Am I making mistake with purchasing this 8-plex as my first prop?

[Oleg Shalumov]

This is my first Multi family purchase and I am very exited. As the result I maybe missing something obvious, so every suggestions would be very valuable. 

This is an off market property which owner is tired of managing himself (he is in mid 70). He owns it free and clear.

Purchase Price: $470K

Down: $230K (using my HELOC), and Seller finance on the remaining $230K.

Expenses (Monthly)

=================

Mortgage: $2,440 

Prop Tax: $1,333

Insurance: $335

Garbage: $100

Grass/Snow: $200

Water/Sewer: $605

Electric (common area): $50

Vacancy (5%): $350

PM & Repairs (10%): $700

TOTAL EXPENSES: $6,113

Income (Monthly)

==============

Monthly Rent: $7,200

no additional income

I am planning to refinance the property 1-2 year after the purchase and pay off the HELOC and Seller.

Property currently values around $650K

Let me know if I missed anything, or anything I need to pay attention to.

Thank you!

[Guy Azta]

Hi Oleg,

Read some of the replies. Seem like you are kind of committed no matter what. Let me go over a few aspects:

1. I know in BP there's a little hype of those 20-something kids buying 3 million dollar large apartment buildings as their first deal and similar larger than life success stories, but I personally don't know if I would buy an 8 unit as my first deal. There's something to be said about experience, resolve and knowledge.

2. The quality of your 8 unit really matters. If it's a true A / B type building with A / B type tenants, then you have less risk, but if you are looking at B- / C type building, the risk is much higher

3. Also the age and condition of the building really matters. What I found with old owners near retirement is that while you can get great deals from them, they "checked out" in many cases long time ago and there could be an ample amount of deferred maintenance. The deferred maintenance could kill you on expenses

4. The $7,200 in rent figure - is that factoring in vacancies? You need to factor in at least 5-10%. also, factor in what your property management will charge for procurement (first month) and lease renewals. That would affect your income. Also, is that number realistic for the area, building and economy? Is it based on pro forma only? Have you verified those rents?

5. When you factor in your mortgage cost, you include both your HELOC and your seller finance, right? I did a quick calculation and seems like you're at around 5% on both for 30 years. From what I know about HELOC, they need to be renewed every once in a while - you should look into that. About the seller finance, does that include a balloon? What if he wants his money in 5 years? Does he have the option to call the loan? Are any of your loans have looked rates or are they adjustable, and if so, by how much?

6. The income vs expenses ratio seems very tight to me. What if you have a series of expensive expenses? 

7. Did you factor in your taxes AFTER you bought the property? I have to say that the $1,333/mo seems a bit high

8. how well do you know the management company?

9. Have you seen the seller schedule Es and P&Ls for the last few years? Those numbers could be very telling

10. 30 years is considered to be a long time for commercial properties mortgages. Doesn't make it bad, but something you should know

And here is another equation for you - can you absorb having multiple months of losses and vacancies? 8 unit buildings could be expensive to manage. They are too small for you to hire your own rental agent or maintenance person

From my experience, real estate looks great on paper. The reality is not as pretty. There are always expenses, and in multifamily buildings there are typically more issues. I have a 12 unit building with a wider monthly NOI spread than yours (around $2,000/mo or so) and it's been losing money like crazy. I have another 4-unit with a similar monthly NOI spread to your 8-unit and it just got stabilized again. I have also lost on it thousands of dollars in the last few months. I can float this from cash flow from other properties I own for the most part, and even then it's getting very annoying at this point. If I had this going on my first property, I may have been out of real estate by now. Who knows.

I look at off market deals on occasion and not all of them are good. Off market does not automatically mean good, on deal on market does not always mean bad.

Last point, if you are looking to sell it for more eventually, and you've done your research and believe that the higher price you established can truly support it for a buyer down the line, then just know you are taking a gamble here. It may work out for you and that would be great. But you need to be prepared for if it fails.

All in all, this seems to be a transaction for someone who got some pockets to absorb short term and even mid term losses, as well as a case where you may be stuck with it for a while. Always protect your downside.