Ms. Goodies Gets Schooled in Real Estate

For anyone interested in real estate investment income, my lessons learned should be of interest.  The price is right anyway!

I’ve been looking at multi-unit rental income properties with my real estate agent, who owns multiple properties herself and therefore seems very savvy.  She has given me the following tips, which help you narrow down from broad to specific.

  1. Buy in good school districts.  Yeah, you generally hear that.  But in buying big multi-unit places, you get tempted to look for the cheapest deal possible or in a town near you for convenience.  But these things really do not matter if they are not in a school district, because you will have a hard time finding reliable, long-term tenants (like education-minded parents) to keep your units rented.
  2. Buy 3-4 unit places rather than 2-units.  Five or more units is considered commercial real estate and has all different (and more restrictive and expensive) lending and insurance rules.  But in the up-to-4 unit world, you want to be at the upper end, even as a newbie.  Basic investment diversification: if you own a 2-unit place and one tenant bails, you’ll probably be dropping money just to make the bills.  With a 4-unit in that scenario, you will at least not be in the red probably.  “Enough units and low enough costs that you could keep one unit empty at all times” is the way my agent likes to put it.  And the thought of one always-available unit seems useful in other ways…
  3. Kids, kids, kids.  More emphasis on kids.  Which makes sense, because the root of all the advice is to try to rent to stable families.  Don’t buy units with just a stall shower (bad for babies).  Any place on a busy street or situated close to the street needs ample/boundaried backyard for a safe place for kids to play.  House can’t be in front of a gun dealer, no matter how low-profile.  You know the problems when you see them, and these are the ones we have seen so far.

So I keep these things in mind.  This weekend we went to see a property I was very excited about, which seemed to meet all these criteria.  A 4-unit place in a famous local school district; situated on an acre but right in the cute, historic center of town.  They are asking $360K, which seems reasonable compared to all the multi-units around.  And the house is in great shape and has long-term tenants in place.  But it kind of fell apart as we looked…

  1. There is just one heating system, and the owner pays heating.  The owner said they just charge the tenants $100/month more than they would otherwise, to offset.  But the oil heater also requires 2x/year maintenance, which sounds annoying and expensive.  The owner and my agent agreed that splitting out the heating with propane would cost about $25K.
  2. Sewerage betterment.  Apparently when old towns decide to improve the sewerage system, they charge each associated house proportionately.  And they charge multi-unit properties per unit.  So this house got hit with a $58K amortized bill, which still has about $30K debt.  This would be transferred to the new owner, so in effect these owners are asking $390K for this house rather than $360.
  3. The current owners are only making $150/month over the bills(!!!)  Much less than I would have guessed.  I have yet to look into the bills they are disclosing, and determine whether they tacked on any improvements onto their mortgage.  My agent did some quick math and determined that at the asking price price, with the current rent values and mortgage interest rates (but without sewer bill), I would make about $600/month over the bills.  But that is still not enough cushion in my opinion to cover inevitable maintenance costs for 4 units.

Before I heard about the $30K sewerage bill, I considered making an offer of $335K, citing that I would need to update and split out the heating.  But given the current owners’ margins, I have no appetite for inheriting the plumbing bill.  They would need to pay it off, which I doubt they would agree to.

Well, that’s a shame.  Back to the drawing board.

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