My first large multi-family. I am ready?

[Dean Hulsing]

I am interested and I have signed the initial paperwork for my first (relatively) Large Multi-family.  I own 4 homes outright and I have bought them on as renovations that have required several hours of my time and effort and capital to rehab.  I truly enjoy rehabbing but I am getting to the point that I have very little time.  I want to run through the numbers and please let me know your input on the investment.  Thank you so very much. Here they are!

16 Unit Apartment Complex

Price:  455,000

Average Income (last four years):  88,400  ( I hope that I can get this up to 100,000 by managing better!)

Vacancy: 12.5%  14/16

RE Property Taxes:  17395

Property  Insurance:  3500

General Maintenance:  1800

Repairs (average past 4 years):  2700

Management:  9100.  (I think I could get this down to $4550)

Advertising: 250

Appliances:  1000

Lawn and Grounds:  1800

Miscellaneous: 500

The other questions about this property that I have concerns about are that there are repairs that need to be done and I estimate the repairs to be in the range of $50000.  I do not think that this area is an area that will appreciate as the area has not seen an increase in population in the past 10 years.  It has not declined but appreciation is something that I can not factor into the equation.  Thanks for any input and any further suggestions in this matter.  

[Joel Owens]

Dean,

"I own 4 homes outright and I have bought them on as renovations that have required several hours of my time and effort and capital to rehab. I truly enjoy rehabbing but I am getting to the point that I have very little time."

You will still have yourself a job and limited time with this type of property. To get passive with multifamily and employ a full time repair person about  75 doors or more is needed. Be careful pushing rents especially if the tenants have been there a long time.

If you push too hard they might leave. Example you have a tenant paying 550 rent but want to move it to 600 as it is top market. Tenant moves and you have one month of vacancy and re-tenanting costs.

You release for 600 but spend 2,000 on the remodel because tenant lived there so long and lost 550 in rent. So you gained 50 buckaroos a month but are down 2,550. At 600 gain a year you are talking about 3.5 to 4 years to recover the money spent. So you really, really need to play the exit game and look at each unit and say " If I approached this tenant for a rent raise and they had to get out how much per unit would I have to put in to land a new tenant?" For the existing tenant they are conditioned to an old and worn out space. Try selling that to a new tenant coming in with a fresh pair of eyes and they will notice all kinds of things.

This is why I love it when I see a flyer from a brokerage saying ( great opportunity to raise rents and are 50 bucks per unit below market ). It's a load of bull and the seller has already extracted out all of the upside without taking the risk. The remaining 50 dollar increase per unit might cause a lot of turnover.

Take all your assumptions if A,B,C,D happens and throw it out the window. No appreciation, no upside, etc. and then if the property stands on it's own in current condition throwing off cash then you might have something. Everything else has to be icing on the cake.