How low can I go on an offer for multi-family?

Question

I’ve been looking for multi-family properties in the Tampa Bay Area and every property I analyze cash flows under 6%. I’m at a point where I want to start making offers at what I think is reasonable (closer to 9% cash flow), but in some cases that’s 15% under asking.

Specially, one example is a triplex in great shape and a good area for an asking price of $375,000 and it would only make sense if we could get it for $300,000.

I don’t want to waste the time of my agent or anger the sellers by going unreasonably low. What do sellers / agents consider reasonable?

Jonathan Taylor Smith · Answer

@Sarah Sheaffer - For how long has this property been listed? If only days or a week or two, then they are not likely yet motivated to take a "low-ball" offer. But a property is only worth what someone is willing to pay, so if it has been sitting for many weeks or longer, they may be starting to realize that it is not worth $375K.I don't worry about an agent or seller getting angry because I'm offering well below their asking price. I have an offer out right now on a property that is 12% below asking and I've made and gotten offers accepted that were as much as 30% below. But when doing so, I try to provide some justification for my amount, and the bigger pockets reports are good for that. Run a rental report that shows the seller / agent that this property won't cash-flow above your offer price (or won't cash-flow at a rate you find worth the risk and effort).If they refuse your offer, then make a counter offer closer to their asking price but with some incentive present for you, like some amount of seller financing that lessens your out of pocket expense, thereby increasing your return even at the higher price.

Kiera Underwood · Answer

@Sarah Sheaffer I typically don't make offers under 5% of asking price. These days I don't really play on market or go through the headache of putting in 5k undervalue bids a day haha but when I did, that was my rule!

Sarah Sheaffer · Answer

@Jonathan Taylor Smith - All great points :-) I think we were spoiled with our earlier investments that are at 9 - 10% and need to let go of that target a bit. I don't currently have my license (keep toying with the idea, but I have a FT, somewhat demanding job). I've always heard that you can't represent yourself in a real estate deal. I wonder if that varies by state.@Anthony Wick - I'm working with a company that partners with a variety of banks, but they all have the same basic terms. It has a 5 year balloon, but most banks will do a re-rate at that time. The example I shared is in Tarpon Springs. We have multiple properties in Tampa now, but we're starting to look in St. Pete/Clearwater and surrounding areas because I believe they will appreciate more than Tampa, which has a lot of low income properties/areas. Tampa is a pretty good market for real estate investing in general, so I definitely think you should consider it. This is the first time I've struggled to find a deal pretty quickly. Another coincidence, I'm originally from IA. You've probably never heard of the town Blue Grass, but that was home in my younger days :-)

Anthony Wick · Answer

@Sarah SheafferGood post by Jonathan below your last post to me. Are these properties in the Tampa area? I’m planning to retire early and relocate in 4+ years to the Port Charlotte area. Haven’t decided if I’ll continue investing down there or just keep my Iowa properties and build a SFH to live in there. My current financing is 20% down, 4.8% interest, 25 year amort, and 7 year balloon. Is your 20 year and interest rate all fixed? No balloon?Just like you, I keep doing the analysis and won’t do a deal that will not cash flow. I’ve got a day job that pays the bills so I don’t have to rely on making real estate deals. If I do, great. If not, I’ll just go with what I already own.

Jonathan Taylor Smith · Answer

@Sarah Sheaffer - My $0.02 is that cashflow is king, so that is always my primary consideration. So as long as it is a positive cashflow number even after accounting for reserves for PM, Vacancy, R&M + CapEx, then I'm likely willing to proceed in making that offer. Sure, 4% isn't anything to get excited about, but if the location is desirable enough that you can keep it rented at a near to market rate, then you must also consider the other ways in which you profit from owning rental real estate. Then it becomes about more than just the cashflow... Will this location likely appreciate? How will you benefit from taxes? Do you / can you self-manage to pay yourself for PM? Do you have your license, so you'll get a commission for representing yourself in the transaction?You also have the benefit of amortization / mortgage pay-down by your tenant. And the benefit of inflation making the mortgage an asset. When you fully consider all factors beyond just cashflow, will this be a good (or possibly an amazing) purchase for you looking back 10 years from now?I started with REI in 2015 and passed up many deals because I did not like the cashflow numbers. Now you can never know what the future holds, but hindsight being 20/20 - I now know that I should have bought every one of those properties that I passed up on because I wanted a 12% CoC-ROI instead of the ~3% that I would have gotten at the time. And now that I'm working with funds from Private Money Lenders that I seek to keep leveraged on good properties, I can't always pass on those deals with the lower initial CoC-ROI. If it is a positive cashflow situation on a good property in a decent location, I make the offer and keep it moving.

Sarah Sheaffer · Answer

@Anthony Wick Bummer to hear your having a hard time finding good deals too!The numbers are a bit of both (confirmed and assumptions). This is the first time we are looking to do a commercial loan with these terms: 20 yr, 30% down, 5.5% interest. All other properties we've purchased in the past were cash or traditional 30 year financing, so it was easier to get a good cash flow. Below is an example of one that I can't make work at the asking price or even a little below. I do try to be conservative, so it could be a bit better than this, especially because it's recently renovated and vacancy and repairs should be minimal. Turn key triplex in a nice area offered at $375,000One 2/1 and two 1/1, with an anticipated total rent for the area: $3,250/month (~1,200 for the 2/1 and $1,025 for the 1/1s)Property Management, potential 5% vacancy, and repair expenses: $550/monthMortgage (including taxes and insurance): $2,295At that price and terms it's about $400/month / 4% cash flow.I appreciate any insight!

Anthony Wick · Answer

@Sarah SheafferYou should post your actual numbers from an analysis so we can see. Are your numbers and assumptions accurate? If so, then it’s just about finding the right deal. I’m like 0-50 this year on properties that won’t cash flow, but they keep selling to somebody! So, if they’re selling then your low bids won’t go anywhere. Found an off market last week that I’m now hopeful on.

Sarah Sheaffer · Answer

@Jonathan Taylor Smith - Thank you! That is helpful/reassuring. There are a couple properties I've had my eye on that have been listed for over a month, so I'll pick one of those to try out a reduced offer. Also, thanks for the advice on sharing the rental report...that's a great idea!