Discover why I chose a six unit multifamily, why I bought in the area I did, how I financed the purchase, how it’s going now, and what my future plans are with this property. This small multifamily property is a great example of the incredibly profitable deals that our students do all across the country:
Why 6 Unit Multifamily?
Investing in a 6 unit commercial property like mine provides significant advantages, particularly the ability to force appreciation on the asset. This means that by making strategic improvements, I was able to increase the value of the property. Whereas any property between 1 and 4 units is classified as residential, and it’s value is based solely on the sales comparables, even if it’s multifamily. If you are interested in learning more about the differences between residential and commercial multifamily, we a two videos that I highly suggest checking out:
Residential vs Commercial Real Estate Investing
4 vs 5 Unit Multifamily, Which is Better?
Why this Market?
The market I’m investing in is a residential, tourist-heavy area, comprised mostly of second homes with high price points. For this reason, 6 unit multifamily properties are quite rare, while larger properties with 20 to 30 units simply do not exist here. This creates high demand and low inventory, which means low vacancy rates and quick lease-ups for me. In other words, these market conditions create a prime opportunity for generating substantial cash flow.
How I Found this Multifamily Deal
You might be wondering how I found this remarkable off-market deal. At Commercial Property Advisors, we’ve developed methods of finding off-market deals using direct-to-seller marketing. Off-market deals, as Peter always emphasizes, often present the best opportunities and by using this approach, the seller actually reached out to me directly.
Seller Motivation
Why would someone want to sell their property off market? Well, the first and most obvious reason is to avoid commissions. Of course, they may just want to avoid real estate agents altogether. However, in this case the seller wished to sell discreetly due to privacy concerns. He had inherited the property and didn’t want his family to know that he was selling the property and what kind of profits he was making. This is a perfect example of why direct to seller marketing is so important; you never know someone’s circumstances or why they may be looking to sell their property.
Leverage (Opportunities and How I Took Advantage of Them)
Property Details
This 6 unit multifamily has several attractive features, including four attached garages, a rarity in this market. The property has two one-bedroom units, three two-bedroom units, and one oversized unit featuring two bedrooms, one bathroom, and a den. The location of the property is another advantage, as it is centrally located, close to downtown, and offers water views from the top floor.
Financing and Deal Structure
One of the key aspects of working directly with sellers is understanding their motivations. In this case, the seller wanted a quick close, which meant that I needed to do a cash closing, and for that I needed to find an investor. Thanks to Commercial Property Advisors, I was able to find an investor who was doing a 1031 exchange and looking for an investment opportunity in my market. We negotiated a 60/40 split that allowed me to leverage my property management skills with no money out of pocket.
Deal Structure: 60/40 Split
Investor: 60% ownership, no management, 60% of capital for upgrades, provided cash to close
Me: 40% ownership, responsible for management of the property, 40% of capital for upgrades, no money out of pocket
Purchase Price: We acquired the property for a purchase price of $850,000, while its estimated market value at the time was around $1.2 million, giving us instant equity of approximately $350,000! Additionally, the land itself was valued at approximately $700,000.
Value-Add Opportunities
Nevertheless, the property came with its fair share of challenges, although those challenges provided us with value-add opportunities.
High Vacancy: First, it had a high vacancy rate, with only two units rented out. One of the units was significantly below market value, while the other was unfortunately a hoarder. To address these challenges, I phased out the tenants, so we could renovate the units and get higher rent rates. The tenant that was under market was easy to deal with because he was already planning to move out. The hoarder, on the other hand, was more difficult. Sometimes in these situations, you need to be flexible to achieve your goal. So with this mindset, we agreed to let the tenant leave the apartment as is, with all his items left behind, and we returned his security deposit to help him get into a new unit.
Neglected Property: Another challenge was the condition of the units. Since the property wasn’t being managed, it was severely neglected. The interior was in poor condition, however the exterior was in great condition, which is key because exterior repairs are often high capital expenses.
