10 unit multi-family....a good investment?

Question

I am new to multi-family investing. I have been doing SFH investing for some time now. I found a deal in Ajo, AZ (population around 5000 people) for a 10 unit complex for 335K. Will be fully occupied next month. I need some opinions to see if this would be a good deal. My concern is that the town of Ajo is very small and jobs are not plentiful however there is a lack of rentals and tenants waiting for rentals. Any opinions are would be welcome. Thanks!

Total gross annual income: 76609 (at 100% occupancy)

Total annual expenses: 29677

NOI: 46932

Purchase price would be no more than 300K

Total gross annual income: 76609 (at 100% occupancy)

Total annual expenses: 29677

NOI: 46932

Purchase price would be no more than 300K

Michael Ealy · Answer

Without knowing the details, I would say your expenses is low. A building built in 1949 will have a lot of deferred maintenance and on-going repairs. You should use a 55% expense ratio (meaning, the operating expenses will be about 55% of your gross income).

And probably you should use a 10% cap.

The math will work out something like this:

Gross income x (1-55%) = $34,474 is your likely NOI (not the $46,932 the seller claims)

At $300K purchase, that's a 11.49% cap rate which is good.

One thing you can do is order a Professional Inspection and have the inspector come up with a Deferred Maintenance List. You can then give this to a contractor to give you an estimate of how much the deferred maintenance items will cost you, say over 12 months, 1 year and 3 years. Whatever amount you get, especially the first year - you need to get a Deferred Maintenance credit for that. That means you get this amount as credit when you close to reduce the cash you need to bring to closing.

For example, if your Deferred Maintenance items will cost about $50K, you can negotiate a credit for this when you close. So, if you're bringing 25% of $300K - that's $75,000..with the $50K credit, your cash to close is now only $25,000! For an old property like that, you need to keep that $50K to take into account for the deferred maintenance items you need to address over the next 12 months.

Hope this helps.

Erik W. · Answer

@Scott Beebe, hi and welcome to BP!

There's not a whole lot of information to go on in your post, but in general I think they are worth looking into further.  They meet my criteria of the 2% rule: the monthly rent is at least 2% of the total cost to purchase, close, rehab, and hold.

That said, I don't know how far away you are, how much hassle it would be for you to keep an eye on your investment (and the manager), how much financing you require, what your goal is (cash flow? appreciation? something else?), age of units, availability of competent contractors to maintain the property, etc.  We also don't know if there are other investors who have noticed the same phenomenon as you -- a lack of housing -- who are getting ready to start building in the next few years, which would ease demand to the point it likely would not grow back.  As you said, lack of jobs; therefore, lack of growth and demand will stay flat, even if someone overbuilds the market.

I prefer to invest in areas where solid growth is likely so that demand will stay strong even as other players enter the market.  That said, if your plan is to buy them, hold for 2-3 years, and then flip them to someone else, then perhaps the cash flow will make it worth your while.

I hope that helps.

Yosef Lee · Answer

@Scott Beebe

Scott, unless this is the only MF property you want to ever own, moving near to the property just to manage it does not make sense. I think you should focus more on finding trustworthy PMs and manage them remotely and aim to own more properties down the road no matter where you are. Or if you really want to manage a property by yourself, then maybe find one a lot closer to where you are now.

Stone Jin · Answer

Wow, moving there would 100% kill the deal for me.

Scott Beebe · Answer

@Erik Whiting, your points are very good and thank you!

1. Yes, if it was not for the government there literally would not be any jobs there. Border Patrol will always be there as Ajo is 40 miles north of the Mexican border. There is a contingent of contractors there now building the border wall but once done, they are gone. After doing more research, I can see there is a 29% unemployment rate in Ajo and from what I can see after viewing the town and the property, there is not much development going on. Ajo is a quaint little southwest town but quite isolated and not known for growth or opportunities.

2. The property is roughly 120 miles from my location. There is only one other PM in town. I was considering moving there if I were to move forward on this purchase so I would be onsite.

3. Yes the maintenance and operating costs will be higher as others have said. I have requested to see the owner's Schedule E. We'll see what happens with that.

Another thing, I have had 5 banks and credit unions turn down financing because of the location and lack of growth but two "alternative" financiers interested. Probably not a good sign either.

I am seriously thinking this is not the best investment.

Erik W. · Answer

@Scott Beebe, a few more things:

1) Town heavily depends on federal jobs.  Keep in mind, our Govt's debt is increasing, as is political brinkmanship.  The Govt has had short to medium length shut downs recently in past years.  If they don't get paid, you'll be waiting for rents that could take weeks if not months.  Be sure you have a contingency to address this.  Large cash reserves most likely.

2) "Employment" mix of other residents.  Artists: good luck collecting.  Retirees: most retirement plans are exempt from garnishment.  Snowbirds: here and gone.  Short tenancies and high turnover.  Entrepreneurs: love 'em, but 8 out of 10 business fail in the first 2 years.  Also, very hard to garnishee wages at a small business.

3) How far away is the property?  What is your plan for "managing the manager" to ensure they aren't skimming your late fees/vacant units or giving kick backs to their cousin the plumber?  What if that person starts out really good but dies/becomes disabled/gets sick/drops your account?   Are there other good, reliable, trustworthy PMs in such a small town?  Operational contingencies for long-distance properties are a must!

I also agree what others have said regarding Maintenance & Operating Costs in general being much higher.  Never trust a Seller's NOI: ALWAYS demand to see Schedule E.  That's where you'll find out what is really happening.  Rents and expenses are often reported lower to "save"  (i.e. commit fraud) on taxes.

Mark H. Porter · Answer

I would agree with Micheal Ealy.  I saw the cap at +15% and thought wow but then I saw the makeup of the community and the age of the building.  The customers are heavily feds but you have to watch carefully for other construction projects.  Check with your local county offices to see what permits are out there.  You only hold a competitive advantage for a short while before others step in.  Go here -> https://permits.pima.gov/acaprod/and at the bottom type in Ajo and AZ and see what others are doing.

Scott Beebe · Answer

@Michael Ealy, Thanks a lot for the insight! That definitely helps!

Scott Beebe · Answer

@Stone Jin: Yes, very true. Border Patrol jobs will always be there. A big chunk of the jobs now are contractors building the border wall but once done, they leave. The rest of the town is artists, retirees, snowbirds, and entrepreneurs.

Thanks for your post.

Stone Jin · Answer

Ajo will always have border patrol jobs.  As long as you have management in place and getting the returns you want then definitely explore further

10 unit multi-family....a good investment?

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