Small mixed-use multifamily properties (3-4 doors)

Houston, Texas
Multi-Family and Apartment Investing
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Small mixed-use multifamily properties (3-4 doors)

Jake Harrington
New to Real Estate · Houston · Member since 2019 · 6 posts · 3 votes

I'm looking to pick up my first property and I'm trying get a good deal on it, so I've been cold calling distressed sellers in the Houston area. 

One common distressed seller I've been finding are landlord-managed multifamily properties that have a commercial side and residential side in C/C- areas.

At first glance, they have good cash flow... but they come with a tangled mess of existing tenants who pay way less than market value and usually have a longer term lease on the commercial side, meaning you'll have to sink in a lot of time and energy to maximize their profit.

It seems like it could be a good niche to go after if you know how to maximize the cash flow OR it could just be a massive headache and money sink if approached the wrong way. 

Plus they seem hard to sell further down the line because they have such a small buyer pool.

Finding a good local property manager could be a solution, but I wouldn't know where to start with that. Keep in mind most of the tenants would be immigrants who may or may not speak English.

Honestly, these seem like a total headache and I can understand why these sellers want to sell. So my question is, how do you go about navigating these deals?

If the price is makes sense, at the very least it could be a good wholesale deal, right?

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Melanie P.Pro Member
Rental Property Investor · Member since 2023 · 1k+ posts · 922 votes
2y
Quote from @Robert Rixer:

The way I like to underwrite these deals is if the retail part was vacant, would the property still cashflow? If the answer is no, then I'm out. My confidence in backfilling Class C retail is low, but that's also because I'm not a specialist in it. May not be the right way to look at it, but it works for me.


 Your analysis is spot on for these. Vacancy can run into years when a commercial unit vacates.

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  • Michael SmytheBusiness Member
    Real Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
    2y

    They are also hard to finance.

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  • Melanie P.Pro Member
    Rental Property Investor · Member since 2023 · 1k+ posts · 922 votes
    2y
    Quote from @Jake Harrington:

    If the price is makes sense, at the very least it could be a good wholesale deal, right?


     Yes.

    0Reply
  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    2y

    @Jake Harrington, I will say there are lots of mixed use buyers out there.  The underwriting is no different than anything else, and some people very much want these types of deals.  They want them for the same reason you are questioning it here: it is an area many people are not familiar with.

    Obviously, this is your money, so you need to understand the risks you are willing to take.  But at the end of the day, there is certainly value in longer term leases.  yes, if they are well below market rents, you have to live with that for a while.  But you underwrite that into the deal.

    The area most people seem to struggle with is: a) commercial tenants are not as price sensitive as residential.  Parking, visibility, side of street, customer demand, visibility, etc all play a bigger role, since businesses are revenue generating first and foremost.  b) Tenant improvements are common in commercial leasing.  If you want a restaurant in there, typically, as the landlord, you are footing the hood system, walk-in cooler/freezer, fire suppression and overall fixture work for the tenant.  If you are converting a "non-restaurant" that can be $500k-$1mm build out. c) CAMs: since it is mixed use, who pays what for roof repairs, concrete work, etc.  

    The potential payoff is great. At the end of the day, you have more to learn, but the high level fundamentals are the same. Take in-place leases and expenses, forecast stabilized rents and expenses, understand the financing requirements (LTV, DSCR, reserves, net worth, liquidity covenants, etc). Plug it all into a model and kick out a return.

    People you should talk to: retail brokers, commercial PMs, residential PMs, lenders.

    And can you wholesale these?  Technically, yes.  But like you noted, there are fewer buyers than residential, so if you know people looking for these types of assets, then it is no different than anything else.  Buy low, sell high.

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  • Robert Rixer
    Investor · Miami, FL · Member since 2015 · 355 posts · 268 votes
    2y

    The way I like to underwrite these deals is if the retail part was vacant, would the property still cashflow? If the answer is no, then I'm out. My confidence in backfilling Class C retail is low, but that's also because I'm not a specialist in it. May not be the right way to look at it, but it works for me.

    0Reply
  • Melanie P.Pro Member
    Rental Property Investor · Member since 2023 · 1k+ posts · 922 votes
    2y
    Quote from @Robert Rixer:

    The way I like to underwrite these deals is if the retail part was vacant, would the property still cashflow? If the answer is no, then I'm out. My confidence in backfilling Class C retail is low, but that's also because I'm not a specialist in it. May not be the right way to look at it, but it works for me.


     Your analysis is spot on for these. Vacancy can run into years when a commercial unit vacates.

    1Reply
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