Author Topic: multi-unit case study! -- sell, remodel or keep as is  (Read 4667 times)

srob

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multi-unit case study! -- sell, remodel or keep as is
« on: April 22, 2015, 12:50:20 PM »
Sorry for the long post! I would really appreciate input from people more experienced than myself. RE investing is a very part time thing for me, and I have only been doing it since 2010. The property is a 12plex of 1 bedroom units, 8 of which were built in 1928 and 4 added in the 60's. lower 8 units were remodeled at that time. The apartments are charming with high ceilings and large windows, but rather small at 600 sq ft. It caters to low income or retired people mostly--many long term tenants. There are not many options in the area for low rent units such as these and the apartments are always rented. It is in a nicer bedroom community with mostly SFH's around. I use a property manager so it does not take much of my time. The market for multiunits in my area is tight...prices have risen over the past few years and there is very little inventory. I am trying to decide if I should cash out, remodel it, or keep it as is. After all expenses including mortgage payments and property management, the property cash flowed 40k over the past year. It has separate electric meters so tenants pay own electric, but I pay everything else. Recently had submeters installed on boiler heat and am now charging tenants a portion of the gas bill starting this month, which can reach 1k in coldest months. I don't rely on the income from the property right now, since I work full time and have a good income. I would like to transition to part time within 10 years or so (I am in my late 30's with a bunch of kids and expenses) and will use income from this (if I keep it) and a couple other properties I own at that time.

options:

sell:
pros: cash out making ~50k, thinking about investing equity in larger (mostly financed) commercial property with lower return but more equity building potential
cons: finding new investment property, probably lower initial return on commercial property, no personal experience with commercial

remodel:
pros: peace of mind with new electric, lower heating costs with improved insulation and modern heating, more bills in tenants' names, increased equity, greater pride of ownership?
cons: expensive, newer similar size apartments don't fetch more than 650/mo in this area--limited financial benefit?, huge hassle, kicking out tenants, etc.

keep as is:
pros: decent 10% cash on cash return, low hassle
cons: expensive utilities paid partly by me--what if prices go up?, will eventually need remodeling?=$$, not building much equity, high income taxes on cash flow



Market Value: 580k
Original Purchase price: 505k
Original Mortgage Amount: 105k
Interest Rate: 5
Mortgage Term: 30 yr fixed (private loan)
Term remaining: 29
Amount remaining on mortgage: 103k
Gross Rents: 6400/mo
Principal and Interest (the P&I of your PITI - should match with the above info): 563/mo
Taxes and Insurance (the T&I of your PITI): 7260/yr
HOA costs: none
Deferred maintenance notes: older building with excellent (brick) structure and exterior, old wiring, central heat/boiler that I pay for, plaster/adobe interior walls in good shape but poorly insulated, most units in decent shape but older fixtures.
Anything else special or unique in regards to the numbers of the property (not the property itself; things such as city assessments, back taxes, special costs due to unique features of the property, etc. etc.): none

waltworks

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Re: multi-unit case study! -- sell, remodel or keep as is
« Reply #1 on: April 22, 2015, 01:07:22 PM »
I am not a multi-unit person but those are pretty terrible numbers AFAIK. Multi-unit properties usually aren't considered a great deal unless they are hitting 2% of market value in gross rent per month.

-W

srob

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Re: multi-unit case study! -- sell, remodel or keep as is
« Reply #2 on: April 22, 2015, 01:37:54 PM »
You may be right waltworks. Unfortunately the numbers on this are better than most in my area. 6% cap rates are the norm, unless you are in a less desirable area.

waltworks

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Re: multi-unit case study! -- sell, remodel or keep as is
« Reply #3 on: April 22, 2015, 02:15:34 PM »
I never understand it when people say this. If your local boot factory is crappy, don't invest it in, invest in the boot factory in Ohio (or something else). If returns for rental real estate suck where you are, don't buy rental real estate locally.

"My area sucks for rentals" is not a good reason to hold onto a terrible rental...

-W

You may be right waltworks. Unfortunately the numbers on this are better than most in my area. 6% cap rates are the norm, unless you are in a less desirable area.

srob

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Re: multi-unit case study! -- sell, remodel or keep as is
« Reply #4 on: April 22, 2015, 03:05:02 PM »
Thanks for the response.

I'm pretty much a newbie what can I say? :) I didn't know how to start looking for places out of state, plus I don't have time to take trips unfortunately. And I do like the area and believe it has a lot of growth potential. Plus it is close to my other rentals.

