10-unit building deal

[Nick Janovich]

Alright, so here goes. My maiden post on BP! I've been interested in real estate investing for some time now but have been focused on my primary residence. I purchased it in 2011 for $115k from a bankruptcy. It was built in the 1980s and the structure was good, it just needed some TLC inside and out. I renovated it for $30k. Total investment $145k. It is worth about $175k. I have about $90k in equity in the property. Great, you say, but what does this have to do with a 10-unit deal?  Well...

I'd like to use the equity in my primary home to fund the down payment on an investment property. I've been looking for about 2 months. Mostly at duplexes and triplexes. I really haven't felt good about anything.

Today I looked at a 10-unit building. Asking price is $70,000 but negotiable. Super solid brick building. It has 2 studios and 8 1-bedroom apartments. All are furnished. About half are updated within 5 years. The other half are fine but could use some updates. New roof 3 years ago, new hot water tanks within 4 years, most windows replaced, gas lines just inspected, new boiler pump. There is also a storefront which could easily be made into two more apartments if the demand is there. Currently used for storage.

One efficiency rents for $200 and the tenant is the unofficial manager. He cleans the halls, shovels the walks, unlocks the trash bins, etc. Been there for 42 years.

The second efficiency rents for $300. The rest of the one bedrooms rent for $450. Four of the eight are occupied. Two long-term tenants just died recently and they haven't filled due to wanting to renovate. They put one renovated unit on the market for $500 and had 10 responses in 24 hours but then had a death in the family so they took it off the market. The current owners have owned the building since 1965. They are retiring and moving south. As the husband told me, "I've made my money, time to enjoy it."

Here is my analysis of the deal. PLEASE look it over. I would pay all utilities. Gas is budgeted. Taxes, insurance, and utilities are figures from the current owners' books. I would initially manage the property so the cash flow would really be about $2,000 until I used a PM firm. 

I like the deal. I've seen 60% cash-on-cash with some duplexes but never anything in the 3-digit range. Thoughts?

[Jean Bolger]

It looks like it could be a great way to get into a multifamily with out a lot of money out of pocket.

Here are some thoughts/concerns that come up for me:

Get independent insurance quotes. I can almost guarantee that you will not get as good a rate as the former owner, unfortunately. Also call the utility companies and confirm costs. I hate owner paid utilities. Everything else about the deal would have to be extraordinary for me to buy a place with owner paid utilities, but that's just me :)

Furnished units, especially furnished efficiencies will have probably have a LOT of turnover. That's a transient demographic. People are renting like that either because they don't want to stay long or because they're one step from homeless. You might consider renting the apartments as unfurnished. Or at least make it an option to have the furniture gone...

Actual management fee percentage increases dramatically the lower the rents are. I would look at 13-15%.

Make sure you base your rent projections on what's really happening in your market. I just did a quick glance at Wheeling on Craigslist and there are a lot of sub $400 units available. So you probably won't be able to raise rents unless your property has something special in the way of location or something. Maybe call a few local property managers and ask about their estimates of local vacancy rates too.

good luck, let us know if you decide to do it!