First deal with potential... 20-unit complex... thoughts?

Question

I am a complete newbie, but I've been searching for property dilligently for the past 6 months and I believe this one has potential... what are your thoughts?

# of units: 20

• all 1 bedroom
• all 360 sq ft

asking price: $379k, down from $399k

year built: 1995 (pretty rough shape though)

current vacancy rate: 30% (6 of the 20 units are vacant)

current rent: $125, collected weekly

location: decent... this property is probably the worst eye sore inside of a 3 block radius

• working class area... some gang-related concerns... all in all a pretty solid town

expenses: all utilities... approximately $1,900 / month

repairs needed: not sure at this point... 10k-20k would go a long way in improving the look and appeal of the property and would likely reduce vacancy rate

cap rate: 9-10%

Based on the numbers, this is without a doubt the best property I've looked at, but I have a few questions:

• What are the best ways to reduce vacancy rates, generally speaking?
• If small capital improvements would go a long way in terms of increasing the value of the property, what would your approach be with the bank if the goal was to minimize up front capital requirements?
• What concerns would you have with a property that has been around for 30 years and looks pretty rough?
• Given that the surrounding area is relatively nice, how much money would you put into capital improvements (hopefully provided by the bank) if the end goal is to maximize profits.  Note: I'm not sure there is a lot of room to increase rents... $125 / week for 360 sq ft already seems pretty high, I think.
• What would your initial offer be?

Obviously, none of you have time to answer 5 questions, but if you could just pick 1 or 2 that you feel good about, that would be tremendously beneficial.  Thank you so much for your comments and advice!

RK

Joel Owens · Answer

Ross your profile isn't filled out so hard to see where you are coming from with an investment strategy.

If you are doctor for example making 400k a year the time constraint will be different versus someone making 30k a year trying to quit their job and replace it with something else.

With this property you will be buying yourself a job. 1 units turn over fast and generally are not great investments unless a college town or seniors type housing. Weekly indicates operating more like a hotel. I have seen these types of properties before. If you do not collect the rent that week the tenants spend it on other items.

You will be buying yourself a job with this property and it sounds overpriced. No investments today I do are a job. It has to stand on its own and make money. For example if a 20 unit takes up every waking moment of your life and you make 30k a year from it then it is a job.

10k to 20k is only 500 to 1,000 repair per door for a property you say is in rough shape. That number is nowhere close.

You could have an exterior item that runs up considerably the cost per door. You might want to pass on this if it is your first one unless the owner finances and you can hand back the property non-recourse with putting little to nothing down. In that way it will either workout or you will get an intensive education on how things work.

No legal advice given.

Azeez K. · Answer

Hi @Ross Kephart

1. Read the BP article by @Brandon Turner 12 Easy Ways to Reduce your vacancy rates and find great tenants

2. Approach with the Bank:

• Create a business plan listing details on how you plan on adding value and re-positioning the property. Doing so will also help you validate and challenge your thought process. You also need to list on how you plan on improving the occupancy and the value add services that will attract new tenants 
• List Capital Improvements that you plan on doing to the property and how you plan on phasing these improvements 
• Request the bank to include the initial capital improvements with the loan. Often times depending on your relationship you can put 20%-25% or 30% on the Purchase price and have the rehab amount available as capital improvements.
• Include your professional Bio 
• If you have done this in the past include your success stories

3. Major Concerns:

• Unit Mix - all 1 unit apartments - small size / you will hit a rent limit
• Roofs - When was it last replaced 
• Plumbing - Type of plumbing, galvanized pipes
• Bathrooms - Leakage 
• Water issues - pipes, leakage 
• HVAC 
• Driveway
• Mold
• Don't under estimate the cost of the above

4. Subjective - Enough to address key issues in phase 1 of the rehab and give a visual appeal that the property is under new management (fresh coat of paint, landscaping (if-applicable, signs)

5. Get facts - Look at recent properties sold in the area, look at per unit price, CAP rates, look at Market Trends Avg List Price to Sold Price, price /sqft, GRM etc. All these indicators will give you a good sense of the price.  You can also go 15%-20% less than the asking price. See if you get completely ignored or if they come back with a counter.

