old multifamily unit - should I? shouldnt I?

Question

Hello BP community,

I'm having second thoughts on buying a multifamily so I thought I'd ask the best real estate guru (BP community) :)

So, I'm negotiating on a multifamily in Caldwell ID. Its a triplex and I've already run the numbers. Cap rate is pretty good at just near 8%. I've talked to local property managers and the vacancy rates are low. The only problem I can see is that the building is really old (built in 1887).

I've given them a really low offer (~ 15k less than assessed value), but this is my first purchase.

I dont know what I dont know about really old buildings.

My questions are:

1. Is it a big risk buying a property thats 129 yrs old?

2. What are the risks I should look out for during showing and inspection (lead paint? asbestos insulation? what else?)

3. Idaho real estate is very hot right now, definitely a sellers market, and this ones been sitting for 229 days. If I'm looking to trade (1031 exchange) down the line, am I setting myself up for a loss?

I'd be grateful for any answers,

Thanks!

Thomas S. · Answer

With that metering issue you were better off not getting the property.

Ajay A. · Answer

Thank you everyone,

Unfortunately I didnt get a deal on the property, so I had to move on. Idaho rental market is pretty hot right now (about as hot as everywhere else I guess). Anyway, thanks again for all your replies, I will be consulting this post again for the next property I look at.

@Matthew Hornsby, If you dont mind I am curious how anyone found out that there was asbestos underneath the siding, you must know a really good home inspector. I havent seen too many properties that have basements, crawlspaces are popular here as well.

There was one issue that I noticed in the Proforma that 2 units were metered together for electricity, and the owner had some strange agreement that they would pay 25% of the bill.

Matthew Hornsby · Answer

Hi Ajay.  I'm in a very different market (coastal NC) but I'll see if I can help give you a few things to think about.

1.  Possibly.  I recently showed properties to some buyer that were built around 1890-1900.  They were large and very well maintained.  Over time they had certain updates done, like reinforcement of the support pillars in the crawlspace, but overall they didn't have major issues.  It depends a lot on how well they are maintained.

2.  You are correct in thinking about lead paint and asbestos on a house of that age.  Lead paint is not necessarily a show stopper.  It would depend on the particular situation and what you are planning to do.  Is the lead already been painted over and sealed up?  Are you going to try to take if off of any existing walls in the house?  Those things (and the price tag for what you want to do) are something to think about when you find out if and where the lead paint is in your house.  Asbestos is a bigger issue.  One issue we had here in NC was that there were some types of exterior siding that had some amount of asbestos in them.  Over time people had put other types of siding over top of that.  Over time buyers were buying older homes that they had no idea had asbestos siding underneath the current siding.  Having it removed was a pain as you can imagine.  I would recommend you ask your home inspector to be sure you don't have that issue.

Other than that some bigger price tag items you want to keep in mind.  1- The roof- When was the last time it was replaced or re-shingled and how long do they last in your area.  You guys have snow (we don't) so I would imagine that affects the longevity of your roof as well.  2- The HVAC - When was the HVAC installed/replaced and how long do they generally last in your area.  3- Foundation issues - In NC everything is either a slab foundation or crawl space so foundation issues are often pretty obvious (the floor will be lumpy or wavy).  I imagine you guys actually have basements so I can't speak to that much.

One other thing to think about in a multi-family property (I just got into a quad-plex myself).  How are the utilities set up?  In our case the quad-plex had only one water meter.  This meant we had to increase rents a bit and take on the water bill ourselves since we couldn't fairly measure each tenants usage.

My overall recommendation would be to google some home inspectors in the area and ask them any questions you have.  I would imagine they will want to make a good impression in the hopes that you will use them for your future inspections.  They inspect several houses a day and over time become very familiar with maintenance issues for homes in your area.

3.  As a Realtor, seeing a house on the market for 229 days would definitely make me a bit skeptical in a busy market.  Here in NC, if there are no obvious issues with the home the most likely culprit with it selling are most likely septic issues.  If you have a septic system on the house rather than regular city/county run sewer lines, I would strongly recommend having an inspection done by a professional inspector (it's worth the $200 or so to be sure you don't have a $10k + issue).  My suggestion would be to call (or your buyer agent call) the listing agent and ask him point blank what issues the house has that it hasn't sold for so long in a hot market.  Ask the listing agent if he knows any "material fact" type issues the house might have.  Realtors in most states are required to disclose any material facts that they know about the condition of the home.

I will leave you with the disclaimer my post-licensing instructor used to tell us.  "Don't believe a word I say, always consult a professional."

Good luck with your deal!

Michelle Smith · Answer

Hi Ajay,

A building that is 129 years old is definitely a different kind of animal.  An old building is constant maintenance, and not doing it in the same way that you would necessarily that you would with something say, 30 years old.  You need to know how to handle her, as does everyone who touches her. If she's in a historic district with protections, you will have to deal with approval processes to get A LOT, if not EVERYTHING down to paint colors done.  And speaking of paint, yes, you would need to have every tenant sign a lead paint addendum, aknowledging it's possible presence.  If any paint is disturbed, then it must be dealt with under the assumption that lead paint is present because of the age, and must follow EPA lead paint removal guidelines which are very stringent.  Neighbors pay attention and can report you and the fines are hefty.  This is not to discourage you!  I love old buildings, have always lived in them, but it's a different way of operating.