Author Topic: Investing in a 8 (or more)-Plex  (Read 713 times)

ReadySetMillionaire

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Investing in a 8 (or more)-Plex
« on: August 21, 2020, 09:28:51 AM »
I am new to this sub-forum and real estate investing in general, so Iím looking for some basics here.

Iíve been sitting on a pile of cash for months now, and a very good friend of mine approached me about investing 50-50 in an eight-Plex (or more). He is one of the most trustworthy and financially literate people I know. He also currently owns five single family rentals. I canít imagine a better partner.

We are looking to do one, big purchase in maybe spring of next year. We would love a 12-Plex (which seem to be common around here).

We obviously want to get the broad strokes right (location, price) but Iím wondering what should we be looking for? How should we evaluate the propertyís value? Is it silly to invest in one property?

I tried doing some research online but there wasnít much about this.

Any thoughts or links would be great.

Michael in ABQ

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Re: Investing in a 8 (or more)-Plex
« Reply #1 on: August 21, 2020, 09:44:12 AM »
That size property is going to require a fair amount of work relative to a single-family home. On the one hand it's small enough that you can handle it yourself, but on the other hand it's too small to justify a full-time manager or maintenance person. You can get some economies of scale with things like appliances or flooring. You can get a management company to handle leasing and phone calls about maintenance but that can eat up a significant amount of your profit if they're charging 6-10% of gross income.

I was a commercial real estate appraiser but only worked on a handful of apartments that small. Capitalization rates weren't all that applicable as it was difficult to get reliable income and expense information from competing properties since they often lacked any sort of professional management or accounting.

A couple of things that come to mind to look out for.

Utilities. If you include utilities with rent you will get some tenants who will abuse the hell out of it. Most properties that small will not be sub-metered. It's extra work but if people know they have to pay for their electricity, gas, water they will not keep their apartment at 80 degrees in the winter and 60 degrees in the summer or take half-hour long showers every day.

You only have one roof to worry about but if it needs to be replaced that could be $100,000. Make sure your budget includes a healthy amount for reserves to handle those capital expenses. At least $300-400/unit/year - maybe more if you know there's deferred maintenance or building components getting close to the end of their life (appliances, water heaters, flooring, etc.).

clarkfan1979

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Re: Investing in a 8 (or more)-Plex
« Reply #2 on: August 22, 2020, 05:53:55 AM »
What Michael in ABQ said

Malcat

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Re: Investing in a 8 (or more)-Plex
« Reply #3 on: August 22, 2020, 06:54:50 AM »
I'm perhaps a little extreme on this front, but I am tremendously cautious against partnerships like this. There are so many decisions to be made when it comes to this type of landlording, and if you are 50/50 partners, then every single decision needs to be an agreement.

Who decides what's worth repairing, renovating, what quality of appliances and finishes, what style, how much to spend on any given thing, which companies to use, what to charge for rent, whether or not to lower the rent on an empty unit, etc, etc. Not to mention when to sell, for how much, what happens if one partner wants out?

That's just so many things to agree on with someone else, it's more stressful decisions to coordinate on that most marriages are faced with.

Some people do really well with partnerships, but I'm very wary of them since I've seen so many go south and compromise the whole deal. Choosing to be share decision making rights with someone is a HUGE commitment.

Michael in ABQ

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Re: Investing in a 8 (or more)-Plex
« Reply #4 on: August 22, 2020, 11:45:30 AM »
I'm perhaps a little extreme on this front, but I am tremendously cautious against partnerships like this. There are so many decisions to be made when it comes to this type of landlording, and if you are 50/50 partners, then every single decision needs to be an agreement.

Who decides what's worth repairing, renovating, what quality of appliances and finishes, what style, how much to spend on any given thing, which companies to use, what to charge for rent, whether or not to lower the rent on an empty unit, etc, etc. Not to mention when to sell, for how much, what happens if one partner wants out?

That's just so many things to agree on with someone else, it's more stressful decisions to coordinate on that most marriages are faced with.

Some people do really well with partnerships, but I'm very wary of them since I've seen so many go south and compromise the whole deal. Choosing to be share decision making rights with someone is a HUGE commitment.

