Making $ with Overpriced Multifamilies

[Curtis Bidwell]

Investment Info:

Large multi-family (5+ units) buy & hold investment.

Purchase price: $1,950,000

22 units comprised of 9 2/1 Duplexes and 1 1/1 Fourplex on 4.7 acre culdesac.

Property is in generally good condition. It has been family held since the mid 1970’s. Was not managed to keep pace with the market.

What made you interested in investing in this type of deal?

This property had 2 failed sales prior to my involvement primarily due to financing (debt service coverage). Rents were very low for the market. Based on the low rents the valuation was high. But based on quickly achievable market rents the opportunity became clear.

How did you find this deal and how did you negotiate it?

Property was listed on the MLS. Asking price was $2.05m. We had information that a $1.95m had been in play so that's where we started, coming to mutual agreement on Christmas Eve. The "no-negotiating" seller agreed to $12,600 in credits for repairs.

How did you finance this deal?

Financing made the deal! My lender gave me 1 year interest only at 5.25% (taking a 1:1 debt service coverage to a 1.3 dscr) with 25% down, then 5 years at 5.25% before adjusting. This allows me some time to get rents closer to market and additional funds to do turnovers.

This is the 4th deal I have used this lender for, so he knows me well and goes to bat for me with the loan committee.

How did you add value to the deal?

In this instance I will use Sec8 to set the new rent rate. Rents currently average $735 for 2 bed, 1 bath units. Sec8 will allow $1150. I should have 2-3 of these in the first month. Once the value is set it becomes easier for existing tenants to understand and accept incremental increases.

Significant upside in rents will be achieved over the next 18 months increasing value approximately 75%.

Lessons learned? Challenges?

Don’t skimp on due diligence. Always confirm assumptions. Seller did not disclose ecology requirements. Asking questions, talking to tenants, research public records, etc. Our research produced a $5500 credit.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

I have worked with Cynthia Niles for over 15 years. She knows the business of commercial, multifamily real estate. Powerful negotiator, principled and focused on your success.

I recommend Ken Pekola of Olympia Federal Savings commercial department for multifamily financing. He takes the time to understand you and your deal and has the flexibility to do what needs to be done to make a good deal happen.