Need advice on 7 unit offer - class b/c?

Question

I’ve owned a couple rentals but none now. I’ve found a multi unit townhome near me. I’ve worked the numbers over and over and even with PM can get around 24% roi or at close to $2000/mo

However, My hesitation is threefold:

A. We are in uncharted territory with the market. I feel like prices will drop by 12/20, but no idea how much or if it’ll even affect this and other multifamily in my area

B. To me these are class c+/b- units. Parking lot could use repave and landscaping need a little touch up. Inside units are decent enough tho (2/2). I’m trying to think just because I wouldn’t live there doesn’t mean it’s a “bad investment”? Right?

C. I’ve never done a multi unit so it’s a jump but I think a good one and I can do it - with PM.

Price is fair for the per square ft. It’s not a slum area but it’s not a near Whole Foods either lol

Anyway, any suggestions or guidance is appreciated

Mike McCarthy · Answer

A) People need a place to live. There may be a recession, there may be unemployment, but people still need somewhere to stay. Also, most landlords have said tenants are paying, despite what the news might be saying. Of course, no one has a crystal ball.B) You say you wouldn't live there... my criteria is whether I feel safe there. Though it might not be up my alley, as long as I'm happy to walk in the neighborhood, I'm good to invest there. Good luck!

Steve Morris · Answer

"I feel like prices will drop by 12/20, but no idea how much or if it’ll even affect this and other multifamily in my area"Well, I can only go back to 2009 in OR, prices on average did NOT drop. However, if an owner got his hand forced like by a bank and had to make a sale, it was below-market. If a sale involved a willing buyer and seller, prices weren't dropping. And from 2011-2018 they easily doubled.I think I'd look at the REAL numbers and if you can make a 8% ROI tax-sheltered, I'd have no problems at any time. Just make sure you're using REAL numbers and understand the property so you get no surprises.

Christen G. · Answer

Happy to help where I can. A Trailing 12, T12, or TTM, is a financial statement that shows a multifamily property's previous twelve months of operations. It's a common ask when looking at this type of buildings and a reputable seller who ran the building well should have it. If they don't, use 40% (of rents collected) as your expenses line.

Steve Morris · Answer

MEANT - I think I'd look at the REAL numbers and if you can make a 28% ROI tax-sheltered,

Christen G. · Answer

I second the, "do you feel safe" versus "would you live there" statement. Also, think about, "would you live there" if you were 23 and working at Starbucks/A bar/Gamestop or whatever? I certainly own rentals that I wouldn't currently live in, but would have at 22 when I was just getting my feet under me. Lending restrictions in the time of the 'Rona have tightened up for sure. Be prepared for 30% down and as others said - have a lot of reserves. Mostly, get to talking to a few lenders and see what they're saying. I've heard, "find out what the tenants do for a living" - which - if you can get it, is helpful intel. The only other thing I'll add is to get the Trailing 12 and Utility statements from the seller - you'll want to make sure there are no delinquent tenants who aren't paying rent and can't be evicted b/c of rent moratoriums all over. And Utility statements can help you pull more accurate numbers together. Best of luck!

Chris Rowland · Answer

@Bjorn @Bjorn Ahlblad Thank you and I appreciate the insight! I will be doing a VA loan with 4 of them and a conventional on the other 3 (all 7 units are attached). What is 12 months reserves in this case? I know the reserves in the COC ROI at 1% which is not an issue, but I think i'm off there haha. all units are currently rented and tenants have been there 2-5 years on average. I don't know about vacancy rates but good to know on that! i'm currently working w/ the lender and waiting to get a preapproval for around 600K total. The current owner is a builder and want to lighten his load, planning to build new homes on the lot directly connected to "mine". Thanks again!

John Teachout · Answer

Our rule of thumb for selecting a property is that we won't purchase in an area we wouldn't live. I am not concerned about future financial impacts on our investing decisions. ie, I don't think the economy is going to fall apart and will continue to improve as it has been. So I would look at the property more from the physical side of things. ie, impending capex, repairs needed immediately and in the near future, all occupied units at market? Any tenants have baggage that could be troublesome down the road? etc. All of this is area dependent and I don't know where you're at.

Chris Rowland · Answer

I'm not seeing the numbers so far; i see listings (with MLS access) that say for instancePrice 475 asking - say i pay 450... generated income they say is over 50K, which i average that at about 4400/mo (sure it could be more but dont' know right now). anyway, without getting too detailed, by the time you add the whopping $550/mo HOA and 10% PM along with the other opex's that is no where near cash flow +. I am basing this off of a loan with 10% down (VA) -- but even if you did 20, it's the same boat really.??

Chris Rowland · Answer

Maybe I misspoke - I think i've moved on from this despite the good numbers. Although I really like the mention of another post (sorry I can't see it and not time to go back right now to @ you, but thanks! LOL) about if you were 20 yo, would you live there.However, John - this case would be (and others) where there are 7 attached, but 4 would be under a VA loan (max 4 units, must be attached) and the other 3 would be separate conventional mortgage.

Chris Rowland · Answer

Thanks for the input.What is 'the trailing 12"?