As Dave Ramsey puts it "the only ship that won't sail is a partnership".

Strongly recommend a very clear partnership document that you sign up front. Specify how much each person is investing, how any proceeds from a sale will be handled, if one or both of you are actively managing the property will that partner get a management fee - if so how much per month or per hour? What about maintenance? If you spend a whole weekend replacing the flooring in a unit while your partner is on a ski vacation is that going to cause some resentment?

Partnership agreements should specify how to handle all the various things that happen in life. Especially the Ds - Death, Divorce, Drugs, Disinterest, Default.
http://www.lumlawgroup.com/how-to-plan-for-these-5-deadly-ds-of-business-partnerships/ 

I can't tell you how many brokers I interviewed to confirm real estate sales and they said that the reason for the sale, or the reduced price for the sale, was due to dissolution of a partnership. Divorce/inheritance/family drama was another common reason for a sale.

Villanelle

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Re: Investing in a 8 (or more)-Plex
« Reply #5 on: August 22, 2020, 02:55:03 PM »
I'm perhaps a little extreme on this front, but I am tremendously cautious against partnerships like this. There are so many decisions to be made when it comes to this type of landlording, and if you are 50/50 partners, then every single decision needs to be an agreement.

Who decides what's worth repairing, renovating, what quality of appliances and finishes, what style, how much to spend on any given thing, which companies to use, what to charge for rent, whether or not to lower the rent on an empty unit, etc, etc. Not to mention when to sell, for how much, what happens if one partner wants out?

That's just so many things to agree on with someone else, it's more stressful decisions to coordinate on that most marriages are faced with.

Some people do really well with partnerships, but I'm very wary of them since I've seen so many go south and compromise the whole deal. Choosing to be share decision making rights with someone is a HUGE commitment.

This.

At a minimum, you need to hash out all the details and eventualities now.  Are people paid for their time?  How and at what rate?  Who is managing it?  If you disagree about a need for repair/replacement, or about which option to choose, how is that decided?  (You want to do replace the roof and he wants to patch it, you want to buy new stoves for all units since three of them need it and the others are old and he just wants to replace the three or even just repair them.  He wants higher end carpet when you redo the floors because it will last longer, you want cheaper.  Etc.)  What if one partner wants to sell?  If selling, who gets to decide on price and accepting or declining an offer if there is disagreement?  Will you keep an escrow fund, and if so, how much? 


ReadySetMillionaire

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Re: Investing in a 8 (or more)-Plex
« Reply #6 on: August 23, 2020, 06:04:36 PM »
Thanks for all the replies.

FWIW, Iím an attorney and I definitely intended to put together a very detailed operating agreement.

This is very, very early stages. We have only brought it up casually but did have our first extended 30 minute discussion about it last Friday. We are not doing anything for at least 8 months and probably longer.

Also, I generally totally agree about partnerships. I left my law firm to have my own solo practice when I had the chance to partner up with a bunch of other guys because I generally donít think they can work out.

However, I think my friend and I have very good qualities that compliment each other, especially as it relates to a possible rental business. We are both good with money (he is actually my accountant and tax advisor). He is an accountant, has experience with rentals, has connections re management and repairs, and does all the books himself. Iím an attorney, pretty handy, etc. Itís a great pair, I think.

I imagine we will meet in the next month or so. Iíll keep this thread updated.


sammybiker

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Re: Investing in a 8 (or more)-Plex
« Reply #7 on: August 24, 2020, 04:30:16 AM »
Partner on a 30+ unit.  Don't partner on an 8unit.

It's not worth the time or stress for something this small.  Do it 100% on your own or let him do it 100% on his own but don't partner.

Embok

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Re: Investing in a 8 (or more)-Plex
« Reply #8 on: September 07, 2020, 11:55:37 AM »
@ReadySetMillionaire:   Iím also a lawyer, and bought an 11 unit through my retirement account in a city in a lower COLA (where I grew up and have relatives and friends) just over a year ago.

The partnership issues have been well articulated above, so I wonít belabor them.

Iím a commercial real estate lawyer, so did a lot of diligence prior to buying, but my inspector turned out not to be very good.  Thankfully I kept significant reserves available to cover unknowns.

