$300k - 8 unit apartment building for a first deal?

Question

I've been looking for small multifamily homes in the metro-Detroit area, and came across an 8 unit building with an asking price of $300k. I haven't done much research on commercial real estate investing because I figured I'd want to start smaller, but this just seems like a great deal so I thought I'd reconsider. Rents in the area go from about $600-800/mo. Each unit has it's own electric meter so tenants will pay for electricity as well. There are also other potential revenue streams such as extra storage bays and coin laundry in the basement. So taking a conservative look at this property here is where my numbers come out. I'd be buying this cash.

Cost $300,000

Repairs (Cosmetic) $30,000

Monthly Income (8 units @ $650/mo) = $5,200

Annual Income = $62,400

ROI: 18.9%

50% Rule: $31,200 annual income or $2,600/mo cash flow

I know $30k is not a lot of money for repairs on such a large building, but I believe all of the units are currently rented out, so that suggests to me that it's already in decent condition. Also, I think $650/mo is conservative and that getting $700 or $750/mo isn't unreasonable. These numbers also don't consider possible storage unit or laundry income. I'd love to know your thoughts. Is this a great deal? Are there things I'm not considering? It's a wholesale off market deal, and would try to negotiate down on price.

One other thing to note is that this building sold for $325k about 8 months ago according to Zillow. This concerns me, should it?

Drew Spencer · Answer

@Justin Frank the fact that they are trying to sell for $25k less than what they bought it for 8 months ago is a huge red flag for me. Additionally, it's a wholesaler who's asking $300k, so they likely got it under contract for even less!

@Robin Casper I haven't walked the property yet. It's a wholesale deal so I think it would have to be cash.

@Frank Geiger I did send details about this property to a friend of mine that owns some apartments. His biggest concern is the selling price for less than they bought it 8 months ago. He also warned that subsidized tenants can be difficult for a landlord and he thinks that is probably the kind of tenants that live there. He also suggested that unless I can do maintenance work myself that using a subcontractor for repairs and maintenance will eat up my cash flow quick. I have a 9-5, and travel a good amount for work so I won't be able to do any maintenance myself.  In regards to nailing down expenses, how might I find information on water and sewer bills for the property, and who has been responsible for paying that bill? I found tax estimates online, and am using some general percentages for vacancy, repairs, and capex.

Thanks for your input guys!

Frank Geiger · Answer

@Drew Spencer Depends how the owner has it structured. Sometimes the landlord pays it if its not sub metered, sometimes the owner charges a fixed amount to the tenants, and sometimes it's sub metered to each tenant.

You can ask the owner for statements, call the water company, ask other landlords in your area with similar units, or talk to the tenants.

Drew Spencer · Answer

@Thomas S. thanks for your input. I'm not sure I understand. The property was a C/D class when they bought it 8 months ago, you think this is the reason they are selling it now? Or are you saying you think they are probably selling it because they are dealing with S8 and have too much vacancy?

Can you explain what you mean by buying your cash flow in this class of property? I understand that if I had a mortgage payment of $1,200/mo that would eat into my cash flow, but that would still leave me with $1,400 cash flow every month. Are you suggesting that this type of property will probably require more maintenance and repairs than a class A/B that will eat into that $1,400, and essentially I won't have any cash flow?

Really appreciate the input!

Thomas S. · Answer

This defiantly sounds like a C/D lass property and is likely the reason they are selling so soon after buying. S8 can be a handful to manage and there are likely vacancies at this time. With the right PM this should be manageable. Proper due diligence should answer all your questions.

Your expenses will likely be greater than 50% initially and you should determine up front how you can refinance to pull out the maximum amount of your equity once you are stabilised. You absolutely do not want that equity sitting dead in a property of that type. You must be able to cash flow with full leverage or it is not worth the investment. You do not want to be buying your cash flow in that class of property.

Frank Geiger · Answer

Your statement “I haven't done much research on commercial real estate investing“ worries me. Grab someone who has done this before and have them partner on your deal. I would really nail down those expenses and not just use the 50% rule. The quick sale could be the result of a major repair item; so that’s something to look out for

Robin Casper · Answer

@Drew Spencer have you walked the property? Your market seems similar to mine as far as rents and price per unit goes. I look for properties that sell for 30-35k per unit and need cosmetic updates. If tenants pay utilities you should cash flow pretty well. Why pay cash? Why not use leverage?

Justin Frank · Answer

@Drew Spencer

Your numbers look good. I’m not familiar with this area that you are investing but I would personally want to know why the building sold less than a year ago for $25k more than they are currently asking to resell.