Posted over 2 years ago

Purchasing Our First Duplex

Up until this point we've only invested in single family homes, but as we keep doing our research, small multi-family (MFRs) are the way to go.

2016 03 31 1446

We looked in the Pensacola area for 12+ months and made offers on 3 other MFRs before we found one that fits our investing criteria. I was so anxious to get in a MFR at times I found myself compromising on our #s - trying to convince myself the #s were ok, they'll improve later. They were not ok and we're not doing this to be just ok. Compromising on the #s is a no-no and this has been a great discipline exercise for me and great display of patience (which I rarely have - I must be getting older/wiser). As we stuck to our investing criteria, we finally found one. And I'm not just talking about a good deal, I'm talking about a great deal; at least it looks like that on paper :).

Excitement. What makes this such a great deal?

  1. Cash Flow. This Gulf Breeze duplex is expected to cash flow way better than our investment criteria require. I couldn't wait to close on it and have the revenue coming in.
  2. Expanding: Our portfolio was expanding and so was our net worth.
  3. Subdivide Lot = Extra Cash Flow. This duplex is on a lot big enough to be sub-divided (which we will eventually do). This area of Gulf Breeze is zoned for many uses, so very little investment on the sub-divided property should yield a few extra hundred dollars more in monthly cash-flow. Another option is to sell off the subdivided lot, lowering our cost point on the duplex.

Struggles. As-in, things that made me question what we're doing.

  1. Patient to find a good great deal. Now that we've found a great deal, this will be easier for me to repeat the next time.
  2. Banks/Mortgage Brokers. This probably goes without saying but I'd rather someone dig sand out from underneath my toe nails with a spoon vs. working with Banks/Mortgage Lenders . We have a great credit score, we have the down payment, W2s, etc, but I just felt like I was chasing them -take my business please!!! Can't quiet understand why they weren't chasing me.
  3. Postponed Closing. Even though I finally caught a lender by the tail and started the process of ensuring financing with them a few days after we went under contract, it took 3+ months for them to pull everything together. The Gulf Breeze seller wanted to pull out, but thanks to my realtor for calming the seller down and bringing him back in. This was a new relationship with this bank and I'm hoping this doesn't happen with our next acquisition. If it does, at least I'll be used to it - they have REALLY good rates.
  4. Choosing a property management company. Gulf Breeze is a bit of a drive and with our portfolio expanding, I thought its best to bring on some extra help. I called 4 different property management companies (top hits from Googling 'Pensacola Property Management') and went with the only one that called me back. Luckily, they have impressed thus far with their availability and response times.

Verification Process. There are a few things we wanted to verify about the duplex and made our contract contingent upon. The previous owner provided all of this. They are:

  1. Verified Rent Roll. We wanted to make sure the tenants were paying at least the amount of rent we used in our calculations to underwrite the deal. They were actually paying a little more.
  2. Current Tenant Rental Agreements. We also wanted to ensure what the current rental agreements look like as we would inherit those (at least until they expire) with the purchase. We also wanted to be aware of any security deposits the tenants paid that will need to be transferred to us at closing.
  3. Maintenance History of Each Unit. Just another verification step we took to ensure we weren't acquiring a property that had a bunch of deferred maintenance.

As the months roll on and this property produces like expected, I'm certain our Excitements will make me easily forget our Struggles. Like a new parent who struggles to get through the first 6 months, I'm hoping we quickly forget the stress and zombie feeling of being new parents.

Comments (12)

  1. This was a great article. Thank you for sharing your experience. I am trying to balance being patient with purchasing my first multi-family in 2018. 

  2. This is an outstanding article. I'm considering doing an owner occupied MFR purchase in 2018. Hopefully I can find that diamond opportunity as well. Cheers!

  3. Hi @Jay Helms, I know I am a bit late to the party, but I was wondering how you funded the deal?  I understand you got a bank loan, but what were the terms?  Was this a 20-25% down, 30 year?

    1. No worries Jon. This continues to be one of my most popular blog posts on my site and a positive cash flowing property at that, so I'm happy to talk about it. But yes, a conventional 20 yr. bank loan, 20% down, 4% interest rate from a local credit union. 

  4. Your feedback about dealing with banks to obtain financing mirrors my experience.  I constantly find myself thinking "Why am I working so hard?  They should be working for MY business."  To me, it's a sign of mismanaged operations, lack of customer focus and a poorly trained workforce.  On several occasions, I've considered writing to the bank president describing my miserable experience.  It seems that banks excel at adding complexity to fairly simple/routine situations. Ridiculous.

    Seems to me like there is a sizable opportunity for competition to steal home lending business from the banks by just getting a few basics right (i.e., treat qualified customers right; make it fast and easy to do business if you meet the basic criteria (verified W2 income, proof of down payment, good credit, etc).

    Are there any lenders out there that "get it"?  Think like owners?  Understand and enjoy being enablers rather than gatekeepers?  Let's hear from you.

    1. John - my apologies on the extended delayed response. The gist that I'm still receiving is that lenders and loan originators are not incentivized correctly and typically fall back on the excuse of "increased government regulations." I get it though, they are trying to protect their money.  Agree with you there is a sizable opportunity - and I wouldn't consider it stealing, just quality customer service. I am happy to report that in a recent transaction, I might have found just said bank. The largest but also the easiest loan I've obtained to date. I scrape the surface of it in a more recent blog post, Purchasing Our First Apartment Complex. 

      Since it has been a year, sorry about that again, have you found any banks/lending institutions that have made the process easier for you? 

  5. Im thinking about getting into multifamily, but the numbers dont seem as good as my SFRs. Do you mind giving some details on your deal. Thanks

    1. Hey @Scott Carre . This is my first small MFR but I kicked over many MFR stones before finding this one. One of our criteria for investing is a minimum cash flow per unit of $200/month. Our SFRs tend to do better than that at an average of $300/month, but those units are typically in lower class neighborhoods where appreciation is going to be slower. With any of our opportunities, the purchase price tends to be the biggest driver for squeezing into our investment criteria. I have to give credit to my realtor (team is important) for this deal. The owner was ready to get out and sold it for way under appraised value. During this process one MFR offer I made (explaining to the owner how I can about my #s) offended him so bad, he told me "you and your calculator can go f&#k yourself!"  What's interesting is that was 6 months ago and his property is still on the market. 

      Purchase Price: $90k

      Total Monthly Rents: $1,300 

      If you'd like another set of eyes to look at any of your opportunities, be glad to do it. Best of luck!

  6. What convinced you that multi family was better then single-family?

    1. Listening to the BP Podcasts @Sarah Lorenz. Multiple units for one transaction, and the more I've dealt with banks, the less I want to deal with banks. Know what I mean? I have a 2-part series post coming out soon that talks about my recent horrifying experiences with banks, but what pushed me to continue to look at MFRs was  @Brandon Turner's consistency on pushing MFRs and recognizing what's going on in some areas of my local market.  

  7. I love that you insisted the returns be better than "just ok".  One hard part in this business is the patience to wait for your home run pitch.  Good luck!

    1. Thank you @Natasha Keck . Patience hasn't always been my strongpoint but this transaction will certainly help it improve.