Distressed Properties
Tough Times for Multifamily Income Property Owners.
It’s that cycle of the market where most multifamily property owners are having to adjust their modus operandi: even well cared for and superbly managed properties are seeing increased vacancy and pressures on rents. This cycle seems to be of great girth, depth and resonance.
It’s a tough one, one that has and will continue to affect may owners. It’s especially difficult for owners who debt prevents them from being competitive with owners who are able to reduce rents to stay competitive and still cash flow.
So what’s going on.
This is a perfect storm, a beauty from the distance but fierce when you’re in it.
1. Depressionary pressures: prices for many goods are down, but so are wages and unemployment. Lower demand has forced many retailers to lower prices, cars, houses and many durable goods are down as well with rental rates right behind.
2. Consolidation: many people are consolidating living quarters reducing the need and increasing supply.
3. Vacancy: is also up because the buoyant housing market where prices have decreased a great deal making the rent vs. buy decision easier for the tenant. The government is providing massive incentives in cash and low interest rates to reduce housing inventory, but at the same time hurting landlords.
4. Competition: is up from other owners and from single family homes and condos. Multifamily owners not only have to compete against each other, but veryattractively priced single family homes.
What can you do.
This is not the time to cut back on maintenance, advertising and property management: quite the opposite. Owners need to be scrupulous with their resources and activities, but not to the detriment of the properties.
To compete in the is market you need to be diligent with having the units be clean, well cared, for, maintenance free and well advertised.
1. Adjust rents, even for existing tenants to keep them in place. It’s much less expensive to keep existing tenants then to to cope with vacancy, repairs and advertising for a new tenant.
2. Paint is an easy and cheap way to freshen up the interior and exterior. Often some strategically painted walls on the interior with interesting shades will make all the difference with out having to paint the entire interior.
3. Increase the competence and quality of your advertising. Make sure potential residents know about your property and get as much information as possible.
4. Be a little bit more flexible with credit. Many prospective tenants in the current market are the same people who lost their home to foreclosure or a short sale. These actions do not necessarily make them bad tenants.
Don’t skip on processing and due diligence. Sometimes it easy to bend your qualifications too much just to get a body in the doors. I’ll tell you from experience that tenants accepted out of desperation don’t work out and often end up costing much more then if you would have waited.
It’s a very difficult market now, one not seem in many decades. On the one hand there is a tremendous occasion to buy low priced distressed properties that will certainly do well. On the other hand current owners and new owners are all in the same difficult rental market. It’s people that take on adversity as a challange in personal life or business that get past it with strength, often in a better position then before.
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Investment Return On An Actual Multifamily Phoenix Property
Here is an example of what can be purchased now. This is an actual purchase of a 4 plex in Phoenix. Since the example below is an REO property it’s all vacant – though not all REO’s are vacant, expect it. There are additional costs for a vacant property. We don’t take them into account below but you could add $8,000 to your cash flow lost due 3 months of all vacant units in the first year, though it does not have to be that way.
$160,000 purchase price REO or Short Sale
$5,000 in closing costs.
$8,000 in post closing repairs and preparation for leasing.
_______________
$173,000 purchase cost.
$32,000 loan 20% of $160,000
$45,000 out of pocket cost including initial investment and expenses.
$2,650 potential monthly income.
($265) vacancy
($530) operating expenses: taxes, insurance, water, maintenance.
($240) management: 8%
_______________
$1,615 NOI Net Operating Income or $19,380 annual NOI
($764.00) Debt: $128,000 @6% fully amortized over 30 years. $7,004 PI annual.
_______________
$10,212 Annual Cash Flow.
12.11 Cap Rate
22% Cash on Cash: This is a return on the $45,000 total out of pocket.
First Year Principal Reduction $2,200
That’s pretty good. There are a lot of properties for sale but not too many are good and provide such compelling numbers.
Artur Ciesielski, CCIM 602.628.4349 (also an investor and owner of multifamily properties since 1999)
Buying REO Multifamily In Phoenix Is Just Like A Normal Sale
Foreclosed multi-family, REO, Lender Owned properties. This used to be the domain of very savvy real estate investors, but no longer.
At least until the market changes and the sentiment changes, REO | Lender’s are simply just like any other seller, just that they are more motivated then a regular seller and they have no emotional attachment to the property being sold: it’s all about the money and results with no sentiment.
Since the bulk of the active properties are REO | Lender owned, buyers should not or can’t ignore them. Buying a lender owned multifamily property is pretty much the same as a regular sale. You don’t need special education, you don’t need anything different then a normal purchase.
Most of the time the sale involves several additional documents and in most cases you should be willing to buy the home without disclosures and in as is condition which may be downright nasty to perfectly clean and move in ready, just like a normal sale. With multifamily homes the difference is that you’re buying a business and often that business is devastated and without a cash flow: many of the lender owned properties are vacant and in need of lots of repair. Calculate that into you offer as vacant properties in need of even minor repairs can actually end up costing more then a well running business.
What you do need is an agent that can make sure you don’t overpay – because not all lender owned properties are super deals: some are over priced – to guide you through the additional paper work and to manage the transaction properly.
Treat lender owned properties just like any other purchase, just know there is no emotions from the lender: simple clean contracts and proof that you can close the transaction.
