Location? Location? Location?

Question

Hey everyone!

Everyone heres location, location, location all the time. Is this really true? All the multifamily homes I find that the numbers work are in areas that aren't that good or safe.

For example:

I found 3 triplex that is selling for 180k owner financed. works out to 60k each

7 units already occupied at 400/month = 2800 gross rent

one of the triplex needs some work but I feel like I can cash flow 1500 /month on this even with 100% financing!

It saves me a lot of costs since 'm buying 3 properties in one

Since it is owner financing I can get out of a lot of closing costs and I also assume banks wont see it if I need to get conventional financing for a second property.

Let me know what you guys think. This will be my first purchase so please bear with me guys.

Thanks!

Jonathan

Mike Hansen · Answer

I think location, location, location such a big deal because it helps primarily to identify 2 of the tangible numbers in a typical analysis:

1. Vacancy.  If the properties are in "bad areas" you probably will have less interest in the units when they need to be rented, and attract not so ideal tenants that will give you headaches (late/non-payment of rent, don't take care of property, etc.)

2. Operating Expenses.  Cheaper properties usually have more that needs fixing.  They also might be in areas with higher crime rates so home and car break ins, property damage like graffiti, etc. more common.

1 and 2 are tied together and can create a death spiral.  When you can't rent them, you don't cash flow as well/at all, which means things don't get fixed, which leads to reduced property value and you lowering rents, which leads to things not getting fixed..... etc.

I think you need to strike a balance: on one side, you can buy great homes in great locations that attract great tenants which saves you time and headaches, but the numbers won't be as good.  On other side, you can go for properties with high returns but it takes more time and effort to operate them.  Everyone picks where they want to be in this range depending upon what works for them.

Mike

Jonathan Ramsuchit · Answer

Thanks for the response Roy,

When it comes to answering the neighborhood all I know that the median household income is 28,000. Assuming little to no growth in the neighborhood.

I guess I can assume Capex to be around 10k.

Aaron Montague · Answer

Grab numbers for the following items and figure out how much your monthly costs are going to run:

Taxes

Sewer and Water

Trash

Heat/Utilities

HOA

Cap Ex and Ops (this is the number you'll use to pay for future expenses, roofs, furnaces, light bulbs, etc)

Insurance

Mgmt Fee (as a %)

Vacancy (as a %)

Jonathan Ramsuchit · Answer

Thanks for the response Joel

the seller is selling 3,  3 unit properties. Totaling 9 units.

7 of those 9 units are renting for 400 each. That totals 2800.

the tenants will be paying utilities

Owner financing requires 50k down the rest of terms are negotiable.

Roy N. · Answer

@Joel Owens

I believe the OP has found 3 triplexes (9 units) and 7 of the units are presently rented at $400/mth for a monthly gross of 2800 [with a scheduled rent of 3600].

I agree that there is not really enough information to provide a proper analysis.

There will be three buildings to maintain (roof, envelope, HVAC, grounds, etc) ... so analyse each building separately.  On a 9-unit building I would be looking for a CoC of 9-10% {pending neighbourhood}.  On three triplexes I would be looking for each to have a CoC of 12-15%.

@Jonathan Ramsuchit

What type of neighbourhood/clientele are involved here?

Are the rents below market (is there room for upwards improvement)?

What type of units are they (2-bdrm, 1-bdrm, efficiency)?

Does the landlord carry any of the utilities?

What are the up-front CAPex requirements?

Joel Owens · Answer

Not enough info to comment on numbers.

You mention 7 units but then a tri-plex?? So is it 7 units plus 3 for ten or is it 7 units all together??

Are all seven units multifamily or  a mix of houses and then a tri-plex?? The values are different and operating expenses for houses versus multifamily.

You mention 7 units but only the tri-plex for sale at 180k. You do not mention the terms from the seller on the proposed owner finance. I also do not see rents listed for the tri-plex. On the multifamily does the landlord pay utility or water??

Post more info.

Thanks