@ReadySetMillionaire: I’m 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 won’t belabor them.
I’m 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 “professionally managed”, 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 I’m 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 I’d 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 ‘s 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 can’t 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 — that said, I’d 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.
