All Forum Posts by: Kate Kedenburg

So glad this got organized! I'll definitely be in attendance from down south in Tacoma! Can't wait!

You guys ROCK! BiggerPockets is quickly becoming my favorite place on the Internet:)

Thanks so much for all the really helpful info, I've realized that for as much information that I provided in the original post, there's an equal or greater amount of real solid info I would need before being able to analyze this further...

@Lee Reeves - Having dug a little bit deeper, I think you are correct that the expenses seem low, and if a correct, higher number gets factored into the math that @Troy Fisher provided, that drags the NOI even lower, however Troy also raised an excellent point about rent discrepancy...why is one four-plex making so much more than the other? That's a question I'll only be able to answer by talking with the owner.

And in terms of location/property condition, as @Michele Fischer commented, there's the possibility that the type of tenants who are in the units right now, paying $600/mo, have had an impact on the property's condition. I did a drive by of the property and the neighborhoods - the location seems nice enough, and the neighboring multi-family properties are definitely in better condition than the subject property...so one thing that got me thinking was, in a situation such as this, where a property has potentially been "dragging down" the neighborhood, how do you approach getting over the stigma that might be attached to that property? If everyone in the area knows that that's where low-class people live and it's dirty and run down...can you just kick everyone out, fix the property up, and people just forget about what it used to be like? Is it best to do it lock, stock, and barrel all at once - or if we were looking at taking a longer-term approach at rehabbing and getting better tenants in, is the stigma harder to overcome? 

In terms of being attracted to the idea of seller financing; it's my understanding that the portfolio/commercial lenders who would be financing a purchase like this generally look for down payments of 25% to keep their LTV at 75%, and for a $600k purchase, we unfortunately do not have $150k cash available. If I have totally misunderstood something or anyone has advice about creative solutions to this problem, I'd love to hear!

Thanks for all the advice so far, everyone!!

Hey BP'ers! 

I've spent a lot of time looking for good multifamily deals in my area, with limited success. However, there is a 3-building property that has kind of stuck in my head. If you'll all indulge me, I'd like to provide some basic info, current financials, photos, and potential seller financing loan terms that my husband and I have talked about. This is all very preliminary, I haven't been inside the property or spoken to the owner yet, but I wanted some outside opinions to tell me if I'm totally off my rocker before I spend too much time and effort on this particular property. Any feedback would be super helpful!

For starters:

-3 buildings on three separate parcels: 2 four-plexes @ 800 sq. ft/unit and 1 tri-plex @ 650 sq. ft/unit for a total of 11 units, each 2br/1ba. 

- The numbers provided here have NOT been independently verified by me; these are from the listing information and have just been rough estimates I've worked off of. Triplex has monthly income of $1,950; one fourplex has monthly income of $2,600; the other has a monthly income of $2,445, for a total income of $6,995/month. Expenses vary a bit between the buildings, but taxes, WSG, and insurance appear to add up to $1,895/mo. 

- Seller has has them listed separately on the MLS for the better part of 3.5 years with no apparent offers, at least nothing that has gone under contract. He's been asking $227k for the triplex and $297k for each fourplex. Obviously he is insane.

These units are located on the eastside of Tacoma; not the most upscale neighborhood in town, but definitely not a "war zone" either. I've researched market rents in the immediate neighborhood and between $800-$850 seems to be what comparable units in slightly better condition are renting for. I feel that the average rent/unit of $635 for this property is more a reflection of the condition of the units and poor/tired management. These buildings and units just look...sad. Here are some photos. 

SO! Now for the good stuff. 

After much discussion, my husband and I have come up with the idea of approaching the owner and offering $600,000 for all 11 units, if he can finance them. I can't find any indication that the owner is in financial distress; he's probably underwater since he bought these units with one more 4-unit building for $1.2million at the height of the bubble(!), but he can clearly handle whatever his payments are, and doesn't appear to need cash immediately. So I would imagine he would welcome the passive income without having to actually deal with these units anymore. Loan terms we've considered would be in the ballpark of: 1 year's worth of monthly income as a down payment, 6% interest, and a balloon payment in 10 years. That way he knows we're serious, has his passive income, and gets a sweet payoff in 10 years when he's ready to retire. 

Regarding our investment, obviously we'd be holding these units for the long haul, and our goal would be to upgrade them one or two at a time to bring them up to market standard so we can demand market rent. Since these are smaller units, and providing all utilities are in good repair (otherwise we'll run in the other direction), I've estimated conservatively that we could rehab each unit for (probably less than) $2.5k. Without having gone inside, I can tell that some sturdy laminate flooring, a new coat of paint, and slightly upgraded appliances (with perhaps a cabinet upgrade here and there) would probably bring the units up to standard. I could only find two photos of kitchens in the unit; one looks alright, the other looks pretty sketchy. If all the kitchens are sketchy looking, that will change the conversation. 

So, if we were to do seller financing for $600,000, with a down payment around $25,000, our monthly payment would be just under $3,500. With the current expenses at $1,895 and current income at $6,995, that leaves $1,600 to account for vacancies, maintenance, and profit. Not super, I know. But, a few years down the road, if we are able to spend perhaps another $25,000 to rehab all the units, bringing the monthly income to between $8,800 and 9,350, we start looking a little better...

I go back and forth about the actual value of cap rates and calculating cash on cash return- some people swear by them, others never use them. Will those calculations be valuable for a property like this?

