Should I buy this property?

Question

Hi guys,

So I am analyzing a 6-unit.  Please let me know your thoughts.  Personally, I'm not crazy about it.  Details below:

Purchase Price:  $124,900

Contains (5) 2-bedrooms and (1) 1 bedroom

Rents: $3,490 totally rented out

Water/sewer: $100/mo

Garbage:  $213/mo

Pest Control:  $68/mo

Taxes:  $450/mo

Insurance:  $250/mo

Property Mgt:  $279/mo

Lawncare:  $100/mo

10% Maintenance:  $349

5% Vacancy (low vacancy area historically):  $174.50

Total Expenses:  $1983.50

Financing:  Bank (80% note):  $830 (15-year term); Seller (10% note):  $99.  Still deciding what I'm going to do about the last 10%...whether I'lll do cash, another loan or combination of both.

No known deferred maintenance, but will have inspection done.

So what say you, BP?  Yea or nah???

Oren K. · Answer

Katrina - A couple of points to consider

Utilities - you don't mention if the tenants pay all or there are any landlord paid utilities. Also, there may be some common area electrical / heating that you have to account for.

Occupancy - Perpetually full is great and using 5% for vacancy gives you a bit of buffer / wiggle room for the unexpected. Having said that, the property can only have 72 months of occupancy (6 x 12) so if there are 4 months of vacancy across all units in a year, you are over the 5% allowed.

CAPEX - Need to really look at this. From your numbers ~$1,500 / M left before financing. Financing is going to eat up ~$930 (assuming the balance is cash) leaving $570/M ($6,840/Y) on your ~$12,500 cash investment (WOW if it works). And now the 'but': But if you have to do a roof, HW tank, paving, or any other major repair, it could easily eat up 1 or 2 years of cash flow very quickly. Even if there is no immediate CAPEX requirement, to determine free cash flow, you need to figure out how much to set aside each year for the eventual expenses. To me, it makes no sense to take any funds out over 2 or 3 years and then turn around and have to give it back when something big breaks.

Prop Mgt - You have that ~8%. From research I did some time back, I believe that in Michigan it is normal practice for PM to also charge when they sign / resign a tenant. Does this PM charge separately for leasing activity and have you accounted for this.

Legals / Accounting - Don't see anything for this and there will be some. Maybe not so much legals if there are no evictions but preparing a Michigan tax return is the minimum.

Good luck

Katrina P. · Answer

Hi @Ken P., thanks for your input!  I agree with you regarding the garbage.  I emailed my agent this morning to ask the seller about this.  I pay $40/month for my 6-unit and my 8-unit, so I know this figure is high.  But I used it in my calculations, based on what the seller told me he currently pays.  Regarding the $68 for pest control...  The seller paid $7k a few years ago to have the place heat treated for bed bugs, and has been on the program ever since.  I assume it was bad if he had to do that.  So I decided I would stay on the program so that I am not getting monthly calls about bed bugs.  This program covers ALL pests and rodents (mice, roaches, bedbugs, etc.), with unlimited callbacks.  So really takes a headache off of me.  So for now, think I'm gonna keep it, and monitor the callbacks for use.

Oren K. · Answer

Katrina -

The property is a 6 unit building (right?) and if each unit is filled for the entire year (12 months), you get 72 (6 x 12) months of occupancy. 5% of 72 = 3.6. Your vacancy allocation covers 3.6 months total across all units regardless of when / why they occur (e.g. 3 weeks for 1 unit, 1 month for another, etc). If your tenant turnover is only 1 or 2 a year and each unit can be re-leased in 1 month at most (including any unit turn activities), then you are well within your budget. IF on the other hand, you lose a tenant at a low activity time of year (e.g. just before Christmas / New Year) and the unit needs some work before it can be re-rented, it is very easy for a fair bit of time to pass.

For a multifamily, it is normal / common to have a house meter for the electrical (external lights, hallway lights, etc) and possibly a house gas meter (if there are common areas and depending on how the common areas are heated). Could be minimal but still an expense that you need to account for.

