What don't I know going in to a 6 plex?

[Mark Tomes]

Let me get this out of the way first, I have never considered purchasing a multifamily.  I own one single family that I have been renting out for 4 years, and just closed on my second property 2 weeks ago.  Multifamily is in my future, I am going to create enough cash flow to leave my job!  So, on with the details.  I was cruising zillow (after deciding multifamily was going to set me free) and found a 6plex in my area.  It appears to be a home converted to a 6plex, 3200 sq ft, 3- 1 bed, 3- 2 bed, with common laundry, there is a lot of paneling, an abundance of 1920's cabinetry, probably old plumbing and electrical.  Seller is offering land contract terms (land installment contract, contract for deed, agreement for deed, installment sales agreement).  I am going to look at it tonight.  I don't even know what I don't know!  

[Tom Mole]

@Mark, don't let me be the harbinger of doom, but you asked what could go wrong, so let's take a look at some of the high points. 

You said 6 plex, which generally translates to commercial financing. This is a very different animal from residential. Be certain to talk to a commercial broker right away for the specifics in your case. You could turn up at escrow needing a significantly larger check to close. Your down payment will generally need to be bigger and you may need to prove sufficient reserves amongst other things in order to satisfy your lender.

Of course this is not relevant if you're not going to finance the deal, but most folks do.

Let's think about the property itself for a moment. From your description this place sounds old. 1920's cabinetry always suggests to me old mechanicals. That is to say plumbing with hardening of the arteries, obsolete electrical, moisture problems including the potential for black mold, termite damage and wood root, etc and energy envelope issues such as in effective insulation. 

Take a look at the the outlets when you do your walk-thru. Are they 2 prong or the modern 3 prong ones that look like happy faces? 2 prong outlets mean the electrical is most likely obsolete. You're going to want your home inspector to take a careful look at the electrical, even if it seems to be updated. A lot of folks try to cheap out on electrical upgrades by simply replacing old sockets with modern ones, but leave the old knob and tube wiring behind the walls. Be ready to rewire the building properly, if inspection comes back that it will be needed.

On the plumbing side, 1920's plumbing used iron pipes, which are notorious for rusting which clogs the pipes reducing water pressure at the point of use (ie, the faucet). Often people have had to replace the pipes already, so you may have copper or PEX pipes. If that's the case, you may be in good shape, but often the new piping is only installed where it's convenient to do so, like in the basement. There may be iron pipes running inside the walls. This is not a great combination. Make sure your competent home inspector gives a genuine "no BS" assessment on your water supply lines.

Often when the supply lines are replaced the drains are ignored, but they clog with rust too. You'll want an honest assessment of that as well. If your tenants can't flush, they'll still try and you'll get the call to clean up the mess (ask me how I know that).

Old buildings are always suspect for mold, asbestos and lead. Anytime the EPA is involved it gets REALLY expensive. Pay for a really good inspector. You don't want to be surprised in this area. You can expect lead in the original paint, inside and out, but it's only a problem if your inspector says it is. The same can be said for asbestos, which turns up in the weirdest places sometimes. Only remediate if you have to. Mold is always a problem that needs remediation and nearly every old building has some form of it somewhere. Ask your home inspector about this and all other structural issues, like termite and water damage.

Enough of all that, now on to the deal itself.

Why is the seller selling? What do his books look like? Does he figure this place is dog? Are you going to be buying someone else's problem? If so, can you cure that problem? Does the price of acquisition account for the problems? If you're not sure what I'm getting at here, ask. It's important.

What sort of neighborhood is this property in? Are there sneakers hanging on the telephone wires by their laces in the street (a bad sign). Do tenants move in and out frequently? How often does the seller experience vacancy? What is the market cap rate? (If you don't know what that means, then by all means ask!) The deal may look good on paper, but could quickly become a big regret when it hits the light of day.

Please, don't hesitate to act, but don't act foolishly. Not all deals are deals. You may get excited by the possibilities of the deal and fall in love with all the passive income the property "should" produce and blind yourself to the realities that you should be ready to recognize today. You would not be the first to do that. We must be cool, disempassioned ninjas as real estate investors. If we make impulsive decisions, we will usually fail (and by "usually" I really mean "always"). If, however, we take care to do our homework while taking a lot of deep, calming breathes and make rational decisions, the income will take care of itself and that will lead to realizing our vision.

This a really long reply. I want thank you for taking the time to read through it all. Again, it is not intended to be discouraging. Don't let this post be the reason for you to be unsuccessful. You asked what to look out for and this is most of that. Now, figure out what you need and get it. Don't take the seller's price just because he'll carry the financing. Make sure the price makes good business sense. Do need help with that? Ask! You're in the right place and you've taken the first step.

So, what else do you need to know? Have determined your offer yet? If you have and you're comfortable with it, then make the offer (be sure to include an ample inspection contigency). We'll figure out the rest once you get your offer accepted.

Big kudos to you for taking action. Keep it up, you're doing great!