is this property a good deal?

Question

Hey guys- live in Minneapolis and found a off market deal for a 6 plex and 3 plex owned by the same person. They don't want to use a realtor to sell, and they firmly believe the units combined value is $750k which I think is crazy. Any tips for how to negotiate the price down? I haven't seen financials yet, but my best guess is that the 9 units (mostly 1 bedrooms) bring in $7400/month in rent.  Using the 1% rule it wouldn't make a ton of sense. Should I pay a commercial appraiser to give me a "letter of opinion of value" or what you would you guys suggest?!?!

Tim Swierczek · Answer

@Tim Zajicek there really is not enough information to give you advice.  That being said, in good areas of Minneapolis 3-plexes are going for high 300K and even above 400.  I'm even seeing many duplexes 375 to 400K.  That's not to say that they are good deals, I wouldn't purchase most of them.  From a seller's point of view, if they can get the money they usually will.  The 750K does not sound high to me in terms of market value, but you might be correct that its not a good investment.  I would suggest using www.rentometer.com to determine the rental market and get the numbers from the seller and compare.  It's possible they are not charging the correct rents.  Good luck.

Todd Dexheimer · Answer

@Tim Zajicek get us some numbers and we can tell you if it is a deal or not. Assuming $830/unit/month = $89,640. If you have a 50% expense to income, then the NOI is $44,820. At a 6 cap it is worth $747,000.  They could be spot on with their valuation. In B class areas of Minneapolis, you will be hard pressed to buy a building at a better cap than 6.

James W. · Answer

I'm not sure if they are two properties on the same lot or if they are separate buildings with separate PIDs, but that will change things a bit as well considering the financing is different for both.  If you pay cash or would want to do commercial for both, that might change things though.

Personally, If they are not on the same PID, I would look at them separately and evaluate them separately since one of them will likely perform better than the other one.

When looking at the expenses, make sure you fully understand what expenses are paid by the landlord.  Also, determine the market rate for rents on your own to determine what is reasonable and if it is feasible to pass some of the utility costs to the tenants over time.  I see posts all the time about passing the cost to the tenants, but it doesn't always work if you are already at market rents with them included.

I wouldn't waste the time on an appraisal at this point.  Just because it may or may not appraise at $750k, doesn't mean it will be a good deal for you to invest in as an investor.

Ask the seller for actual financials for the last few years and see what they say.  If they give you the we don't prepare financials for a given property as it is a part of a larger portfolio line, I would look at that as a red flag.  Make sure you do your own analysis either way.  Some things to make sure you consider are trash, water, sewer, gas, electric, city licensing fees, maintenance, Cap Ex reserves, vacancy, management costs, and snow removal/lawn care.

I'm not sure if you have any experience yet, but possibly jumping into two buildings with 9 units seems like more than I would recommend chewing off if you are new.  The triplex seems like it might be more manageable to determine if it is something you like.

Tim Zajicek · Answer

alright guys. here are the numbers let me know your thoughts! 9 units total (one 6-plex and one 3-plex on same PID), The 6 plex looks like your traditional apartment building, the 3-plex is a house that was built in the 1920's and converted into a multi-tenant space. total revenue is $75,120 or $695 per unit. That rent seems low?? Wonder if I could increase rents to market? Expenses (electric, water, sewer, lawn, snow removal, insurance, property taxes) were $29k. Owner didn't factor in any repairs or maintenance factors (I'm shocked hehe ). of the 9 units, 3 are two-bedroom, 5 are 1 bedroom and 1 efficiency. Thoughts? Doesn't seem to be a good deal to me. Owner managed property himself so no property management fee was factored in either.

AJ Singh · Answer

@Tim Zajicek

i am in contract on a six apt bldg in southern ca but primarily two to three bedroom units.

i was warned by a multi family investor to have as less a one bedroom units since the renters keep on moving once their families become larger. he advised me to concentrate on two bedrooms and three bedrooms.

just my 0.02 cents

Even on SFR my min criteria is 3/2

Tim Zajicek · Answer

I have 12 doors, mostly duplexes and single family, and so trying to figure out how to scale, and scale quickly has been a challenge. Never bought a 6-plex, so having more info will help me from making a bad decision!

Tim Zajicek · Answer

Hey Todd- that’s exactly the kind of info I was looking for! Thank you for sharing. I’ll be meeting with the owner and will grab those numbers. I’d be happy to share with the group and get your thoughts.

James W. · Answer

@Brandon Hershey How would you make that work if they are on the same PID?

Brandon Hershey · Answer

If you are only interested in the tri at this time, I would be willing to purchase the 6 after seeing the address and a few of the numbers. Under contract on a 6 right now as well in Minneapolis.

Tim Zajicek · Answer

good deal. thanks for all the feedback everyone. definitely need to get some real numbers from the owner before doing anything. I was just more curious on what an investor would expect as far as returns, cash on cash, cap rates in the Minneapolis area.  The 6 plex and 3 plex are on the same PID's and the owner made it very clear she wants to sell all of them and get out of the business altogether.

is this property a good deal?

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