New to Mulit-Family Purchases - What to look for?

Question

I am currently in the San Antonio Market for my first multi-family unit.  I have been listening to the podcasts and reading as much as possible on this subject.  Many of you have the experience of purchasing these properties.  Wanted some feedback on your key criteria that you look for in a MF property, your experience is invaluable.  This is my criteria list and at the bottom is a property that I have been running numbers on:

- Location of property/ crime stats/ school district

- Price point of property

- Taxes and maintenance

- Gross Income (Verify financial statements)

- Cash on Cash and Cap Rate

- Taxes

- Vacancy Rate

- Tenant Contracts and Tenure

- What improvements does the property currently need through an inspection.

- Can the property be improved by adding additional structures?

Here is an actual property on the market -

$140,000/ 3 units/ Days on the market 200.

Financials (They wont show unless UC)

Monthly

Annual

Income:

$2,350.00

$28,200.00

Mortgage Pay:

$642.97

$7,715.62

Vacancy (10%):

$235.00

$2,820.00

Management Fee (2%):

$42.30

$507.60

Property Tax:

$275.00

$3,300.00

Total Insurance:

$66.67

$800.00

Maintenance Cost:

$83.33

$1,000.00

Other Cost:

$16.67

$200.00

Cash Flow:

$988.06

$11,856.78

Net Operating Income (NOI):

$1,631.03

$19,572.40

Hadar Orkibi · Answer

@James Bigley if you didn't read the book Investing in Duplex Triolex and Qouds by Larry B. Loftis then its a good one.

Take in account that small multifamily is often only the start, once you realize the economy of scale multiple doors offer.

Its Ok to start small when you go in to a new market if that's comfortable to you, but sooner rather then later you will rather buying 20 doors in one deal instead of 5 x Fourplexes. etc etc.

if you are able to take the leap earlier then great, but make sure you have solid team in place to support you on that.

As far as education, I think it's a must.  there is only as much as you can learn from books and podcasts.

The benefits of having a coach and peer group supporting your growth is the key to successes.

If you can't see it right now, then don't worry, you will realize it sooner rather then later, when you feel that you are not making any progress or have no one to support you towards achieving your goals.

I can suggests you talk to @Gino Barbaro about their coaching program, I think its great value.

John Mocker · Answer

James

Here’s some info I’ve posted before that may help in your search:

Here are some things to look for from an Insurance prospective:

• Any in-ground tanks (active or inactive)
• Any Knob & Tube or Aluminum Wiring
• If built before 1978, does the building have Lead Safe certifications
• Any wood stoves or secondary heating units. If so, were permits pulled & were they installed by a professional
• Are any of the homes rented to students
• Is there a flat roof
• are there asbestos shingles - Heating systems- PlumbingSome companies will not write properties with systems that have not been updated

The Year that the following were updated (either partially or fully) would be good to know:

- Heating systems

- Roof

- Plumbing

- electrical

Some companies will not write properties with systems that have not been updated.

As long as you are living there, the proper policy for a 1-4 family is a "Homeowners" policyc. If the property is solely tenant occupied you will be looking for a Dwelling/Fire Policy (may be called a Landorrd policy or similar name) or a commercial policy such as a Businessowners or Package polciy.

Most homeowers or dwelliing/fire policies include:

1. Dwelling (Building coverage)

The limit should be based on the Replacement Cost of the building (cost to rebuild with

the same kind and quality excluding the foundation)

2. Contents (Personal Property): most homeowners policies give a set % of the Building

limit for Contents. Dwelling/Fire policies requrie that you request a limit for conents.

3. Detached Structures: for other buildings on the property (ie. sheds & detached garages)

Again, there is normally an included limit of 10% of the building limit. That can be increased

if needed.

4. Loss of Use / Loss of Rents: Normally, there is a 20% included limit. Loss of use is for

your additional expenses if you can not live there due to a covered claim (ie. Fire). The

Loss of Rents is for the loss of Rental income if the tenants can not occupy the house

after a covered loss.

5. Personal Liability: For claims due to Bodily Injury or Property Damage that you become

Liable for and which is covered under the policy. Companies normally offer limits up to

$500,000 but some offer $1,000,000. Buy the max.

6. Medical Payments: Provides coverage for an injury suffered on the premises. Does not

require proof that you were at fault. Used to keep small loses into becoming lawsuits.

Normally offered up to $5,000 but check to see if higher limits are available.

