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Buying first piece RE, 6plex, details of transaction, what you guys think?

Discussion in 'Real Estate Discussion' started by Myron Bas, Oct 30, 2017.

  1. Myron Bas
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    Myron Bas New Member REIN Member

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    So the six plex is in a northern Alberta small oil town.. The town has horrendous vacancies, a building with $1650+/m rent are probably 90% vacant..
    Building with $950/m rent is around 50% occupied.. That's where I come in, 6 Plex is foreclosed and appraised at $270k, I've put it under contract for $150k. We will be doing inspection and contractor remodel quote next week.. My plan is to freshen it up, and put it up for rent, the lowest rents in town.. Am I brainwashing myself this will work? On downside, assuming 0 vacancy, I can hold onto this building for a long time, until oil price comes back, so that's good lol Anything that's jumps out at you in this scenario? I am buying to position myself for increasing oil prices, under no illusion it will take some years.. Thanks!
     
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  2. Matt Crowley
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    Matt Crowley Well-Known Member Registered

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    So $150,000 for the whole 6 plex - $25,000 per door? I need more details. At $25,000 per door I daresay anything will work.

    What are the condominiumized comps at? What are expected rents?
     
  3. Myron Bas
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    Myron Bas New Member REIN Member

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    Idk condomized rents.. Expected rents are $500/m plus utilities.. In boom times, the building has been full at $1000/m utilities included.. Appraised value boom times $550k-600k.. It's was a storage building that was converted into a 6plex.. Metal roof, metal siding..

    Myron Bas
     
  4. Myron Bas
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    Myron Bas New Member REIN Member

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    Idk condomized rents.. Expected rents are $500/m plus utilities.. In boom times, the building has been full
    at $1000/m utilities included.. Appraised value boom times $550k-600k.. It's was a storage building that was converted into a 6plex.. Metal roof, metal siding..

    Myron Bas
     
  5. Michel Lafleur
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    Michel Lafleur New Member REIN Member

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    @ $25k/ door this sounds like a good deal. Does it need substantial work to be rentable? By the time all 6 units are rentable, what will your total cost be on this property?
    Having grown up in small town northern AB, I'd use caution about the markets, vacancy rates, rents, and your tenant profile. If you arent local and/or dont have a local & reliable team in place, this may be an uphill battle. If you are planning to use professional property management, good luck - those are tough to find in smaller centers.
    When deciding on the cheapest rents in town, don't be surprised if those tenants may be more work than you are hoping for - for whomever is managing the property. My suggestion here would be to try and pair with one of the largest employers in town (presumably a Mill or Oil & gas?) The easiest option would be to can get rent $$ right from the employer and have them provide you tenant applicants. Trying to find "good" tenants on your own with cheap rent in a small town is likely to be difficult.
     
  6. Myron Bas
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    Myron Bas New Member REIN Member

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    It's extremely hard to fill these apartments in the area..

    Myron Bas
     
  7. Myron Bas
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    Myron Bas New Member REIN Member

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    I'm looking at American shale and it seems to me that their oil service costs will begin to rise like they did in Canada as more and more companies need those services, driving up production costs out there, meanwhile our oil service costs and transportation have fallen significantly.. I believe the global investment dollars will flood back to Alberta oil fields.. Even if I can break even with this building for 3-5 years, when it picks up, that's when I get paid..

    Myron Bas
     
  8. Myron Bas
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    Myron Bas New Member REIN Member

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    150k for the whole thing.. My gut is yelling at me but I have no track record for that gut feeling's merit..

    Myron Bas
     
  9. Myron Bas
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    Myron Bas New Member REIN Member

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    It's been on the market for 2 years.. If it's such a great deal, why hasn't anyone bought it?

    Myron Bas
     
  10. Martin1968
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    Martin1968 Member Registered

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    Seems like a good deal. But one of the above posts hits the nail on the head. First off, what is the property going to need in $ to make it rentable. What will your total cost be including your renovation budget.

    Secondly, there is a difference between small town and a small centre. A small town could be nothing more then a hamlet, far removed from any major centre or business district. A small centre could be a small town that functions as a regional centre. If the property is in the first described example, know that it will always be difficult to attract any tenants at all, and an exit strategy years down the road might be tough as well.
    If the second example is what describes the property the best, then it would be appealing to take a serious look at it.

    You said 90% of the rental unit's in town are empty? Why is that? Is there simply no market? (See example 1) Or is the quality of all rental units so bad that no one wants to live there period.
    If the latter is the case, then you would not want to compete in that space by being the cheapest in town and offering below market rents. You would want to make sure your rental units and property stands out, both inside and out, so it would be a first choice for any tenants to pick your property even if it means they have to pay more. Would be the way better strategy but it takes a few dollars. And you need to have patience. Building your tenant base carefully.

    As far as purchasing, It could be ok from a possible cash flow perspective, but more often then not I have run into investors that have invested in such properties in way to small of a market, number 1 reason being the attractive purchase price, but ending up regretting it due to not finding quality tenants, the amount of work required managing the prop, and when trying to dispose of the property.

    You do want to take all these things into consideration instead of only looking at what you think is value for money invested.
    All the best on making that decision.
     
