8 Unit deal - Buy or no buy?

Question

So for the last 18 months I have been looking at the same piece of property, ill try and bullet the chain of events:

• - Property comes up for sale ( Boston area ) listed at 1.8 million
• - Total rent roll is 10,600 - 5 one beds, all under market value by about 250-400 ea minimum; 3 2 beds, also under market by about 300-400 ea. These are CONSERVATIVE market rents, as I have bed apartments personally im renting for 2100-200, and these are currently at 1550 ea. 
• - Only one heating system, so the bill is insane, almost 8-10k a year
• - water very expensive, not sub metered and a pain to do, tenants won't pay for it anyway, at 8500 / yr
• - Flood zone, needs flood insurance & crazy other insurance, totaling about 10k-11k a year
• - Deferred maintenance - needs roof, deck work, landscaping and some interior work. 
• - No one buys it, it sits, they price drop to 1.6, now they want 1.4, but it is no longer on the market.

So back when it was on the market, I offered 1.1 , essentially, a bank won't finance this ( in my market I have a 80% LTV lender ) and they want 1.2 DSCR, but this will not cover with their underwriting #'s... 5% prop mgmt, 5% reserves, 5% vacancy, and the info I listed above, and it doesn't cover because the rents stink. All BTW, mostly section 8.

They keep calling me to re-make an offer, but won't take less than 1.4 - im told, and I have not remade my offer. About every 5 months I re-do my analysis and look at how much of a cash cow this could be if you do the work to the property ( light work ) get out some of the cheaper tenants so you can appeal & raise rents thru housing, and get the rent roll to where it should be, add coin op, decrease regular costs and so on. We have the money lined up & ready to go, but I keep looking at it, and can't pull the trigger.

Last point, if you moved this same piece of property 2 miles down the road its prob double the value, and, if you fix the rents, you can force some serious appreciation, around 500-600k.

What would you do?

Lien Vuong · Answer

Hey,

I believe I know the prop you're looking for as I analyzed it for a 1031 Exchange client of mine. The things that made this deal hard was you don't have much control of is the flood insurance and the utilities were included. Those bills are very hefty. I think that some serious Cap Ex would have to be done to separate the utilities, water meter, and get market rent for the units.

The plus side of the deal is that they're mostly 1 beds which is excellent for renters and I believe the units were in good condition. It's an also in a great appreciating market and good for long term hold. I remember there wasn't a ton of parking ..

Would you be able to negotiate with Section 8 to get more rent? I have done this before and have gotten more market rates as a result. I think an Airbnb strategy could work for this property because it's close to the airport. There's also the option of vacating some of the units and slowly renovate and bring it up to market rents.

I would list all the Cap Ex and potential rent increase that you'd have to do upon purchase and figure that into the offer. At this point it looks like your figures are going to cap at the $1.2mm range to make the deal work.

They're the one that is motivated to sell so I think you have leverage there and use the bank's lending parameters to iterate why your max offer is the only one that makes sense.

Omar Khan · Answer

@Seth Williams You can exponentially increase the value of most properties by moving them 2 miles down the road. The only problem is that in real life things don't work that way.

In a hot market like Boston, if a seller is coming back to you repeatedly but not budging on price they are either stupid, think you're stupid or not serious.

You are on the right track. If $1.1M is the price that works for you - $1.1M is the price that works for you!

I would suggest tabling a firm offer and moving on. You can proceed if the sellers are serious but move on to other things in life. Don't talk yourself into paying more for a property.

Seth Williams · Answer

@Lien Vuong I feel like its adequate, considering most properties of similar sort around have 3-4 spots tops. And yes, that is what I did haha. I did float back the idea of holding back some money too. Seem like I got enough info from y'all, prob just move a long!

Luciano A. · Answer

@Seth Williams

A good deal doesn’t sit on the market for 18 months. You have done your analysis and it doesn’t work at their asking. Stay firm as numbers don’t lie. Best to walk away and put the file in the drawer as a deal that didn’t happen. Seller wants a sucker so stand your ground.

Best of luck

Michael Justice · Answer

@Seth Williams

gosection8.com

Seth Williams · Answer

@Dan K. for sure, this is true around Boston a lot, but not for this building. Great call overall tho. @Tj Hines , that is the plan! Thanks everyone!

Tj Hines · Answer

@Seth Williams, to keep this short and brief - I would just move on! The numbers work at 1.1M point blank period. You can't force a deal to work my friend. We're not in the business of pleasing sellers. It has to be a win win situation. If not, move on to the next

Dan K. · Answer

My 2 cents on parking -- depending on the town/city, they may require one spot per a unit. I know it's ridiculous since the majority of buildings are grandfathered in and don't meet that requirement, but zoning often requires a 1:1 ratio. It's especially frustrating in areas where tenants don't own vehicles.

Lien Vuong · Answer

@Seth Williams 8 spots for 8 units isnt a ton of parking lol. Let me know how to make out, tell the seller to stop being greedy. I think they only bought it a short time ago. Ask them if THEY would buy this deal! What about seller financing a part of the DP since you have CapEx right when you come in? Might help with liquidity issues.

Seth Williams · Answer

@Lien Vuong that you! There is a ton of parking here, almost 8 spaces, and a capability to add more in the back, plus regular street parking. I do agree with you though! There is a lot of upside to cut the lower tenants out, and then with them out you could appeal & raise rent. I did this in a different building where a tenant was there for almost 40 years only paying 400/mo, so the other tenants in the building were paying 1000/mo tops because the in building rents were too low. The second she left, I got the 1000 rents to 1500 overnight thru section 8. ( small 1 beds ), so I know its possible to get these rents up with ease. Thanks for the comment!

8 Unit deal - Buy or no buy?

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