Off market 6 unit deal analysis-- should probably do it but...

[Steve K.]

This off-market deal came across my desk today: https://www.biggerpockets.com/buy_and_hold_results...

Rare 6 unit in a hot market (literally first 6 unit I've seen for sale here in years). High-appreciation area with steadily rising rents (avg. appreciation 6.9%, rent increase 7.2% 2018). I own a quad just down the street that has had 0% vacancy, 10% appreciation, 10% rent increase last few years. The building is a late 70's 6 unit consisting of 1200ft2 townhome-style apartments, all 2bd 1.5ba with private decks, off street parking. Units are in decent condition but dated with plenty of room for value-ad. Currently rented to long term tenants, 25-30% under market. Rents could be pushed to $1,350 easily as-is (lipstick only) or potentially $1,750 fully updated (rentometer says $1950 average but it's a below average building for the neighborhood). Class C+ building in a solid B+/A- area (just across the street from a popular lake and surrounded by mostly nice SFH in the $350-500k range). Good school district. W/D in units.

Inspection report looks pretty good: nothing major, 4 furnaces from the 80's, 2 others are new, water heaters need replacing soon, EPDM roof 10 yrs old good condition, some windows newer vinyl others original need replacing, foundation and bones pretty good. The plan would be to keep everything going as-is minus necessary repairs like windows and water heaters, then update the units and max out rents as they turn. 

What I like is that this is in one of the last "affordable" areas of Boulder County where average home price is $550k and average condo is $400k. Tons of new restaurants and breweries are going in downtown which is 1 mile away. Our other buildings nearby perform well and the area is up and coming with great upside potential.

I usually shoot for $500/door positive cash flow and this isn't there but it can get there in 2 years. COC isn't stellar at a mere 7.72% but if appreciation continues on pace that could easily be six figures per year so we could potentially refi and pull all our cash out in a year or two (although I don't usually do that because I'm too stingy to pay closing costs twice and sourcing capital for deals isn't an issue). The building is set up townhome-style with kitchen/living/half bath on 1st level, 2 beds full bath upstairs, and is individually metered so it would be possible to sell off units as townhomes for ~$210k easy as-is or potentially ~$300k ea. with ~$20k in upgrades/unit. That will probably be the exit strategy but for now we'd be looking to hold.

My main hesitation is due to limited bandwidth. We just had our 3rd boy so we now have 3 high maintenance boys under 4yrs old. I already do repairs and maintenance on 19 units, so not really looking forward to all the headaches inherent in taking on a new 6 unit property built in the 70's (I would outsource more but it's nearly impossible to find quality labor around here, this is a boom town likely cresting the market cycle so all the non-methhead workers are booked solid for months and the smart ones stick to new construction or high-end stuff and wouldn't return my calls on most of this crap. One day my boys will swing hammers at something besides their brother's heads lol). With all the tenants being long-term I know there is a ton of deferred maintenance waiting for me. Taking on a new property is always time-consuming in my experience and I don't have any of that at the moment. The water heaters are in tight crawl spaces which I dislike, it's got swamp coolers which I dislike, and pretty much all the other work that needs doing just doesn't look enjoyable and I'm already too busy. I was hoping my next purchase would be closer to our house and a higher quality building that I would enjoy working on more, so I'm not over the moon on this deal just for those personal reasons. But compared to any other deals I've seen around here in the past year, the numbers are enticing so should probably suck it up and pull the trigger... Thoughts?

[Steve K.]

Originally posted by @Jaysen Medhurst:

@Steve K., time to get a good property manager. Stop wasting your time on low-value tasks. The 10% will be well worth it Let someone else collect rent and unclog toilets while you play with your kids. Sure, you may still need to handle some of the repairs due to your tight labor market, but off-load what you can.

Opportunities don't arise when they're convenient, but you've got one knocking now--open the door!

 Jaysen thanks for your feedback and motivation. We do have a great PM that handles leasing, emergency toilet clogs, tenant drama etc. for 7% and everything else a la carte as needed which works really well for me. We've had them in place about a year and I’ve been leveraging them more and more... we have a few  properties fixed up enough to a point that I rarely go to them but with new properties I just know I will be involved, especially seeing as it’s a 70’s build that has likely been hacked apart by cut rate handymen for decades. With my background as a carpenter I’ve seen how the sausage is made, I’ll never be completely hands-off because my strategy is value-ad which requires expertise and at the very least a lot of oversight and decision making. First step will be to triage and prioritize what gets done first and how. I find doing certain things myself is faster, always cheaper and to be honest it’s the only way to know for certain it won’t need to be done over in a year. But I’m delegating more and more as time goes by through building better teams and managing them better. Our PMs maintenance team is really great as far as PM maintenance teams go but the standard for PM maintenance teams is extremely low in my professional experience as a lifelong carpenter doing restorations and high end fine carpentry, you’re not gonna find that level of quality on a budget that works with rentals but that’s what I bring to the table. I typically work on new properties a lot until I get the major items checked off, make them as bombproof as possible then let the PM take over. Works well for me. 

After sleeping on it I'm considering buying it, making minor lipstick improvements then listing on the MLS. That approach won't be as profitable long term and flipping isn't usually my strategy but I think we can make some decent quick money with much less effort than fixing it up to keep as a buy and hold. Properties like this get multiple offers above asking on the MLS even at a 4 cap in this area so that might be the best option considering my bandwidth at this point in time...