I'm interested in learning what others would do in my situation...just looking for ideas. Thanks!




iamlindoro

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Re: multi-unit case study! -- sell, remodel or keep as is
« Reply #5 on: April 22, 2015, 03:10:35 PM »
Thanks for the response.

I'm pretty much a newbie what can I say? :) I didn't know how to start looking for places out of state, plus I don't have time to take trips unfortunately. And I do like the area and believe it has a lot of growth potential. Plus it is close to my other rentals.

I'm interested in learning what others would do in my situation...just looking for ideas. Thanks!

I would sell.  That rate of return doesn't justify the risk you've taken on.

No need to take trips.  I'm not a home inspector or a contractor, so my evaluation of a property is of little use-- that's what inspectors and contractors are for.  There are a number of well regarded real estate investment brokerages who participate heavily over on BiggerPockets.  These are the guys who will help you objectively evaluate the quality of the property and the neighborhood, too.  If you do enough reading over there, and then start evaluating some of the deals posted in the marketplace on BP, you can zero in on the subset of those brokerages who both offer something back to the community (rather than just troll for buyers) and consistently produce good deals.  Some of those companies have most of the benefits of a turnkey provider (property management, rehab crews) but aren't flipping the properties themselves, so there's still plenty of meat on the bone.

srob

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Re: multi-unit case study! -- sell, remodel or keep as is
« Reply #6 on: April 22, 2015, 03:31:38 PM »
thanks for the info iamlindoro...I'll check it out over there at bigger pockets.

It is tempting to sell the property and get something updated...

WannabeFrugalRN

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Re: multi-unit case study! -- sell, remodel or keep as is
« Reply #7 on: April 23, 2015, 12:07:42 AM »
I would keep it as is. You mentioned multi-family property is tight in your area, that means rental rates will be going up. It looks in pretty good shape by the picture. You lose a lot of money buying & selling. These are close easy & comfortable. Its nice to be able to drive by and check on them at times. Maybe a few updates here & there when you have the cash.

srob

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Re: multi-unit case study! -- sell, remodel or keep as is
« Reply #8 on: April 23, 2015, 03:08:01 PM »
Good point frugalRN, it does seem easy to just keep it going as...the manager takes care of everything and it is close. I did upgrade one unit that turned over this year with new carpet and paint.

Those of you who own far away properties, is it as satisfying to own it if you never see it? I actually like going by the place, checking on stuff, making small improvements occasionally myself. (For example, I installed a motion switch for the laundry room fluorescent tube lights recently that should save me about 15 bucks a month on the electric bill. :) The light was always left on before.)

Does anyone have experience rehabbing a place like this? What issues did you run into?

Thanks for your replies!

iamlindoro

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Re: multi-unit case study! -- sell, remodel or keep as is
« Reply #9 on: April 23, 2015, 03:28:21 PM »
Those of you who own far away properties, is it as satisfying to own it if you never see it?

It's awfully satisfying to see the wire transfers every month.

Personally, I'm not in this as a hobby, but as an investment.  If the best you can do is 1.25%, knowing that for multifamily you should be at 2% or higher due to the higher costs associated with multifamily ownership, is this the best use of your resources?  Do you get enough enjoyment out of changing out switches and driving by to swallow the pill that you're getting 6400 per month on 500K when you should (and with a moderate amount of legwork, fairly easily could) be getting 10K on the same amount?  Only you can answer those questions, but that's a solid "hell no" from me.

srob

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Re: multi-unit case study! -- sell, remodel or keep as is
« Reply #10 on: April 23, 2015, 04:19:14 PM »
iamlindoro--If I could trade into a 500k place grossing 10k/mo that would be awesome--I would be very tempted. Can you get this kind of place in a decent area? I look periodically on loopnet and other sites but I haven't seen these kind of numbers much. Maybe it is where I am looking...st louis and kansas city, and some areas out west. What markets have these kind of deals?

I suppose I could keep a place or two where I live to fool around with and then get a couple far away with better returns...

Other than commercial financing, what aspects of multifamily cost you more? I thought that having more units under one roof, with one landscaping bill and one exterior, (and one furnace in my case) would make it cheaper per unit to run than having SF homes. I suppose with SF you can have the tenants more easily pay for trash and water though...honestly just asking.