No issue with the PM % but my understanding is that in Michigan, it is normal practice to separately charge for lease / release activity. If this PM does not or I am mistaken, that is great. Just make sure you know.

And one more thing: Taxes. Are your numbers based on the current valuation or the valuation at the purchase price. Eventually they will catch up with you if your purchase price is higher then the current valuation. Generally speaking New taxes = New Valuation / Old Valuation. So if the Valuation doubles, so do your taxes.

Ken P. · Answer

Maybe we have been fortunate, but the most we have ever had to do is two units at the same time. Usually bedbugs affect only one unit.  In the case of the two units, the tenants that live in those apartments were friends with each other, and were constantly going back-and-forth between units, which transferred the bedbugs.

Steve Babiak · Answer

That sounds very low for bedbug treatments IMO, especially for six units with total of eleven bedrooms.  What sort of treatment procedure do you get for that price given the building size?

Ken P. · Answer

@Katrina P., thanks for sharing your numbers and inviting input, it's always interesting to see what is out there.

Regarding expenses, I'm surprised by the costs you've listed for garbage and for pest control.  Is garbage a city-imposed tax, or is that something you'd be paying to a private company?  That sounds very expensive in either case.  From comparisons around the country it averages $10-20 per unit per month.  Waste Management's website quotes $90/mo for weekly pickup of a 96 gallon bin, and even doubling that still is a lot less than what you quoted.  If the tenants are generating more I would look at implementing a RUBS system (ratio-ed utility billing system) so they pay for the waste they generate.

Also, $68/mo for pest control in Michigan is very high for a 6 unit building.  Much better to go a la carte, and only pay as needed.  It might cost you $200 once or twice a year if there are bedbugs, and you can charge that back to the tenants if your lease is written correctly, because in all likelihood any bedbugs were brought into your clean and BB-free unit by the tenant themselves.''

By far the biggest question though is around cap-ex expenses.  As mentioned above, you need to be setting aside for roof replacement, driveway maintenance, HWH and furnace replacement, etc.  Those larger expenses are not part of normal maintenance, and are not covered by the normal maintenance budget.

Katrina P. · Answer

Thanks so much!  Got it!

Katrina P. · Answer

Thanks @Oren Karp for the points!  Tenants pay their own gas and electric, so that's why I've only included the water, sewer and garbage in my numbers.  Regarding occupancy, I'm feeling a little slow this morning...can you please expound on your explanation?  Regarding CAPEX, I'm hoping to have a better understanding of what's to come after the inspection.  Property Mgt is 8% in this area.  Waiting on return calls to get the full scoop on taking on tenants and how they handle filling vacancies.  You're right...didn't account for any legals/accounting.  Need to do that.  Thanks for the input!

Katrina P. · Answer

Thanks for the input, guys.  You're really the best!  Guess I am hesitating because, I am just really digging into this multifamily business, after starting off in Single Family; and while, at first glance, the numbers seem great for multis, when you dig in, the expenses are MUCH higher.  Since I've been investing, I have experienced virtually NO turnover in my single families.  I'm a good landlord, get things DONE, so my tenants love me, and just stay.  With the multis, not only are the expenses much higher, but it seems to be more of a hassle dealing with tenant issues (parking, disputes, etc.), rodents & pests (e.g., bed bugs), among other hassles.  So I guess when all is said and done, I have yet to decide if multifamily is ultimately better (or more profitable) than SFR.  The jury is still out, as far as I'm concerned.  With this particular property, it seems I can make the same cashflow with 2 SFR (and two tenants), vs SIX tenants (and all their issues).  I guess the CapEx would make the difference in the long haul (1 roof vs 6?).  Idk..still figuring out my niche, I guess.

@Michael Ventura PM me and we can discuss.  Thanks for your input, sir!

Michael Ventura · Answer

Hi Katrina, the numbers seem to work, and I also invest in college towns in Michigan and I like the income... let me know why your hesitating, I see your in Maryland, maybe the distance is causing you concern.  I completely understand that. Depending on the area I could drive by for you and take a look, possibly partner with you as well to help off set some of your cost.  Let me know and good luck! Michael V

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