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  11. Michel Lafleur
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    Michel Lafleur New Member REIN Member

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    If you dont mind sharing, what is the small Northern AB "oilfield town" where this is located? Are you local in this town? If its a 4 hour drive from home and you dont have local knowledge, then Id say stay away.
    You mentioned only $150k for the 6plex and that it was a foreclosure. Any idea why it went into foreclosure? If its from prolonged vacancy, then stay away - means someone else was not able to get this operational & cashflowing.
    If the previous owner over-renovated and couldn't get the rents needed to support the renovation costs, then you may have a good opportunity here (assuming its renovated & rent ready.) At $25k/door, it's imaginably hard for this not to cashflow, even with 50% vacancy.
    Another word of caution around smaller towns - does this property have a local stigma or reputation? Everyone knows everyone & everything in the smaller towns. With prolonged vacancy and a series of previously crappy tenants, it may be hard to turn the reputation around on this building and get decent tenants into it.
    Before proceeding, I would do a gut check on your true holding costs - meaning purchase price, financing & necessary renovations, but also including property management (who will do this, and whats the cost), plus vacancy (I'd plan for at least 50% vacancy just to be safe), plus low rents (you mentioned the cheapest in town.) If this is still positive cahsflow with local management, cheap rents & 50% vacancy, then it may be a worthy investment.
    When planning your exit (you mentioned "in a few years when things pick up")....know that most other investors also know about the ups & downs of the small town economies, vacancies, rents, etc. It can be tough to find a buyer for these as many investors don't venture into the smaller centers with questionable economics. And remember that small towns know everything...they will know that you got it for $150k as a foreclosure, and are unlikely to support paying anything near "retail" for this when comes time to sell.
     
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  12. Myron Bas
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    Myron Bas New Member REIN Member

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    I'm estimating with reno and closing costs, total building price around 210k.. I put for rent signs everywhere, got 19 responses, which I interviewed and whittled down to 2-3 tenants.. It's in Wabasca, AB.. Pop: 1500 or so.. I need to check to see if it's on municipal or indian reservation land.. Do you think I need to go through more tenants or is looking through 19 to get 3 tenants pretty good ratio?

    Myron Bas
     
  13. Myron Bas
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    Myron Bas New Member REIN Member

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    Wabasca AB, I live 2hrs away.. The building has local stigma of a slum den.. The previous owner was a drug addict that mismanaged.. I also believe that he bought it at a premium price from his father, when oil dropped and town vacated, he got hit hard.. The nearest bulk rental units rent for 950$ at 50% vacancy.. The units that rent for 1650+$ are 90% vacant

    Myron Bas
     
  14. Myron Bas
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    Myron Bas New Member REIN Member

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    The building is trashed, my plan for taking care of the local stigma is to make the exterior clean and fresh with a whole new exterior paint job.. I believe that may have the psychological effect of helping people change their minds on the building.. Lol have you heard of anyone doing that and making it work?

    Myron Bas
     
  15. Martin1968
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    Martin1968 Member Registered

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    I would assume the property is freehold. Buying on native land (thus leasing) would be an absolute no-no.
    It's tough to answer your question about tenants. Depends on your selection criteria. You will have to cater to the market you are in and pick the very best one within that criteria.

    As far as sprucing up the prop, yes sir I have experience with doing such things and it does wonders.
    When a prop looks nice, outside and in, it's the first step to attracting better tenants.

    The thing that works for you is that your are living relatively close. As mentioned if you think you can make it work then go for it but at least you have had lots of input to really make the right decision.
     
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  16. ThomasBeyer
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    ThomasBeyer Well-Known Member REIN Member

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    Some buildings are overpriced at $1 however with no mortgage this may work but economies of scale and distance work against it. Who is the
    local manager who will manage it impeccably for you ?


    Sent from my iPad using myREINspace
     
  17. Myron Bas
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    Myron Bas New Member REIN Member

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    I will manage it myself.. Ill have 100k of debt on it, I believe that amount of leverage is perfect, not too little and not too much.. I need the property management experience and to see how these small apartments in oil exposed towns tick.. Depending on if I get slapped or not, on this deal, it may be time to start buying everything I can get my hands on..
     
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  18. Martin1968
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    Martin1968 Member Registered

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    Cool to see your passion and excitement. Managing it yourself is the right decision and money in your pocket, as well as a great learning tool. Keep asking the right questions. Cheers!
     
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  19. Matt Crowley
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    Matt Crowley Well-Known Member Registered

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    A few comments Myron...

    - Underwrite as if you will never be able to sell this...ever, can you live with the dividend yield?
    - 1500 people is too small for me to want to invest in for almost any price over the long term
    - what is the flip potential?
    - to make money, you need to see an opportunity that no one else sees and be right about your market assumptions... don't buy into the crab in the bucket mentality why hasn't anyone else bought it? That's where investors make profit.
    - 2 hours away is too far to deal with turnover and property problems, you need a PM
    - I'd look at buying something like this with 100% cash and owning it unlevered... why? For a 12% yield, on a $200k / asset, I need in NOI = 0.12*200,000 = $24,000 per year from the property... or $6,000 per unit / year... or $500 per unit / month.

    Maybe a bit of leverage but I probably wouldn't underwrite $100k debt on something in a market with that much vacancy.... this is a mostly cash play for a dividend yield.
     
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  20. ThomasBeyer
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    ThomasBeyer Well-Known Member REIN Member

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    Some guys have big hairy balls ..And some guys make the page 1 of newspapers as they become millionaires and others one never hears from again as they end up in bankruptcy ..

    I used to be the biggest landlord in Fox Creek, AB with over 80 units under management in 4 buildings .. a similar sized very small town .. and made out like a bandit from 2005 to 2007 .. but would not do that again today ..

    Enjoy the ride, Bronco !!

    May the force be with you !!
     
    Last edited: Oct 30, 2017
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