Should I buy a 5 unit that has two vacancies!?

Question

Hello all!

Thanks in advance for the feedback.  I'm looking at a 5 unit apartment building in an area that my realtor tells me is in high demand for rentals.  However the property itself currently has two vacancies.  The numbers look as though it would be very lucrative if it were fully rented or even had just one more tenant.   I'm not particularly concerned with the ability to rent it out, or would be an easy rental to fill as one of the units was recently remodeled but never rented.

My gut feeling tells me that I'm looking at a great deal here but I don't know if I should buy my first investment property on a building with a 60% occupancy rate.  The reason that the owner is selling is because she inherited the building upon her mother's death.  The current owner now has no desire to be a landlord or property owner, so she's selling.   Another notable point is that the owner now owns the deed free and clear so there is no outstanding mortgage obligation to her.

The last thing is that the building had been on the market for over a year and was originally listed for 149K and she has been methodically reducing the list price by 10K every 3 months.  It's now listed for 115K.

Should I buy the property if everything checks out, even though it's currently missing two tenants?

Franco Urbaez · Answer

Thank you everyone for responding, I really appreciate it.

@Patrick Noel, I don't know how long the two units have been vacant but I would say for a while based off of the correspondence I have had thus far with the listing agent.  Apparently, they had discussed filling the vacancies but the current owner declined because she doesn't want to be a landlord.  They "wanted the new owner to be able to set their own rents and fill with their own tenants".  Thanks for your input, I've read the ABC's of real estate investing myself, really really good book.  That's why I want to do things by the book and want to rely on the expertise of other knowledgeable investors that may have some insight as to this peculiar situation.

@Henri Meli, $/sqft = $41.91 (2,744 sq ft.)  I have no intention of purchasing the property for list price, I was thinking of putting in an offer of around $82,000.  My realtor hasn't gotten back to me yet with the comps.  Is there a quick way to check comps without going through my realtor?

@Pat L., that's an awesome success story and definitely helped mitigate much of my reservations for acquiring the property.  Thanks for sharing, pal.

Barbara G., $500 (for 2 units), $550 for the third.

Taxes = $4,519.00

Insurance = $1,737.96

Repairs = $3,500 (This is either an estimate or due to the renovations for the one vacant unit)

Down Payment = Because this is a 5-plex, I'm under the impression that I need a commercial loan which would require 20% down of whatever my offer is.  So, if the offer is accepted at $82K, then I would need $16,400 down.

Any additional feedback is helpful.  I really don't want to make a misstep as I start out in my investing career.  Thanks again so much.

Justin Fernandez · Answer

I don't think it's in a good place, if she had to drop the price every week and then if she accepts your super low ball offer. Have you driven by the area? Day, night and late night? It just may be she wants to liquidate but by a rough calculation the place is worth  247k (income based on 5 spots utilizing a 7.5 GRM). Is the 550 the highest your market can bear with fixed up units?

3500 sounds like paint and carpet, have you walked through it yet?

It sounds like a steal so I would definitely check the area first.  You'll definitely cash flow but this is all theoretical until you get all your variables together.

Before I get off topic, congrats on the deal!

Johnny Le · Answer

Go for it. From the numbers you provided, you would be ok even if only two units are rented.

I don't know whether $82k is too low but $115K doesn't seem bad either. We bought a $400k property and rent it out for $2,500/month. That's a good deal in our area. Your property is $82k-$115k and get $2,500/month. That's about $20,000 a year or 20%-25% ROI. I would say it's a fantastic deal.

Barbara G. · Answer

So you have given us the price of the multi 5 plex but we know nothing about the current rent of the 3  occupied apartments.

How much is the tax and the insurance and down payment and maintanence and rehabbing  What is the age of the house?  What major  replacements are necessary?

Pat L. · Answer

Usually I prefer vacant possession but we did buy a 5 plex last year with 2 vacancies that lingered for 3 years. It had been 'professionally' managed & the owner was out-of-state & simply lost interest.

We got it for a 'great price' & within 30 days I had one unit rehabbed & rented for $750. The other I rehabbed for our youngest daughter the new landlord. Another unit then vacated & within 25 days I had it rehabbed & rented for an extra $250/month plus they now pay all their own utilities. Yet another vacated after a minimal $25/month rent increase. We painted it, laid new carpet & slightly rehabbed the bathroom (all while the previous tenant was still moving out) & we had it rented for an extra $75/month immediately.

We have one more 'inherited' tenant paying $575 & we will be increasing the rent so hopefully she moves. That one should also pull $750 after I'm done rehabbing it.

good luck

Henri Meli · Answer

What do comparable tell you? How are similar properties in the same area performing? What is the $/square foot?

5 Unit properties selling for $115k sounds like a good price. But you need to get the true numbers. This site has a rental property analyzer tool, which you should try to use and get more information about this property.

Patrick Noel · Answer

Also, being that it is your first investment, you shouldn't rely on a "gut" feeling because that comes from experience (ABCs of Real Estate Investing). The numbers need to make sense at the end of the day

Patrick Noel · Answer

How long have the two units been vacant? If the property is only operating at 60%, then I would base my offer on that current operational level and not the "potential" of 100% Occupancy.