Multi-family properties

claptrap · 11-14-2005, 06:55 PM

Does anyone here have experience with purchasing multi-family properties, and if so can you relate lessons-learned, how you got comfortable with the risk, how you managed tennants, what was a successful strategy, what your goals were?

Would be grateful to hear first-hand from those who have done it.

Thanks;
Scott

Dantilla · 11-14-2005, 07:04 PM

1- Lessons learned- Still learning. Stay tuned.

2- Comfort with risk- Beats working eight hours each day.

3- Managing tenants- The best way to get rid of a bad tenant is to not let him in in the first place. Screen the snot out of everybody before giving them keys to your building, and do not relax your high standards. Better to have an empty unit than wish it was empty because somebody won't leave.

4- Succesful? Enough to let me goof off with Porsches.

5- Goals? To be able to goof off with Porsches.

Evans, Marv · 11-14-2005, 07:56 PM

Scott,
Buying multi-family properties is a business, so when you go into a deal, look at it that way. If you are worried about risk, then you shouldn't get into a property unless you do the math, look at the rental market and know you won't get in over your head cost and operating expense wise - just like any other business. Dantilla's advise about tenants is right on. But, even after you screen somebody well, you'll find out some still turn out to be disasters. I always found that letting the tenants know if a certain thing happens on their part, a certain event will result and do it that way. I sold my properties this past year at what was near the top of the market in my area. I wasn't interested in continuing since I was retiring. Now, many of those who bought recently are finding it hard to make money bacause of the rental market and still high prices for properties.

claptrap · 11-14-2005, 08:18 PM

Marv and Dantilla thank you both for your wisdom. I've taken college courses in Real Estate and understand principles of cash flow but have not really had to apply it yet as it pertains to commercial and rental properties. I understand risk is somewhat mitigated with research and education. I also understand this may not be the time to invest due to a possibly faultering RE market.

Thanks again;
Scott

Big Ed · 11-15-2005, 03:42 AM

Scott,

I'm in real estate in New England, and I suspect CA is similar if not worse than here on pricing versus expected rents. Around here, now is not the time to invest, and it doesn't have to do with the weakening market...

If your area is like mine, the implied cap rate of investment properties is insanely low. I don't know how today's buyers think they will make money given current pricing. I had one guy go as far as to say he didn't care if he lost money on a cash flow basis, because he was going to make his killing on capital appreciation.

Yeah, OK chief. Being a landlord is a hassle -- it's up to you to decide if the hassle is worth it to you, but I'll say this. If you aren't projecting a gain on a cash flow basis from day 1, don't do it. Nothing worse than an investment that hemmorhages money every year while being a headache as well.

Of course, that's my free advice, YMMV.

Ed

Dixie · Dixie's Garage

Quote:

...look at the rental market...

What's the best way to gauge the rental market if you don't have rental property yet?

motion · 11-15-2005, 04:25 AM

Looking around, I'm seeing cap returns of 6.0% for 4-6 unit buildings, up to 9.5% for 200+ unit buildings. Those numbers are too low to get involved with. With the ongoing depression of the rental market, now is definitely not the time to get into the multi game. Wait until the market starts to adjust downward and interest rates rise. Rents should start to creep up and create a favorable multi-family environment.

turbo6bar · 11-15-2005, 04:54 AM

Quote:

Originally posted by Big Ed
Yeah, OK chief. Being a landlord is a hassle -- it's up to you to decide if the hassle is worth it to you, but I'll say this. If you aren't projecting a gain on a cash flow basis from day 1, don't do it. Nothing worse than an investment that hemmorhages money every year while being a headache as well.

Print this out and don't forget it.

Landlording is not easy in this environment. Finding good tenants is hard. Now is a good time to be selling properties with skewed rent/price ratios.

Otherwise, I agree with other comments.

turbo6bar · 11-15-2005, 05:16 AM

Some predictions for commercial properties

If his predictions for the 10-yr bonds play true, the RE market will tank.

red-beard · red-beard's Garage

#1. Find your local Tenants rights organizations, and get the information they give tenants.

#2. Screen the living heck out of tenents. I only had 1 bad one. See #3.

#3. Do not rent to friends or relatives.

#4. Interview the tenant where they live now, not just at your place.

#5. If you can avoid it, don't take section 8.

#6. Always have them fill out an application which allows you a credit check. Always check their credit. If you deny them an apartment based on a credit check, they have a right to demand a copy of the credit check.