Poorman

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Re: multi-unit case study! -- sell, remodel or keep as is
« Reply #11 on: April 23, 2015, 04:37:57 PM »
If you are going to sell, then now might be the time to do it.  The consensus on Bigger Pockets is that cap rates are getting so compressed that it doesn't make sense to buy apartments now.  Listening to them, it sounds like 2% deals are nowhere to be found.  That means as a seller, you might get a generous price and sell fairly easily.  The downside is you might not find another good deal to put your money into right away.

If you decide to hold, I wouldn't do any heavy remodeling unless it has the potential raise your rents, and thereby, your value.  Otherwise, you wouldn't be getting any return on that remodel money.  I don't know your market so you will have to decide.

Also, 1.25% might be good for your area, or it could be terrible.  It depends on the future upside for rents.  The 2% deals are generally for areas that don't experience much appreciation, so the bulk of the return will be from cash flow and whatever appreciation you can force through improvements.
« Last Edit: April 23, 2015, 04:39:32 PM by Poorman »

iamlindoro

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Re: multi-unit case study! -- sell, remodel or keep as is
« Reply #12 on: April 23, 2015, 05:48:55 PM »
There are pretty good markets in Ohio, Michigan, and Wisconsin.  2% would be a C/C+ neighborhood.  Not white collar, but not a warzone by any means.  I don't often see anything of worth on loopnet, however.  If you're willing to break from one property into duplexes and triplexes, 2% gets even easier.  The BiggerPockets marketplace can be a good resource if you spend the time to sort out who is credible and who is just trying to dump a property.  I recently looked at a 20 unit property in one of the Ohio cities that was about ~600K (just above, but surely negotiable to below that) and returned 11K a month.  So, just shy of 2%, but a good deal closer than you are right now and that's before negotiation, and I'm not even looking for apartment buildings.

Also, am I reading this right that you only financed 20% of the current property?  I know some people are leverage averse, but why did you put 80% down?  For the same amount of invested cash you could have 3+ properties of the same price (thus diversifying your risk, too).

Anyway, do what you feel comfortable with.  I just know that if I had access to 400K in cash, I would take an out of area property over an objectively poor performing local property, and I wouldn't put more than the Fannie Mae required 25% down on any one of them-- probably I'd finance 4 x 400K properties or 8 x 200K ones... or 16 100K ones... or...

srob

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Re: multi-unit case study! -- sell, remodel or keep as is
« Reply #13 on: April 23, 2015, 08:55:01 PM »
iam...I'll look around a little more. That 20 plex sounds pretty good. There is a company locally that specializes in these out of state properties...I was always a little skeptical bc I thought, how can you know it is in a good area, etc etc. You would really have to trust who you are dealing with.

Yeah I put 80% down...needed to park some cash. It was a really busy time and I couldn't look around much for more property. I did put the minimum 25% down on my other properties and I agree the overall ROI does work out better on those.

Thanks for the advice poorman. It would be a good time to sell but I would want to have something else to invest in...maybe doing a 1031 exchange. Since I have only owned it a year, I'm afraid I would be socked with short term cap gains on the profit, which is one's marginal income tax rate I think. True on marginal return from remodeling in my case I think. btw how long does old wiring last? ;)

NoNonsenseLandlord

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Re: multi-unit case study! -- sell, remodel or keep as is
« Reply #14 on: May 05, 2015, 08:04:47 PM »
Here is the way I see it...  We do not have all the numbers for expenses, so here is a rough shot...

Down payment (80% of $505K) = $404,000
Gross rents ($6400 * 12) = $76,800
Expenses (45% of $76,800) = $34,560
Gross Profit ($76,800 - $34,560) = $42,240

P&I ($563 * 12) = $6,756

ROI ($42,240 - $6,756) = $35,484
ROI % = $35,484 / $404,000 = 8.78%

Keep the property.  Fix it up enough to keep good tenants.

srob

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Re: multi-unit case study! -- sell, remodel or keep as is
« Reply #15 on: May 14, 2015, 09:10:10 AM »
Thanks for the reply NNL. Your numbers are pretty darn close. I checked out your blog and liked it. Pretty cool story about turning that complex around! I have no problem getting good tenants fortunately. Many have been in there for a long time. The rent is pretty low for the area so we can be selective.

I just got an appraisal and was quite surprised that it came back at 729k! The cap rates are getting pretty low around here and there is nothing for sale. A fourplex was listed a couple of days ago that did not even meet the 1% rule at asking price but was cheaper than anything else. It had 16 offers as of yesterday and was bid up almost 50k over the asking price. Crazy.