Skip to content
Welcome! Are you part of the community? Sign up now.
x

Posted over 8 years ago

Multifamily exposed

Multifamily is buying more than 1 unit and just putting paint and carpet in and having it rented the next day right? WRONG

Here is my first multifamily deal:

It is a quadplex in Nashville. 

Four Units: 3 of which are 2/1, 1 is a 1/1.

We purchased at $105,000 from a wholesaler. They said 5-7k in repairs, which was way off. Mistake number 1. However, we did our own due diligence and budgeted for $20,000 in repairs. It mainly was cosmetic work, and we were only renovating 3 units since the 4th unit was rented out at $600 (with is under market value).

It turns out, when you start ripping out cabinets, and flooring, you discover other problems. Quickly our $20,000 budget went out of one of several broken windows we had in the place and turned into $35,000. 

Before we get to the rehab, we ran into trouble on the financing side. We used our cash for this purchase, which wiped us out personally. So we asked for a refinance on the place in order to pull cash out and to rehab. Turns out, banks do not like you if you do not have a W-2 income. Originally, the banker we used (small portfolio lender that I will never use again) said we could pull out 50% of the purchase price and add repairs, that would be the loan, so $57,500 + $20,000 budgeted = $77,500. He said we would close in 2 weeks. Mistake number 2. When a bank says 2 weeks, It means 6 weeks. Well, 6 weeks turned into 8 weeks (2 months to close a loan!!! Yikes). The banker claims it was because we had no steady income and the loan was "complicated," so underwriting took forever!

Turns out, we did not get the refinance. We were lucky to have another house that we inherited from a family member that is worth approximately $420,000. So the banker said we could use that as collateral, and he would lend us half of that as HELOC. This actually turned into a better situation for us. Mainly because it was an interest only loan so under $200 a month is mortgage payment. However, in order to pay that down, we were amortizing it ourselves at 25 yrs, so we needed $900 a month to eat away at the principal, so we could use that money for future deals.

Now that we had financing in place, we could proceed with the rehab. He told us 4 weeks at $30,000. Mistake number 3. A contractor should be able to do $10,000 a week in renovations. If they can't, YOU MOVE ON TO THE NEXT CONTRACTOR. That is a huge red flag. Because, he was doing the work himself. No team. Did I say red flag? 4 weeks turned into 8 weeks (another 2 months). We were already 4 months into this place with one renter.

We ran into several hiccups throughout the process:

1. We had to submeter the properties for water. We had a bad plumber. He would leave the job site without finishing, he was on the phone the whole time. The company we used made it very difficult for us by making us do all the work, and of course, it costed us a lot more than we expected. We originally thought $1000 for the submeters and installation. That turned into $2,000.

2. A leaky basement. Be very careful when buying properties like this. When we bought the place, it had a flooded basement. We originally thought the pipes froze. It was during a time of subzero temperatures and the property was vacant. We budgeted $5,000 for pipes. It was not the pipes, but we have a foundation crack. 

3. We ran into electrical issues in one unit which fried one of our air units. 

4. When you rip out cabinets, kitchens, and bathrooms, EXPECT to find mold and rotten everything. We didn't account for that at first. We learned the hard way

5. One of the units has no washer and dryer hookup, meaning they have to go to a laundromat to do their laundry. That is a HUGE turnoff to renters. We will probably have to run a hookup into that unit. Probably will cost us another $2,000

All of this and we have not renovated the 4th unit yet, which will become vacant soon. The tenant is not happy with us as a landlord (Probably because we are making her pay her water bill now), so she broke the lease and is moving out. I am not mad or even trying to fight that because she was an inherited tenant. I have not heard good things about inherited tenants for the most part. Besides she can leave, we renovate, we charge more rent. 

Here are the numbers: 

Purchase: $105,000

Rehab: $40,000 when all done

Taxes: $1,744

Insurance: $2,000

Management: 10% = $3,480

Vacancy: 10% = $3,480

Monthly rent: $2,900

% rent of total investment = 2% exactly

mortgage = $900 a month = $10,800 annually

Cash Flow - $13,296 annually = $1,108 monthly

Basically, expect the worst out of a property. If you think it's a good deal after that, buy it!



Comments