Investing in Occupied Rentals

Hi,

I don't currently own any multi-family, but not too long ago I heard someone speak about it. You absolutely should base your inspection period on reviewing the books and records. Lots of investors will try and sell the property based on projected income when the actual income is less. They tend to over inflate all the numbers, so you need to find out the real deal.

You need to know what is the Cap Rate, the Cash on Cash return on your investment, Debt Coverage Ratio, the Net Operating Income. I'm not super educated on multi-family, but there's a lot to know.

You can have a mortgage contingency based on appraisal. You can ask for inspection even if buying As-Is. You can ask for repair allowance as part of the deal if there is deferred maintenance and I understand $400 per door is standard.

Always look for what is not disclosed. Hope this helps a little, even I'm not the most knowledgeable.

Hi,

One of the coaches gave us some great information on how to figure cap rate and cash on cash returns on this sight earlier this year that would be archived in past form posts.

Patrick

____________________________

Be your very best always-Judy Williamson

You would want to get copies of the leases to make sure each tenant is on a year lease at least vs being on a month to month lease. Now I wouldn't think there would be a way you can find out if the tenants are current on rent and always pay on time. I guess you would have to take the landlords word for it.

and you definitely want to know the numbers, but I am not sure other than asking for paper trail of proof like bank statements. Maybe if you are unsure; pass on the deal.

when you say multi-family, do you mean a 4 unit, 6 unit, 12 unit, more?
anything over 4 units is considered commercial; and every landlord needs a Property Manager and an Accountant; if they choose not to hire them, it's most likely to save some money, not because owners 'enjoy' managing their properties.

If I would consider buying a multi-unit property, I would ask for the leases (all of them); You can ask owner for bank statement showing the monthly deposits (at least two months, then compare the deposits to the leases, and also check the date of the deposits to verify tenants pay on time.)
I would also ask owner for all estimates/bills for any repairs done since he owned the property, and I would pay for an inspection (walk-through every unit in building).

Thanks for your comments, everyone! As always, the support and help from DG-ers is always amazing. Valerie, the properties I am talking about are in RI, and many of them are 3 units. Sounds like what I was thinking is right. I would have to either ask and take the owner's word for it or request bank statements and check. Otherwise, pass on the deal.

Passing on a good deal because of lack of past data just doesn't make sense to me. If you get a copy of the lease agreements then you know the terms of the lease. Now decide if the rental rates are at market levels (this does not involve the landlord). Check with local property managers and find out the market vacancy rate.

Now confirm expenses. Taxes and utilities can be determined by receipts and purchase price x mils. Insurance estimates are an easy matter to get an idea. Repairs - well depending on the condition - I factor in 10% of gross rents each month. Set aside 5% per month for capital expense. (or just use the 50% rule and done).

Can the property cash flow? Does it meet your investment requirements? If it meets your requirements then go for it regardless of whether or not there are deadbeat tenants. You are always going to have deadbeats. You just evict them and move on.

Don't pass by a good deal out of fear of a deadbeat tenant.

Whenever I go to look at a property that is tenant occupied I try to make an appointment for when the tenants are home. Yes, I rely heavily on the seller/landlord as to whether the tenants are current on their rent. However, I like to informally interview them myself before counting on the income. Right off the bat, I try to build a rapport by noticing the personal touches that they have maid to the unit. I befriend them by asking how long they have been there and how they like the unit/neighborhood. I explain that I am an investor who takes great pride in his properties and ask them if there is anything that they would like to see repaired or updated. I tell them that I haven't had an opportunity to review all of the leases yet so would they mind if I ask what they pay per month? Then I confirm what it includes such as utilities. At this point you can ask if they are current with their rent. At the very least, you can cross reference the information that you get from the tenant with what you get from the seller to establish his credibility.

One time, I actually "inherited" a tenant who was months behind in their rent. I agreed to take on the task of evicting them myself after closing for a discount in the purchase price. One day while I was working on the property and before I got a chance to file the eviction papers with the court, I was was handed a check by the tenant for the current and previous month's rent. I looked in disbelief. The wife told me that they had been asking for some minor repairs and the previous owner "was greedy, cheap and just didn't care about anything other than money". They said that they really liked me and saw that I cared by both taking the time to talk with them and fixing a few things that they mentioned. They ended up staying with me for the next 5 years and were still there when I sold the property.

In order to know whether tenant pays rent on time and in full, you can ask current landlord for references.
Search for the tenant’s names on various databases to see what appears. Unfortunately, you don’t have a permission to run credit reports and background checks on them, unless if tenant grants this right for you in writing.