Need help evaluating a property

[Rob]

Hi all,

I am looking to invest in real estate for the first time. I have a partner who I am comfortable with, and we primarily are interested apartment complexes or multi-family homes, but ideally we would find something for than just a duplex. We are in the Milwaukee area and have found a 9 unit, 4 building property, that sits on 2 side by side lots. 25 bedrooms split out into one single family 3 bedroom house, one duplex with two 4 bedrooms, on duplex with two 3 bedrooms, and one four unit of 2 bedrooms.

The units we looked at are nice, there are minor outstanding violations on two of the porches that we believe the current owner will fix. Fully rented, the property brings in $5,925 per month with a low of $525/mo/unit to a high of $850/mo/unit. Tax on the property is $1525/mo and insurance is $157. All units have month to month leases, and 8/9 units are rented. One unit has been rented by the same tenant since 2006, and there are a couple units that have 2 and 3 year tenants. The neighborhood is not a great neighborhood, but we do not feel like it is a dangerous neighborhood. Over the past few years, evictions have occurred, and it sounds like it has been fairly common with possibly around 2 evictions per year. I know common advice will be that it is not worth it to deal with evictions, and we definitely understand that argument and it is definitely a huge negative to us. However, we are wondering what kind of offer we should consider making on this property if we did decide that we wanted to take on that project.

We think that if our offer factors in the assumption that we have to deal with 2 evictions per year, we can potentially get a solid return while dealing with that uncertainty. What do you guys think? Is there any additional necessary information needed? Any and all advice is welcome. Thanks!!

[Another Reader]

Generally, a property like this is not a good place to start for someone with no experience.  It could be a nice little money-maker, or it could be your worst nightmare. 

First question I have is are the buildings, as they are laid out on the two lots, legal, conforming uses?  Second question that comes to mind is why are the tenants all month to month and not on leases?

You have included very little information abut the realized income or the actual expenses.  What was the vacancy and collection loss for the last several years?  What costs were incurred for repairs and maintenance?  What are the ages and conditions of the heating and cooling systems, the roofs, and the other structural and mechanical components requiring maintenance and replacement?  Who pays for what utilities - does the landlord provide any?  Are all the units separately metered?  What about parking - is it adequate and is it part of the rent?  What are the laundry facilities - are they in-unit or in a common area?  How much is the water and maintenance for the common areas - lawns and landscaping?

If you have not thought about most or all of these questions and a lot more, my guess is you are not ready to buy and operate a property like this.

[arebelspy]

I don't see anything about purchase price.

You'll want to know that to calculate return after you figure your NOI and see if it is acceptable.

Aside from all AR's questions (which you should answer), what are cap rates like in the area?  I'm assuming they're asking around 300-400k?

[Blindsquirrel]

  my advice would be to start with only one unit or two. The place sounds like it would require a fair amount of time and attention. That is a large number of units to take on as your first rodeo. Just my advice as a veteran landlord.

[Rob]

Sorry to bump this up, but I neglected to reply and have been feeling guilty. I appreciate the feedback. We are no longer looking into this property because we want to start somewhere smaller. AR -- you are right, I couldn't answer all those questions yet. Points like that were why I wanted to post here to figure out what information I would need to collect before moving forward. Rebel -- I specifically left off the asking price because I wanted to work backward and see what a reasonable price would be without the influence of the asking price. Yes, they were asking $325k.

Again, appreciate it and sorry to bump.

[tomsang]

I know you are no longer looking at this, but an other thing to keep in mind for the future is that you may have difficulty getting a long term 30 year mortgage on anything over 6 units I believe.  When I was looking into a 10 plex the numbers were very good, but the longest fixed rate I could find was 10 years. 

[Daleth]

I want to know where you guys are looking for loans! We have amazing credit and 25% down, but we could never find normal, fixed-rate loans for anything over a 4-unit. You had to get into a commercial loan, which would be fixed for X years (say, 5 years) and then would turn into an ARM, and in any case would never be over 20 years.

We stuck with smaller properties and apart from the one we live in, we got 15-year fixed loans (on the one we live in, we went with a 30-year fixed first and a 20-year second, with the idea being to throw all extra money at the second and thus slash our monthly payment by paying it off).

[arebelspy]

Yes, anything over 4 units is a commercial loan, 4 or less residential.