#7. Know what you're trying to do with the rental. It is a business. Are you after cash flow? Help you cover a mortgage? Investment in the property for later selling the property?

I bought a 3 unit Apartment building in Upstate NY for $95,000. It was in the "fun"/"Party" section of the city, which is what I wanted to do after my divorce. The good news, I could afford the mortgage without the tenants, which meant I could screen them a little closer. My focus was some assistance in my mortgage, but mostly long term value increase in the building. I wanted good tenants.

Bad Tenants: A rented to a friend of a friend. It turns out, I was landlord #5 in 2 years. He was paranoid. Fortunately, we never signed an agreement and I gave him 30 days notice.

All the rest: They were excellent! I tried to rent to medical and law school tenants. These people had little time to screw around and needed a good clean safe place to be. I installed washers and dryers in each apartment. I put new (or relatively new) appliances in each apartment. I paid someone to fix the problems before they moved in. I painted and put down new carpeting, tile and flooring. I changed the medcine cabinets and lighting so they were modern. I made the places extremely nice. I was able to get good tenants and top dollar. I also had 2 offstreet parking spaces, and connections to additonal ones.

Know your market. Want to find out what it is? Call people up and go look at rentals (act like a prospective tenant).

Advertising: Don't advertise in the newspaper. You will only get flakes looking for the lowest dollar place.

TerryBPP · 11-15-2005, 06:09 AM

I think this is the wrong time to invest in multifamily rentals. With the 0% down mortgage loans its hard to rent someone a unit for $1000 a month.

From what I've heard from my client (Im a civil engineer), the big money right now is in lease multi unit industrial buildings (light industrial). ie. 10-12 unit building that are 20% office 80% warehouse. They are building them for $5-6 a sq ft and leasing them for $10-11.

turbo6bar · 11-15-2005, 06:40 AM

Quote:

Originally posted by TerryBPP
I think this is the wrong time to invest in multifamily rentals. With the 0% down mortgage loans its hard to rent someone a unit for $1000 a month.

Damn, you guys are swinging the bats well today! Here's more advice that's on the mark, except you could apply this to the entire markeplace (Single family and multi-family).

TerryBPP · 07:00 AM

Small business rentals is prime right now. They can't afford to build or buy due to overhead and start up costs. So they are forced to rent. Theres your market.

And another niche market right now is storage units. They are leasing for 12-13 bucks a sq ft. Cost to build is next to nothing (no infrastructure unless there A/C'd). I'd say $4-5 bucks a foot. Constant money maker with no hassle.

Wrecked944 · 10:30 AM

Excellent advice given so far. I especially agree with what turbo6bar said about landlording being a tough job. It is so tough I don't do it. I hired a property manager to handle tenants and maintenance for me. I really don't have what it takes to be a good landlord and so I am very glad I found someone else to handle it. I could not do it without him.

Also, I have to advise you not to do what I did when I bought my two family house. I purchased a 90 year old house which has been a maintenance headache ever since. I also own a modern townhouse condo which requires almost zero maintenance. Old buildings are beautiful and charming. But they are an expensive PITA to maintain. I'd gladly live in an old house - but making a profit from one is problematic.

claptrap · 11-15-2005, 10:28 AM

Great advice. You guys are right on with the cap rates.
At this point I'm not looking to build an empire of income properties (yet), I'm more interested in developing a stream of passive income. We're planning to move to Phoenix, and if we were to buy a house, might it be a multi-family property that would provide some additional income for us? Problems are that I don't know the Phoenix areas at all, property values are pretty high and the future of RE is uncertain with many predicting an impending correction. Plus as has been pointed out the cap rates are low. I have had past experience with rental properties and managing tenants (not extensively though), and like you guys have learned some valuable lessons from my mistakes.

I do not plan to take a loss on an investment in the hopes that I can make it up in appreciation later. Like most of you, I don't think the current appreciation rate is sustainable and some sort of correction is around the corner, so any investment like this must be worthwhile from day 1.

Your advice and experience is well received, thanks for taking the time to respond, I'm very grateful. thanks for the link to the article I'm reading it now.

Scott

motion · 11-15-2005, 11:00 AM

Good luck... Phoenix is in terrible condition right now. Prices have peaked and are sliding... rents are absolutely decimated. My advice would be to rent for a year or two and see what happens with the market. You can rent a brand new 4-5 bdr home on the west side for $1000 per month. The same house is $350,000 to purchase. Do the math and you'll see what's happening in Phoenix.