I knew the building was a long term play because it needed significant rehab, but many of the issues that have turned up have been worse than expected.  In addition, though the building had been ďprofessionally managedĒ, the prior management company kept very poor accounting records and essentially managed the building as slumlords.  I suspect they were committing fraud by accounting for capital expenses as operating costs, but Iím not an accountant nor a prosecutor, so ultimately it was not worth the time to dig that out to be sure.

Since that building is ultimately an investment designed to throw off cash after I retire (as a lawyer in private practice finding such investment opportunities is a necessity), and is a well built though dated building in a decent area, I think it will work out over the long haul, but the last year has been rough. At the start, the building was fully rented, but the tenants were very low quality. Two left almost immediately, which was OK as they had significant behavior problems, and, again, I had sufficient reserves set aside.

I planned to rehab all the units as they became available, and to upgrade the building from a C- building to a B class.  I have found that the downside of a lower COLA are fewer tradesmen and material suppliers, so much higher rehab costs to get things done right.   My costs to rehab similar units in another building in HCOLA Southern California ran about $15K per unit.  In the Lower COLA building, they run about $33k per unit when Iíd expect about $20K (due to slightly bigger scope of work).

Professional management is more expensive in the low COLA city than in my local high COLA city.  So is insurance, though I think I can beat that cost down this year, now that the building and our management has been seasoned.  When I bought it, I knew the building Ďs boiler would need to be replaced for about $30K. Done.  But the internal plumbing was poorly maintained, so has been a rich source of income to local plumbers.  Ugh. I hope we have uncovered all of the hidden problems now.

I now have 4 fully rehabbed units, out of 11.  Rehabs include new kitchen and bathroom flooring, new kitchen cabinets, granite kitchen counters, refrigerators and ranges, blinds, ripping out carpet and sanding/refinishing the oak floors, repainting etc.  All 11 units are now rented (as of last week) and all the new tenants are paying rent.  I have two remaining bad tenants:  one - the worst - just gave notice (after I raised her rent a lot) and will leave at the end of October, so it is unlikely that unit will rent til spring, given the seasonal nature of the local rental market, so I will have that unit rehabbed in November/December. I canít evict the other one due to a local COVID evictions moratorium.

I expect I will end up paying about 20% of the purchase price to rehab the building, including replacing the boiler, reroofing the building, replacing all the laundry machines, and repaving, striping and extending the parking lot.  I have a great local contractor doing the rehabs of the units, but he is probably doing too good a job ó that said, Iíd rather do any rehab work once and right, so that it does not have to be redone over and over.  We are currently working to figure out how to reduce the cost of the unit rehabs.

The investment works for my needs, as I have a 30% mortgage on the property, and the rents pay it, the taxes, and the operating expenses plus have a very modest cash flow left over.  Once the rehab is done, which will likely take 4 years due to COVID, which has slowed us down, and the mortgage is paid off, the building should cash flow at least $60K per year.  I suspect it will do better once its reputation has changed. 

I will eventually renegotiate or change management companies as mine is good but too expensive. Again, once the building is stabilized, with decent renters, the management and leasing should get easier.

If one were good at investing in the stock market, my returns might not be attractive by comparison.  But I like this building, despite its problems, because unlike the stock market, I have more control over it, and its value is unlikely to plunge precipitously.  I need it to work, and to make money, over a 4 year period, and think I can get there.  But it is not a fast way to make money, and is occasionally hair raising.  On the other hand, now my retirement funds are growing as the rents pay off the mortgage, which is a great change after years of essentially no growth despite stock market growth, due to the fees of our retirement plan provider.

I hope sharing this experience is helpful to you.  Feel free to PM me if you want to discuss further.

ReadySetMillionaire

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Re: Investing in a 8 (or more)-Plex
« Reply #9 on: September 08, 2020, 07:00:09 AM »
Thank you for the incredibly thorough post, @Embok .

My goal would also for it to be a long term investment, as my partner and I have discussed that we do not intend to pull any cash from the building for quite a long time. Both of us want to retire in 8-12 years, so we are going to try and make a purchase that will be profitable by then.

I think we would like to buy a B-minus and make it a B-plus. C would be too much work and we don't want to do that.

Again, thanks for sharing.