Buying a multifamily in the pandemic

[Carl C.]

I thought this might be interesting for folks here. It’s a little long but I have tried to include details to make it worthwhile. We closed last week on a nice 4-unit building in New York’s Hudson Valley. We have been slow and steady with our investments to date, doing our best to minimize financial risks. This is important when your partner is your wife. We both need to be on the same page before doing anything.

After a slow few years looking for the right property, we purchased a 3-unit last year and then suddenly found ourselves ready for another this year. We started looking at properties in December and settled on this one in February. This building is 4 units, about 3200 sq ft, built in 2005. The asking price was $399,000 with rental income for $4,400 per month or $52,800 per year. Expenses were listed as $14,890 per year giving us an NOI of $37,910 or $3,159 per month.

We planned to put 25% down and buy it through our LLC. This was our first time getting a mortgage through an LLC, so it added a little bit to our learning curve. I can save that process for another post but the short takeaways are, find a local bank (as so many have said before), and the process is just not that hard. In fact, in some ways it was the easiest we have done to date. We assumed a 5.5% rate with a 25% down payment would mean roughly $20,388 in annual mortgage payments. So that leaves our cashflow around $1,460 per month. Not bad, though not quite as good as we would like. We ended up with a 4.625% rate for ten years at which point it will reset, however our goal is to pay it off before it resets.

After some back and forth negotiating in late February/early March we settled on $378,500 purchase price. The contract was signed the week before New York went into lockdown. At this point my wife and I are seriously wondering if this was a good idea. Will the house appraise? Will the tenants keep their jobs and be able to pay rent? Could we have waited a while and gotten a better price? So many unknowns, but we looked at this and realized that if the world was normal, this property still made sense. It was in the right price range, it was the right size as we are trying to grow our portfolio, the income was good, the location was good, the condition and age of the property was good. Let’s keep going.

The bank, unsurprisingly, got caught up with Covid related issues. They had lots of borrowers approaching them looking for forbearance and our deal got sent to the bottom of their underwriting pile. Initially we were looking at 4 weeks to close. It ended up being almost 12. In the process, we found out that all of the tenants were deemed essential employees and so they all continued to pay their rent. We also got through reasonably well with our other units which gave us confidence to keep plugging along.

After closing we found out that one of the units was only paying $1,000 rather than $1,100. Rather than try to immediately raise their rent we will give them some time before we gradually bring it up. We also found out that the previous owner didn’t account for the coin operated washed and dry in the building. I don’t know what to expect from that but we collected $44 from them yesterday. So after adjusting for the lower rent we expect to cashflow around $1,360 per month.

There are a few minor items to be repaired in the house, but no major deferred maintenance. Several tenants have already sent in rent. Three days into ownership, I’m happy with the decision to continue the process during the pandemic. Prices in the area have been going up due to New Yorkers trying to buy places outside of the city. As we have been going through this purchase, I’ve been slowly developing a plan to continue scaling into syndications. So I’m thinking the next property will likely be 8-12 units to keep us getting a feel for operating larger properties while we flesh out the syndication plan.

I was very worried about a major recession holding back our forward momentum but it seems pretty clear now that if a deal makes sense, it makes sense. I’m glad we didn’t jump ship when the world went haywire. Stay steady and keep moving forward one s