Anyways Good Luck!

Oren K. · Answer

Between Joel & Azeez you have some excellent points to consider especially as a first time investor. Owning this property will take a chunk of your time even with a management company. There are very few (if any) true 'hands-off' / 'passive' investments.

The items that caught my eye were the weekly rent collections which is more of a rooming house arrangement and the rental rate; $125 per week is $525 per month on a 360 sq ft is $1.46 per sq ft. Double check if this this the going rate of comparable units as it seems high.

Adam Bartomeo · Answer

I am beginning to research the multifamily arena but this seems like a very high price based on the numbers. It has negative cash flow of 8%. They would have to pay you to take the property. Although, I wouldn't pay based only on future earnings, I would take them in to account. Can you raise the rents? If you cannot then can you lower expenses? Are you financing?

If you were always fully rented all of the time you would only earn $2,500 per month. Just the cost of the utilities is $1,900. Leaving you only $600 per month for all of the other expenses (management, landscaping, debt service, property taxes, insurance). My general numbers are showing that with fully occupancy you would have a negative cash flow of about $2,500 if you had debt service.

Based on the info provided I would not touch this one. I am not understanding why this would seem like a good property. Am I missing something?

Ross Kephart · Answer

@Vincent Crane@Kyle PenlandOren K. - thank you so much for your feedback, insight and advice.  I am scheduled to see the inside of the units this week, so I'll have a much better idea of how bad these units actually are.  $125/week for 360 sq ft does not parallel the market, so that seems a little funky.  Starting with a 20-unit highly intensive project may not be the best idea.  At the same time I'm tired of looking at deals and reading books and ready to get something done... obviously if this thing is a definite bust then I won't move on it, but I'm willing to take some risk for an appropriate return.

Adrian Stamer · Answer

I'm seeing a little over $6k a month in gross rents. $125 weekly * 4 weeks in a month * 20 units = $6k, though you'd make more since that's only 28 days

That being said as a newbie this is not really the way to start

John Thedford · Answer

Agree 100% @Joel Owens. This sounds like a full time job or you would have to hire a PM. Generally speaking, MF has more turnover than SFR but you don't get the fast scaling of income in SFR. In our area you would pay a LOT more per unit for SRR. The rents would be substantially higher and turnover would be lower...but you would have units scattered all over town which mean many more roofs, etc. If I was looking for MF I would definitely seek at least 2BR units. If you purchase upscale MF, your cost would be higher but there could be positives in other areas such as tenant turnover, tenant quality, etc.

Henri Meli · Answer

@Ross Kephart. I'm curious how things have evolved with this property you were looking at. Did you proceed? Did you move on from it? Lots of people could benefit from it.

I'm new to multi-family ( I own many single family) and after looking around for many months, I have found something that has caught my interest quite sharply and where I have been doing more in-depth analysis. Mine is also a 20 units of 2brms/1.5 baths. So, I'm curious what you did and why.

Oren K. · Answer

Ross,

Impatience can be very bad for your bank account.

As a manager / director in your field (whatever it is) you have developed a 'feel' for the issues that come up. You have seen them or similar things a number of times and can weigh the pros / cons / risks. This 'feel' is NOT an analytical number crunching exercise.

As a self declared newbie in real estate you do not yet benefit from a similar 'feel' and all the more so have to be conservative in your assessments. If that means passing on a deal that may be workable but is marginal, so be it.

In my career, I did a lot of technology project management. In assessing the risk of a project, one exercise was to list all the significant milestones and then assess the risk of each milestone in isolation. Even if everything else was 'Low Risk' and one milestone was 'High Risk', the entire project was 'High Risk'. There is no 'averaging' of risk.

Lets put it this way, would you trust a new hire with no previous specific experience in your field to make major go / no-go decisions. Ideally, you start them off shadowing someone, move them on to small decisions and let them grow. As they prove themselves capable, the scope and significance of their decisions grows.

Oren

First deal with potential... 20-unit complex... thoughts?

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