8 plex . . . ideas?

Question

1b/1b units 8 of them, not great shape not great area, 300K, rent will pull in $350/unit but all utilities are on one meter, there are currently only 2 units rented, like I said not a great area. I know there is a lot more to look at but what would you say is a reasonable offer? Clearly NOT 300! How would you present the offer? with numbers explaing or simply offer and assume they have to understand they are asking way too much?

Jon Holdman · Answer

Assuming $500 is realistic, and that I wouldn't have vacancy more than 20%, I might go $180K.  I'm not entirely comfortable even with that number.  I'm using 50% for expenses, but with a shared boiler (standard in that area, as far as I can tell), and a potential vacancy problem, that may be optimistic.  At 60%, the max price drops down to $120K.

I would drive the area and call every building in the area.  There are many, many, many 8-12 unit buildings in this area, and if a large majority of them have a unit available right now, I'd be worried about vacancies.

Aurora uses a different building code for buildings over two units, so I'd assume I would have higher expenses for any work.

There is one specific sub area that seems overrun with vacant or nearly vacant buildings and I'd be really leery of that area at any price.  I don't know what's going on in that spot, but its ugly.

I think it may be challenging to get good financing on these buildings.  I'm assuming 7%/30 year fixed for my calculations, but I think that's optimistic.

Jon Holdman · Answer

$500 should be about market.  However, there are tons and tons of small 1/1s in that area.   Take a drive.  You'll see lots of "move in special" signs.  I've not seen anything there that's cheap enough to buy.  The price you mention is about the market price, though.  No idea how anyone makes any money on these, but they do change hands.

Michael Rossi · Answer

It's a loser - I wouldn't even make an offer.  However, if you were going to make an offer, I wouldn't pay more than $90,000 less any needed repairs.

Good Luck,

Mike

Michael Rossi · Answer

That's a deal breaker for me!  I never buy rentals if I have to pay heat.  One angry tenant can wipe out a year or more of your cash flow just buy cranking the heat up and opening the windows.

Just say NO to paying the heat!

Mike

Masa Don · Answer

Ok so lets say that this particular place is a D in all aspects except location I would put it at a B- C+ somewhere in there, and lets change the rent as Jon said to $500 including fix up what would be a good offer?

I guess my main concern on this place is that they have all the same utilities meaning that the landlord will have to pay ALL utilities (unless there is a way around this?). What type of liability is that? I am thinking with these volatile times utilities could be a huge damper on profits! What do you guys think?

Michael Rossi · Answer

Thanks Will, that is the general criteria I was looking for.  You see, that's what I mean about the classifications - it's gibberish.  Most properties don't fix so easily in one of these boxes.

So, what if a property was 15 years old, had lots of amenities, excellent location, good (but not great) curb appeal, and was in very good (but not prime) condition?

Or even more perplexing, what if the property was 50 years old, had top of the line amenities, excellent location, great curb appeal, and was in prime condition?  If it's 50 years old, does that make it a Class D property?  A Class A property?  Or something in-between?

All I care about with multi-family property is the numbers.  Do they make money or don't they!

Gibberish!

Mike

Will Barnard · Answer

Actually, class ratings for apartments are based on several factors: Age, location, ammenities, curb appeal, overall condition, rents, etc. Class A & B apartments have the highest occupancies as well.
            
            Class D apartments refers to a property that is more than 40 years old, has no ammentities, is in a very poor location, and not maintained at all.
            
            A class C would be 21-39 years old, few ammentities, poor or slightly better location, and in need of some maintenance.
            
            A Class A would be less than 10 years old, have lots of ammentities, excellent location, great curb appeal, and in prime condition.

Michael Rossi · Answer

No, there is no standardized classification system that I know of.  There are as many different definitions of Class D property as there are people you ask.  Basically, yes, it's generally an older property that will bring in lower rents than a Class A, B, or C property.

If you spend a few minutes searching, you can find a few definitions of the different classifications of property.  Here is one definition that applies to office space, but is close to the definitions I've seen for multi-family apartments also:

http://www.crye-leike.com/commercial/SSOfficeTips.php

Mike

8 plex . . . ideas?

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