7. Deductible: This is not a coverage but rather your portion of a claim. Most better policies

will not have a deductible for either the Liability or Medical payments coverage. It will

apply to the other 4 coverages. You can select the amount of the deductible, usually

ranges from $500 to $5,000. The higher the deductible the lower your overall premium

but get quotes on all the deductibles you are interested in. Sometimes the incremental

savings from $1,000 to $2,500 or from $2,500 to $5,000 are too small to make the higher

deductible worthwhile. ***depending on how far the house is from the coast, you may

also be required to have a separate Wind or Hurricane deductible. Most times, the

deductible will be 2% to 5% of the building value. That is a significant amount

(on a $500,000 building that comes to $10,000 for 2% or $25,000 for 5%). A policy

with a higher premium may be a better deal if it does not have a wind deductible.

There are many endorsements that are available on the homeowners policy. Without

knowing the details I can not suggest which would be right to add on.

Several you should

pay attention to are:

- Ordinance & Law: Provides additional building coverage to deal with rebuilding cost

Increases due to changes in Zoning or Building laws

- Personal Injury Liability: Libel, defimation of character, wrongful imprisionment, etc.

(normally recommended, especially if you are a landlord)

- Water Backup: For water damage due to the backup of Sewers or Drains.

- Personal Articles: Coverage for belongings that have a special or collectors value

such as Jewelery, Furs, Fine Arts, Collectibles, etc...

Your age should not be a factor on the pricing but, depending on the company these other factors may get you credits:

- Insurance Score (company pulls certain info out of your credit report)

It is not your credit score but generally better credit will result in a better score

- Time at your job

- Education level

- time at current residence

Good Luck

Gino Barbaro · Answer

@James Bigley

MIH!!

Looking forward to connecting

Gino

James Bigley · Answer

@Hadar Orkibi, good points.  Will re-scrub the numbers.  Suggestions on direct education?  Podcasts and reading books as much as possible.  Appreciate the feedback.

James Bigley · Answer

@Hadar Orkibi I agree education is a must, I heavily invest in real estate coaching at this time but I think I need to do a deeper dive in investing myself.  I might reallocate those dollars for a specific mentorship.  Residual income is a must in this industry and this possibly fits the ticket.

Noted on economies of scale, more doors and fixed costs will expand your profits.

I will check @Gino Barbaro

Appreciate the constructive feedback!

Susan Foreman · Answer

I agree the insurance sounds low, definitely need cap ex.  Not thinking its a bad deal but the numbers don't add up.  Education in learning to truly run numbers - be honest with your numbers because you WILL have maintenance issues... make sure you have some reserve from day one to deal with them.

Tim Herman · Answer

@James Bigley Bp has some calculators that make it easy to input numbers. Use them 5 times for free and unlimited use for pro members. In the tools section. You didn't change your maintenance or add a column for Capital expenditures, that will cost you an additional $269 a month. Drops your NOI to $1235 per month. The calculator also show cash on cash. $1235*12= $14820. Assuming 20% down and 3% closing cost= $32200. $14820/$32200= 46.02% cash on cash. Not bad as long as it is in a good neighborhood.

Hadar Orkibi · Answer

@James Bigley  I would like to suggest that you consider getting some more education.  shorten your timeline to success.

You are missing few line items and Due Diligence points:

Check for Flood zone on the FEMA map online.

COC maybe low up front, but once reposition it should meet your criteria. (thats what a value add deal is all about)

property management fee 2% ???

Economic occupancy vs Physical occupancy

Termite policy

Yard care

Utilities?

Why is it 200 days on the market?

Did they had any offers so far? at what level?

any structural issues with the property?

insurance sounds low, did you get a quote?

Any upside in the rent or other value add opportunity?

(without building an extension or anything structural that require permits and take long time)

I hope that helps!!

Tim Herman · Answer

@James Bigley I would assume eventually you want to replace the roof, floors, kitchens, water heaters, ac. You have no Capex budget. Your maintenance budget is low. I use 8% vacancy(1 month out 12), Maintenance of 7% and Capex of 8%. I don't know of any PM that will do it for 2%, more in the 10-12% range. It exceeds the 1% rule monthly rent divided by 1% = max purchase price. This is at 1.7%. if this is in a rough area tenant problems and vacancy will be higher. Good luck

Rick Pozos · Answer

Is this 3 units or 1 house that is chopped up (maybe illegally)??

Since you are showing rents at about 800 a unit, are they all 2 bedrooms??

You know the line about real estate? its all about location, location, location. What part of town is the proeprty in??

I did not see water expense, do they pay their own water?? That would be about $80-100 per month if you pay it. Insurance should be double what you have. If a window unit or central unit goes out (and they will) that will eat up expenses pretty quick.

On the lower end properties, like this one, tenants are a whole lot harder on the properties. Things tend to break quicker. Just something to keep in mind.

Also, you did not put your down payment to figure your ROI.

New to Mulit-Family Purchases - What to look for?

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