Multi-Unit Opportunity - Money Pit or Gold Mine?

[Katie Caldwell]

Hi Everyone,

(LONG POST WARNING :: LOTS OF THOUGHTS) I came across an opportunity to purchase a multi-unit building for an amazing price. It was one of those "this is way too good to be true" situations and figured I needed to ask more questions. My husband and I are new investors and only own one other property currently. It should bring in about $300 or so in cash flow every month once we have a tenant in it next month.

This 5 unit building is listed at $69,900. $27/sq ft. I inquired with my financial institution about the feasibility of doing this deal so fast considering we JUST closed on our first property. He agreed that this sounded like a great opportunity, but had some concerns. I've outlined the general cash flow situation below. Basically, we were informed that the property "needs some work." It needs a roof and I don't know what else. Also, the building is setup to where each unit COULD be billed separately for electricity, but the current landlord pays the electricity still. Also, the landlord disclosed that in any given year, they have not spent less than $3,500 on repairs and maintenance. Last year they spent $4,800. This year they have already spent $2,700. These figures are obviously way higher than they should be. My gut instinct is they are a major things that should be remediated and instead they are temporarily patch the issues whether it be heating, air, roof... anything else.

4 of the units have month-to-month tenants and the remaining unit currently has a tenant with a 12 month lease in place that goes until April 2017.

If the electric could be assumed by the tenants, that adds $9,000 back to the total profit. If the maintenance issues could be resolved, that's potentially ~$2,000 more in annual profit. So $11,000 in annual profit COULD be realized through some careful planning.

My initial thought was to assume the mortgage and work with the management company to get new agreements in place that require the 4 month-to-month tenants to cover their own electric. This would be an average increase of $150/unit and tenants may not be too happy about that... If all 4 month-to-month'ers get ticked and move out at the same time, we're left with 1 tenant on a lease who could be the one paying $400/month for all I know. At this point, we would be trying to cover the remaining expenses with rent from one unit. I'm sure you can do math and see why that would be a very, very bad thing for someone with only 1 property and no real way to absorb that loss. I would then be relying on my management company to effectively market the units and fill them ASAP but if the units are in dire need of major repairs... that's a double whammy because I don't have any extra cash flow to cover those repairs. Our first step is to do a walk-through a visually asses the situation. If the building would need basically a complete renovation, we would have to walk away from the deal.

I feel this could be a very good opportunity given the right circumstances. It is in a great area of town with a lot of development happening. Our city is in the process of building an Indiana University Medical School campus that will be completed in the next year and a half and this property is less than 1 mile from the school. It has a lot of potential.. I can feel it. I am struggling to find a way to mitigate the potential issues with the property and transform it into the cash flowing machine I know it can be. Any helpful advice for this newbie investor would be greatly appreciated!!

Purchase Price	$69,900
Down Payment Needed	$13,980
5 units - Rent Revenue	Monthly	Yearly
Unit 1	$600.00	$7,200.00
Unit 2	$600.00	$7,200.00
Unit 3	$475.00	$5,700.00
Unit 4	$475.00	$5,700.00
Unit 5	$400.00	$4,800.00
Total	$2,550.00	$30,600.00
Mortgage	$(385.30)	$(4,623.58)
Management Fees Estimate	$(255.00)	$(3,060.00)
Insurance Estimate	$(150.00)	$(1,800.00)
Property Taxes	$(179.67)	$(2,156.00)
Electric (ind. Meters, paid by LL)**	$(750.00)	$(9,000.00)
Utilities (one meter, paid by LL)	$(300.00)	$(3,600.00)
Trash Removal	$(93.92)	$(1,127.00)
Maintenance Estimate	$(333.33)	$(4,000.00)
Pest Control	$(27.67)	$(332.00)
Total Expenses	$(2,474.88)	$(29,698.58)
Estimated Profit	$75.12	$901.42