Buying a 5plex. Numbers are great but dieing town. Input?

Question

I am looking to purchase a 5 unit apartment building in a small town in Maine. I am getting a deal at 60k for the building. Appraisal value is 120k. 3 units occupied, two vacant currently. Building is in fair condition and in no need of any major repairs. Everything sounds good except for location. Its in a dieing town. The town has 1 gas station, 1 grocery store, 1 restaurant. Surrounding towns and cities are 10 miles away which isn't bad.

Only thing I am afraid of is getting tenants into this building. But in such a small town you would think people will only want to rent. This town doesn't have much to offer but the numbers all work great if I can keep the building full. Advice?

Kevin Coggins · Answer

If Vacancy is already at 40%, if it's going to be conservative, shouldn't it be higher than current (like 60%)? I feel like unless there is a demand for rentals in a dying city, there isn't really money to be made on this. From what's been posted, it seems like the supply exceeds demand.

If the numbers worked, and like somebody mentioned if you cut rents maybe you could attract renters from the next town. But seems risky with not a ton of upside - unless the numbers are far better than the rough estimate from the person above.

Jeremy Dugal · Answer

@Andrew Michaud  I understand your concern.  I assume you are talking about Limestone, Washburn, or Fort. Not only is the tenant pool in these towns typically low but the quality of tenant is potentially low as well.  So you're not only looking at finding tenants but hopefully finding good ones.  Don't discount the amount time you will have to spend in managing all of this if the tenant is not right and put that into the equation.  I don't know if you have a full time job or not but management on top of work can get old fast for small returns.

I find one of the keys to getting good tenants in this area, and something that is slowly becoming a trend around here, is to offer something other then the norm.  And that would be a nice, clean, updated apartment.  I don't know if you've had the opportunity to look at any of the inventory in this area but most is old, worn, and outdated.  I have had numerous potential tenants complain of this and get super excited to see something new.  They are willing to pay more for this as well.  Relatively inexpensive updates, if you can do the work yourself can go a long way.  Floors, paint, vanities, kitchen cabinets.  Also there seems to be a lack of exceptional service when it comes to landlording.  Good communication, prompt responses to calls and emails, and getting problems taken care of quickly are something that people are not used to, extremely pleased with, and can go a long way.  Essentially run it like a business that you really want to succeed.  If you can do these things and gain a good reputation and network, then you can fill these units with good people.

Now the numbers themselves don't look bad.  I like the high appraisal and the large amount of immediate equity that you would have.  You could ultimately use this equity for money down on more buildings in either  Caribou or Presque Isle area where you wouldn't have to worry about vacancies as much, could be a little more selective on what you're purchasing, and be in a position to jump at any opportunities that may arise.  You could also use some of that to update the two vacant units you would have and get on the path to transforming that building and offering something different. Anyway I could go on and on.  Hope this helps

Scott S. · Answer

Did you find it on or off market? If on, how long has it been marketed? If the seller is having to offer such a discount in a hot market, that would make me pause.

You will most likely not be able to raise rents to any significant degree (for many years?) and may even have to lower rents to keep vacancy down. You'd want the numbers to work in that kind of scenario before moving forward.

See if you can get financials for 3, 5, or 10 years to see the trend that property is following.

Would you need financing? Have you found a lender that will lend on that property?

As we all must, evaluate your risk tolerance. Can you spare the money in the case of a total loss?

Andrew Michaud · Answer

@Jeremy Dugal its great to be in touch with someone nearby. Thank you for the great advice. This property is located in Limestone. The numbers all work great if I can keep the units full. I am looking at other properties in Caribou and PI that cost 3x more per door. 100k for 3 units. But vacancy rate would be much lower I would imagine. Not as much equity in the Caribou and PI properties either. I am a little unsure on what to do. Almost went in for this Limestone property but my gut told me to wait and the only thing holding me back is location.

Justin Schaefer · Answer

@Andrew Michaud When you say dying town are you meaning like a mining town where the mine went out of business and the town simply has nothing else to offer, or is there a chance that this town could come back in the coming years?

Andrew Michaud · Answer

Here is what my expenses and income look like:

Monthly income - 2350 x 12 =28200

Annual Heating - 5000

Annual Water/Sewer - 2600

Property Taxes - 2300

Insurance - 1400

Mortgage (375/mo) - 4500

Trash - $550

Lawn/Snow still in the air. Debating on doing myself or hiring out. Lets say $1200 Annual

$17,550 total expenses before repairs/vacancy. Tenant pays electric. That leaves me with a little over 11k profit with a 0% vacancy rate. If I have 40% vacancy for 12 months I break even. Basically I have to keep 3 units occupied to break even.

Buying a 5plex. Numbers are great but dieing town. Input?

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