What would you do with this multifamily property?

Question

So, I'm coming to BP for advice on how to approach a property like this or IF to even approach it. Hopefully, some landlords also chime in.

I was looking at a multifamily in Boston the other day that was massive - 4800 sqft. The 2 most interesting things about this are the layout and the tenant situation, so any help here would be great. On layout, it's listed as a triplex because of the 3 levels, but the current owner has the 1st floor with 3 separate tenants. One of the "apartments" is off to itself with its own door, and the other 2 apartments actually looped and connected, but because the apartment is so long (4800 sqft makes the building stretch very long all the way back), the owner installed a door that blocks entrance from one unit to the other. Here's the kicker: only one of those 2 units has the kitchen, and there is no kitchen in the unit on the 1st floor that is off on its own. Second floor is same long setup, but it's vacant because that was for the owner. The 3rd floor is really crappy with a kitchenette, a sink that is off in a little inlet/cove type space that barely gives you space and the curvature of the roof slants right above you. As for the tenant situation, there are no leases, most pay by check but some pay cash, and the owner says that he hasn't had problems with any of them. Oh, and I'm pretty sure I saw a real scoped high-capacity gun just hanging out in the room of the 3rd floor unit...

So questions for you guys:
1) What would you do with this layout? I'm happy to occupy one and have roommates or something.
2) Would you keep these tenants? What would you change? Is there that big a market for people that would live in an "apartment" without a kitchen? (Let's not forget it's winter season in Boston right now.)

Thanks, in advance, to all who took out the time! :)

Matthew McLoughlin · Answer

I think it's a good one to walk away from. Illegal units combined with existing, probably not paying tenants and a property that needs a considerable amount of work is an overall bad combination! If its your first deal, you are better off going paying retail for a three family delivered vacant. The company I work for owns around 30 multi's in the Dorchester area. There are a couple, not on the market right now ,that we might be interested in selling. Anyone on this thread that may be interested please let me know.-Matt

Mike Hurney · Answer

@Francisco Feliz I'd buy it at a price where I could move into one of the units and fix it up, then into another, fix that up, etc Then either refinance to maintain some cashflow and pocket money for the next deal or Condo it and move on.I've almost NEVER had good results when I inherited long term Tenants, I'd give them plenty of notice and help them move.

Sergio V. · Answer

@Francisco Feliz where is this property located exactly?1) I would try to keep the units separated per floor (each floor being a unit). Most likely the current setup is illegal. Whether you rent to families or roommates you should have only one lease per unit/floor (jointly and severally meaning all occupants are responsible for the lease and implicitly all the rent as a group, not individually). Depending on your situation, I would suggest renovating and occupying the top floor.2) Absolutely not. Take over the property, stabilize and renovate it and go for higher quality tenants. Of course, you can try to teach an old dog new tricks by running the old tenants' credit, writing new leases, collecting deposits and demanding one check a month but odds are a bit against youGood luck!

Sergio V. · Answer

@Francisco Feliz you know the city of Boston is trying to have all rental units inspected, right? This property sounds like what they started this program for. But the bigger worry would be if there is damage to the property (fire? maybe caused by the shady electrical?) and not only the insurance doesn't pay up but you are hold liable for people being hurt. Again, it depends on your risk tolerance but I would rather know than not know about all the problems of the property. Myself, I would only touch this if I renovate the entire thing and redo all the systems. It's not in my core area and the price is not right if it needs that kind of work so I am definitely not encouraging that. Remember, this market is counted in dog years and anything still active for that long is likely to have issues.In terms of off-season rentals, I had to do it for several units over the past 2 years because that's how timing worked. It's not as easy... I haven't taken a hit but the areas probably helped. But in your case, if you close in 2 months you are probably not putting the property in service for another 4-6 months due to repairs so you would be in the right schedule. Boston permitting and inspections are not what they used to be, it takes me weeks and multiple visits to pass rough these days.Good luck

