you area? Check with your energy company. There are rebates generally for such. 

    Are you enforcing late fees?

    Are you charging application fees?

    Are you charging monthly pet fees?

    Can you set up coin laundry? Snack/Drink machines?

    Can you turn some units into short term rentals and charge per night?

    Pet deposit fee?

    Can you package cable/internet and offer to tenants?

    Have you reviewed the vendor contracts? 

    Go through the lists of repairs and see if some could have been avoided or done in more cost effective way.

    Have you reviewed tenants lease contracts, to make sure you are not leaving money on the table?

    Can you set up a website (or use existing ones) for tenants to enter maintenance problems? If you self manage, tenant 

    should only call u for serious issues. Otherwise, they shouldn't really need you.

    What's your marketing strategy and what is the typical turnaround time to re-rent a vacant unit? What strategy do you have in place to keep vacancy/turnaround time to a minimum?

    And there are many other ways ... some might require sweat equity, but it well worth it  , once automated.

    1Reply
  • Mike Wood
    Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
    7y

    @Michelle Shriver If you don't have experience with Section 8 in New Orleans, this would be a huge jump into the program.  I don't have any Section 8 rentals, but everyone single small investor that I have spoke to have had issues with Section 8 units in New Orleans.  Most have stopped using the system.  Tenants are just really hard on the properties and can create more than their fair share of issues.

    Given that you stated the rents are around $1070k for a 3bed, this property has got to be in a C- or D location (my guess in New Orleans East).  You are correct that rents will not be able to be increased, since your only market is Section 8.

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  • Michelle ShriverPro Member
    OP
    Rental Property Investor · York Haven, PA · Member since 2018 · 49 posts · 39 votes
    7y

    Wow @Henri Meli, such a lot of great ideas!  I will keep them in mind for the future as most of them are not applicable to this situation, though several of the ideas could be helpful.

    @Mike Wood  I do have experience with Section 8 in New Orleans, but only with one duplex in Algiers.  I had one bad experience with a tenant who was in a unit when we bought the building.  That was quite the story!

    My tenants now are stable.  HANO is a pain, though I hear they are getting more efficient.  

    And you are right, it is in the East!

    0Reply
  • Jonathan Nixon
    Rental Property Investor · Fort Lauderdale, FL · Member since 2018 · 86 posts · 33 votes
    7y

    @Michelle Shriver Tough market on the East side, but you’ve got to love NOLA market. I personally would just push to get the best price as humanly possible. For a huge exclusive Section 8 in that part of town I would want it to feel near “too good to be true” status pricing.

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  • Michelle ShriverPro Member
    OP
    Rental Property Investor · York Haven, PA · Member since 2018 · 49 posts · 39 votes
    7y

    @Jonathan Nixon

    Yes, for that area and the hassles it's got to be a great price!  Seller is unwilling to play at my price point.

    1Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    7y

    @Michelle Shriver i am curious about the insurance number you have listed. Is it really 1,000 per month? 

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  • Michelle ShriverPro Member
    OP
    Rental Property Investor · York Haven, PA · Member since 2018 · 49 posts · 39 votes
    7y

    Yes @Mary M., it is.  

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