URBAN CORE MULTI FAMILY - WIN

[Lesley Resnick]

In June of 2017, I bought an urban core triplex. Many people told me I was crazy, not the first time I have heard someone say that! In hind sight, I can say it was not for the faint of heart, but profitable. My thinking was, I would own it for a while and sell if for what I had in it, just taking cash flow out. These properties generally do not appreciate. I WAS SO WRONG.

The units are all identical 2/1 and were rented for $600 a month when I purchased it. Fully rented it was producing $1800 a month and each tenant paid their own utilities. The building came with a property manager, who was a local guy and did a fine job in the beginning. He quickly lost interest in the place and became slow to collect rent or evict. I managed it myself for around six months and moved it into property management. Better than the first guy and easier than doing it myself. Urban core rentals are challenging for property management, I give them a lot of credit. The second manager I was using ran into some financial difficulties and discontinued operations with 30 day’s notice. As of April 1, I would be running the show again. At this point I made the decision to sell. I do not have the time to manage this property. It is around 15% of my portfolio and taking up 50% of the time. I already have 2 other day jobs, fining properties for other investors and growing my own portfolio.

The third unit was occupied by a man in his 60's who had been there for 5 years before I owned the building and was never late paying rent. He kept his table set complete with charger plates. He was fastidious to say the least. The other 2 units were somewhat of a revolving door. At this price point there is no problem finding tenants. I would put up the sign and get 5 calls the same day. The challenge was finding the best candidates. I was asked more than once, “why I would not rent to them”? They had been evicted from the last place they lived and did not have enough money to pay the deposit and the first month’s rent. In one case she did not even have a job.

One of the tenants was living in the middle unit and paying on time. Then he started to fall behind. The guy in the rear unit told me his daughter and wife had been killed in a car accident. In one night he lost the wife, daughter and only transpiration. Keep in mind this is someone living in a $750 a month rental, he could not just go to the Chevy dealer and drive off the lot with a new car. As if this was not enough, COVID hit about a week later and he was laid off. The guy in the last unit called me and told me he thought the middle unit guy might be suicidal. I met with him and we agreed he would take until the end of the month and get his stuff out. I would forgive what he owed as long and he does not leave a mess or trash the place. I regularly get sob stories and always wonder if any of it is true. In this case it was.

It is constructed out of brick designed to be a triplex. It is a better choice to buy buildings that were constructed as multi-family as opposed to a house that gets cut up. The triplex maintenance was low. The roof, a/c's and hot water heaters were replaced by the previous owner. The A/C and the hot water heaters were encased in wood boxes to keep anyone from disturbing them. With the exception of the rear unit, I replaced the A/C filter more than the tenants. There seems to be a lack of understanding that the machine needs a new filter every month or it will not run correctly. When I sold the building I had the coils cleaned. I replaced 2 refrigerators in three years. I bought one at Lowes and the other from a local used appliance guy. My thinking was buy new and it would last, I will not have to deal with it. Somehow the handle "fell off” in the first few months. It was lost in the second few months. Lesson learned! Used appliance it is.

Over the next three years I would raise the rent in the front 2 units to 750 each. I kept the other tenant at 600. When the property was fully rented it was 2100 a month. Mortgage was 700 with tax and insurance. I cash flowed every month I owned the building.

Sale summary:

$102,000 Bought in 2017

$38,000 Out of pocket includes prepaids

$178,000 Sold in August 2020

$3,600 seller concession

$1,500 in seller repairs

$72,000 mortgage payoff

$91,250 Due to seller

The property appreciated $76,000 in 3 years, not a bad take down (75%). Sadly all of it does not go in my pocket. After paying off the loan, transaction costs, paying myself back the down payment. I estimate I cleared $50,000. The property cash flowed around 1k a month for the last 36 months.

Lesson learned:

It is easy to buy and finance these types of projects. They cashflow well, so banks are interested in them. However, the management can be challenging. Doing it yourself can be done, but requires time and energy or it will eat your lunch. Finding a good property management company is key. Affordable housing must be their focus, it cannot be a we will manage anywhere. If the deal was right, I would not hesitate to buy another building like this.