Francisco Feliz · Answer

You guys have all been so gracious to take this time to offer your input. I've read this all, but I'm just now able to respond. Let me take this in pieces.First things first, you guys have all convinced me that this one actually requires more work than I'm comfortable being responsible for on my first personal property. In fact, I've even changed my strategy, especially due to my 6-month timeline (personal reasons), from focusing solely on multi's and major cash flow to really just looking for anything where I'll at least break even, even just regular apartments. Of course, many of you would already know this excludes condos bc the monthly HOA fees are insane -- I was looking at them on redfin. But would it include single families? Are there areas within Boston limits (incl. Brookline, Cambridge, Somerville, Roslindale) where single-families are rented? That's probably the only thing I'm figuring out right now. On to your posts...@Jeffrey H., thanks so much for giving me a framework to think about the investment. "If it costs 100K to renovate but will only get 2K more per year bottom line I would leave it as-is." I'm going to use this on the next properties I look at.@Sergio V., thanks for the knowledge on what makes a property illegal. When you say "illegal," do you mean he can be fined by the city or anything like that? I'm pretty sure not all units have 2 means of egress, most do because they also have an exit onto the back deck. And the utilities are not metered separately - in fact, there is only one electrical panel that somehow works for the whole building. There are 3 meters, though, which is really strange. So, overall, you're right on not buying into a liability and not forcing a deal. Would you still be a fan of getting the building vacant even despite the difficulty of finding renters during winter? (This is just what I hear; I don't have personal experience with it)@Bill Thompson, thank you for putting into perspective how much work this would need. Clearly, I'm not willing and able to get into all that on my first personal property. Don't have $100k+, and I'm not sure I want to have to evict anyone on my first go-around haha. Honestly, I was okay with the rent including the utilities because I ran the numbers that way and there was still good cash flow, but one panel for a whole building is scary or ... a "liability," like Sergio said. Of course, the landlord paying utilities is not ideal but it didn't seem like an urgent fix just from the listing. Also, good to know about condo conversion, still learning where the prime areas are, especially in Dorchester. Finally, when you suggest your offer price and say "need to be realistic, this is Boston," what do you mean -- that the offer price can't go too low because Boston still is expensive?@Reed Sasamura, thanks for the reminder to look at what the competition is doing.This was all very helpful, gentlemen! Thanks a lot, as I'll be using this as I approach what I end up buying. All the best.

Sergio V. · Answer

@Bill Thompson right on! I agree with everything you said except the reno costs. If he will get into rewiring, moving walls and separating the heat I think it'll be more than $100K. But I wouldn't get that property otherwise.

Reed Sasamura · Answer

@Francisco Feliz, to piggy-back off what @Jeffery H. said, I'd recommend considering the rents in the area before renovating.No matter how "nice" you make an apartment (granite/stainless/etc...) rents will cap at a certain amount in a given neighborhood. And for obvious reasons certain neighborhoods have higher limits, but to my knowledge Dorchester isn't one of them. Do some rental market analysis and gauge your competition in the area, then strive to make your units competitive with the rest.

Bill Thompson · Answer

Ok, so I think I know the property you are referring too. Good location. Exterior is aesthetically pleasing. Ample parking in rear. This property has a lot going for it. It might be the perfect house hack BUT you have one major obstacle (besides the price) to deal with before you get into design / layout. That obstacle is the combined utilities for the various units - the heat and electrical redone so they can be metered separately to make the tenants responsible for those costs. Currently, the heat and electric is included in the rent. This will eat up your operating income like nobody's business. Make sure you factor this in rehab budget. It must be done.Here's what I would do. Target price would be high fives to low sixes (need to be realistic, this is Boston). Empty out the units and rehab all three units NOW. Given the size of the units, your rehab should include updating all systems as mentioned above and reconfiguring the layout to make efficient use of space. Aim for an open floor plan with three bedrooms and two bedrooms, with all units being legal. From your previous post, it sounds like the kitchens need to be done over so you might as well tackle the bathrooms. All of this work will set you up nice for years to come with low capex and allow you to charge top dollar for rent. You would also be primed for condo conversion should you decide to go that route later on. Assuming you are able to contribute a lot of sweat equity, you might be able to get most of the work done for $100K.

Sergio V. · Answer

Btw, I think I figured out the property. Good street, right on the edge between B and B-, old condo conversion favorite in the mid-2000's, def a B neighborhood. Steep price, try to make that start with a 5 or low 6. Def. get it vacant, you need to figure out the heat and electric situation. The demographic is perfect for higher end rentals there and you are right around the corner from the Red Line. Good luck!

Sergio V. · Answer

@Francisco Feliz I agree with everything you said about the neighborhood. I am not sure whether it's Savin Hill or Ashmont (hopefully one of the two) or the area in between around Adams St but East of Dot Ave is always better than West. Definitely not a D area and probably not B+/A- either. Regardless, I don't think individual leases are illegal, but I always write jointly and severally leases. I have a few roommate situations in South Boston and Malden and it has worked out better for me. I do not have to deal with multiple checks (in my case wire transfers), I am not interested in reasons why the other roommate(s) are late etc. If one is late, all are late and get one notice. It hasn't been the case but that's part of my property manager's speech when they move in. I do prefer families which is the bulk of my units.I was saying that the setup is probably illegal as I am sure the building is assessed as a regular 3-family (floor over floor). If you have one floor chopped up into tiny apartments, despite the legality of it, are you sure each has 2 means of egress, are smoke detectors installed properly, are utilities metered separately, would insurance pay up if there is an issue etc.? Don't buy into a liability, that would be my advice. Besides the current landlord's word, are you sure all tenants pay? I hope I am wrong but I suspect issues if you keep everyone. Not to mention you can't do a lot of work to the property with tenants inside. It sounds like it might need it, correct? I realize this might be cost prohibitive for this property, but I am a big fan of getting a building vacant, doing everything to it and then renting it. That way the number of maintenance calls goes down to single digits a year, the quality of tenants most likely goes up and so does the rent. Again, not knowing the particular property these are just suggestions based on what I've seen over time. Don't force a deal but if you think you've identified an opportunity go for it!S