Property Improvements:
To increase the overall value and income potential of the property, and make it more suitable for the local market, I implemented several strategic improvements.
Rehab Projects
First, I converted the large two-bedroom one bath plus den, into a two-bedroom, two-bathroom configuration. I had to rehab this unit completely down to the studs and in addition to adding a second bathroom I also put in a brand-new kitchen. The reason we invested so much money into this unit was to boost its potential as a short term rental. In our tourist-heavy market, I can rent this unit as a short-term rental for $3,000 – $4,000 per week. In comparison, on a yearly lease, this unit would only collect about $3,200 a month.
Next, I converted the one-bedroom units into two-bedroom units, catering to the demands of the local market. Another key point to remember is to know exactly what is needed in your market. If your market is primarily single busy professionals, then you may have left these as one-bedroom units.
Disclaimer: Converting a unit for short-term rental has proved to be a strategic move for me, but I need to make a disclaimer. A lot of markets are tightening up on short term rentals, so you need to know the by-laws in your area. You may not be allowed to do Airbnb, or your property may need to be zoned business in order to do short term rentals.
Value-Add Upgrades
Additionally, I installed commercial-grade washers and dryers, creating an added stream of passive income. Also, utilizing the property’s sizeable backyard area, I converted it into a parking lot to provide off-street parking for residents, ultimately increasing the property’s value.
Upgrades to Reduce Expenses
An energy program in the area presented us with the opportunity to insulate the entire building at a significantly discounted rate, making the property more energy-efficient. Using this subsidized program, we were able to save 75% on this capital expense! It was an incredible opportunity for us and you may have similar programs in your area. We also replaced the oil-based heating systems with 6 new gas units, drastically reducing heating costs. These improvements not only increased the property’s value but also lowered the overall operating expenses, further boosting cash flow.
Management
Tenant Selection
Managing a 6 unit multifamily requires effective marketing and tenant selection strategies to find reliable, long-term tenants who can sustain the property’s cash flow. To achieve this, I conducted thorough credit and criminal background checks to ensure the prospective tenants had a solid financial standing and a good history of paying their bills. Additionally, I verified their income and employment status, allowing me to rent to tenants who could comfortably afford the rent. Lastly, and maybe most importantly, I called previous landlords to verify that they were a good tenant who left in good standing.
Property Management
Of course, vetting potential property managers is just as important as vetting tenants. When I find a property manager I’m interested in, I first check their online reviews. Then I ask them for references and to speak to other owners that they manage for. Now, I must admit that after the first year of owning this 6-unit, I fired our property manager and I had to self manage for a short period of time. I don’t recommend this unless you have experience, but holding onto a manager just because it makes your life easier will cost you more money in the long run.
New Value and Exit Options
The combination of forced appreciation, low vacancy rates, and strategic improvements has transformed this property into a cash-flowing asset with substantial equity. And as the property’s value has appreciated, the question now is, “How can I capitalize on that added value? Do we sell or hold it?” Currently, the property is valued between $2.2 to $2.5 million, effectively doubling its worth since its purchase 4 years ago. However, due to its steady cash flow and profitability, there is no urgent need to sell.
Additionally, the property is owned free and clear, providing several options for leveraging its value, such as obtaining a HELOC (Home Equity Line of Credit) or exploring refinancing possibilities. These are available options for the future, but for now this property serves as a prime example of a “piggy bank property.” It is a stable investment that operates efficiently and generates consistent cash flow for myself and my investor.
Every Successful Multifamily Real Estate Investor Has a Mentor
With the right system, and the right team, you can navigate the challenges of multifamily real estate and maximize your success. If you’re looking for an experienced mentor, apply to be one of our proteges, just as I did, and join the Commercial Property Advisors community. Get your mentor here: Commercial Property Advisors Protege Program
If you have any questions, post a comment below or text PETER to 833-942-4516.
Hello, I was going through some messages and came across your link. I’m looking to build my network of like minded people and invester and lenders.