And now that I've basically written a novel - what does everyone think? Am I dreaming thinking that this is a worthwhile buy and hold investment? Should we offer lower? Who can offer some advice about structuring seller financing deals? I've read as much as I can on the forums, and it seems fairly straightforward, though I've never dealt with seller financing before. Give us some feedback! Thanks in advance, everyone!

Thanks for the insight, @David Frandsen and @Dru Steeby ! From all the valuable advice that everyone has offered, I feel more confident in what to look out for and investigate regarding older/converted SFR's - I can't thank you guys enough! I still feel like there's a good niche for these kinds of investments in my area; they tend to be more affordable than newer construction (with fairly similar rents), and I believe the "character" factor is definitely applicable, especially in the trendier parts of Tacoma. So, being sure to be extra diligent about investigating zoning, and spending a little more upfront to have a plumber and electrician look everything over seems to be the name of the game. I've got my eye on a few of these properties and once we get settled in our home we just closed on, we'll (hopefully) be diving in! Any continued advice or insights will be greatly appreciated - there's just so much to learn from talking with others and hearing about their experiences...Thanks again everyone!

Thanks for the welcome, @Michele Fischer ! We're definitely coming to the conclusion that with the limitless different opportunities for investing in the area, picking one strategy and niche is going to be the way to go... We're still exploring and talking through what that will be, but shortly here we are looking forward to taking the plunge!

@Tim Cooper - given your experience, do you have thoughts about the quality of newer construction compared to the older construction? I'm sure it has lots to do with the builders and location, etc, but some of the newer multifamilies that I've had the chance to look around in seem like they're almost...flimsy. Thinner walls, everything made of laminate (which I despise, though understand), and they're still wildly overpriced in my opinion. 

@Angelique Tinney - Good call on the exit strategy! I try to keep that as a primary consideration, but it always seems to fall by the wayside when I find a seemingly good deal and succumb to the "shiny object" syndrome...I also did not know that little tidbit regarding Section 8 or other government assistance programs.

And lastly, @Jean Mercer  - Ahhhh your experience sounds miserable! I'm going to take a lesson from you and the suggestions of others and add confirmation of zoning to the top of my "Things to Investigate" list! With your experience, did you have a standard home inspection before you purchased the property? Would a standard inspection catch any issues with plumbing or electrical that aren't up to code or is it necessary to bring in separate subcontractors to check all that stuff? 

Thanks again, everyone - I'm writing all this awesome info down!

Thanks @Spenser Harding ! - We've just been hitting the pavement (so to speak), driving around and checking all the neighborhoods out. It's crazy to me how just a couple streets can make a huge difference in the quality of the neighborhood. We've looked at a couple of places in Parkland, but I haven't even heard of Hilltop yet, so thanks! I'll be interested to hear how your first deal works out - keep us all in the loop!

Kate

Awesome - thanks guys! 

@Colleen F.  and @Bradley Bogdan - good points to look at the condition of the structure as a whole rather than focusing on the separated units, as well as taking zoning into consideration...that was something that I hadn't considered. In terms of rents, I've been looking in some of the "trendy" areas of town, where it seems like people are actually willing to pay a little more for a unit with some vintage characteristics like original hardwood floors or exposed brick, etc... rather than a place in a newer 100-unit apartment building down the street with laminate flooring and smaller rooms. This is definitely something I would want to look at more closely, however. 

@Account Closed - I'm glad to hear from your firsthand experience! You're right, there are way more of these types of converted properties on the market, and many of the newer properties built as multi-families that I've seen are outrageously overpriced and shoddily constructed... In terms of your portfolio, did you purchase your rentals after they'd been converted or did you do the conversion? Probably a stupid question, but when considering the quality of the electrical and plumbing work, is that something that an inspector could look at during the due-diligence period, or would it be necessary to separately bring in a subcontractor to look at those elements?

Thanks again!

Hey everyone!

I'm interested in the some input on the idea of "converted" multi-family properties vs. "intended" multi-families. We have recently moved to the Tacoma, WA, area, and in my search for rental properties (2-4 units), I've noticed that especially in some of the more established neighborhoods, there exist a plethora of properties that were built as SFRs but over time have been converted into duplexes, triplexes, and 4-plexes. My husband and I aren't seeing 100% eye to eye on the idea of investing in properties like these - he wants to stick only to properties built as multi-families, while I am more open to the idea of these converted SFRs.

Help us settle the discussion! I know there can be serious issues with older SFRs that have been converted - on some of the podcasts I've heard stories about inadequate plumbing, electrical, sewer(?) issues, etc... what else should I know about regarding these converted properties? Does anyone have any success or horror stories that can help me solidify my position or change my mind? Tips for estimating maintenance reserves, anything at all that you think might be helpful!

Thanks in advance, everyone! 

Thanks for the resources, @Elizabeth Colegrove - I'll be keeping an eye on your website in the future! It's refreshing to hear also that you've managed to be successful with properties that don't necessarily fall into the 1 and 2% "rule" categories... while I've seen many properties in my area that do meet those guidelines, I've also investigated others that definitely don't! I know many military folks who rent their houses when they are transferred to a new duty station and have done really well. We also have a friend around here who bought a duplex with the intention of living in one side and renting the other, so we'll be interested to see how that strategy works out for him! Thanks again, and see you around the site!