We’re back with another episode of Ask an Investor, the series that gives investors the opportunity to ask their real estate related questions to Jenny and Chris. Our guest this week is Greg who’s currently stationed in Germany but is planning on buying a property when he moves back to Colorado Springs this winter.
He lived in the Springs before moving overseas and still owns a house there that he’s been renting out. He initially planned on moving back in when he returned but has since learned more about real estate investing and now wants to add to his portfolio. He’s also purchased two turnkey properties in Kansas City, MO.
He’s looking for a small multi family property he can use to house hack. We had a great conversation about the process of buying a multi family property, how to get his offer accepted, and what to expect once he’s under contract.
- Listen to the podcast “#54: Buying a Multi Family Property in a Competitive Market” on the Colorado Springs Real Estate Investing Podcast
- Watch the YouTube video (at the bottom.)
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
If I want to buy an off-market property, can an agent help with that? What would that look like?
Greg has been following the real estate market in the Springs and notices that every time a small multi family property comes on the market, it’s gone almost instantly. While he’d prefer to buy a property off the MLS, he’s wondering if finding something off-market is his best option.
Jenny says: I’m seeing the same thing with good fourplexes; they’re only on the market for a few days, and even that’s just to collect the most offers. It’s highly competitive because of low interest rates. Leah and I are both working on off-market fourplexes that we were able to source ourselves. We keep our ears to the ground to find these opportunities and pass them along to our clients.
When buying an off-market property, there’s no real difference in the way the process works; we bring the properties to our buyers and ask what they think about them. In terms of commission, we typically write into the contract that the seller is to pay the buyer’s fee since that’s usually put in the MLS.
It is not impossible to find an off-market unit yourself, but I recommend bringing an agent on board to help walk you through everything. Agents have experience with the sales and closing process and can help coordinate the title and inspection, as well as give you access to our network of professionals.
Chris says: Trying to find an off-market property for a primary residence seems challenging. If you’re trying to source the deal yourself, you’re going into competition against people who spend 40 hours a week on the phone, have teams behind them, and spend resources on things like direct mailing. You have the opportunity to network with people, talk to neighbors about selling, but think about how much time and money you’ll be spending.
Often, the deals you find off-market aren’t that different from the MLS deals, except there are fewer competitors.
What’s the supply of multis in the winter?
Jenny says: Investment properties like multis don’t tend to be as cyclical as standard real estate. Because the buyers and sellers typically aren’t living in them, they aren’t tied to things like the school year which makes them less seasonal. That said, it’s been such a weird year that I can’t make a guarantee of what to expect this winter.
Who else is buying multi family units in the Springs?
Jenny says: Everyone. I’ve seen a lot of people who want to expand their portfolio and take advantage of cheap debt. After looking at the agent notes in the MLS, I’ve noticed that most people are touching on 1031 exchanges in one way or another. It’s an attractive area, and multi families are attractive products.
Would it hurt me competitively to use a VA loan as opposed to a conventional one?
Greg has the ability to use a VA loan for this property. VA loans are great for those who qualify because they require zero down. The drawbacks of using them are that they need to go through their own appraisal process and the user must move into the property within 60 days.
Jenny says: It depends on the other competition and how it fits into the seller’s timeline. If the seller is doing a 1031 exchange, they’d prefer the deal to fall apart on the front end and not 45 days in.
Chris says: It’s not a major hurdle, just a different aspect to the buying process. We’ve helped people with VA loans buy multi family units before, and we can find something that works well for you.
We’ve even had situations where the clients used VA loans and it pulled the heartstrings of the seller. Clients have gotten the property not because they had the highest or best offer but because the seller wanted to help out a service member. Greg, you’re a young guy serving the country who wants to get into investing, so they may want to help you.
How have you seen rent prices for single family homes and multi family properties trend? What’s the best way to figure out rents for multis?
Greg listened to our podcast on rent trends in Colorado Springs and wants to know how that data is applied to multi family units.
Jenny says: I like to analyze small multis more in line with apartments. Of course, apartments that don’t have gyms, pools, or other similar amenities. Rents have been going up significantly for small multis, single family homes (SFH), and large apartments. I’m constantly seeing news articles about rents jumping astronomically. On a personal level, tenant turnovers have allowed me to command much higher rents than I was previously getting.
You’ll need to consider the legacy of the multi that you’re buying. As a rule, most landlords don’t raise rents on good tenants. If you buy a multi where three of the tenants are great and have been there for ten years, you’re probably not going to see those rents in line with market rate. You’re faced with the situation of buying something at pro forma rates and when the actuals are much lower. You aren’t going to win with an offer based on actual rents because people are selling and valuing based on the pro forma rents.
It’s a balancing act. I have a client who just bought a fourplex that had two vacant units and two legacy tenants. He kept the tenants at legacy pricing and is able to rent out the other two units at market value.
Chris says: The Denver Post recently ran an article “Rising Front Range rents are widespread and will keep climbing”. Colorado Springs rates are up 22% since the start of the pandemic, which is the biggest increase nationally. This ties back into your earlier question about who’s buying multis. People are seeing this data and rushing to scoop up these properties.
What are your thoughts on buying a cash flow neutral or negative property? Will the expected appreciation, loan paydown, and rising rents offset the risks?
Chris says: Personally, I’m fine with it. And I’m fine with it in your situation since you’re putting so little down. With a VA loan, you’ll have a good spread between the interest rate and cap rate.
Otherwise, someone who is putting $150-200K into a property probably wants to keep more cash on hand or at least have neutral cash flow. I see the economic indicators that we don’t have enough supply, so values are probably going up. In the worst case, it’ll be flat for a few years which is why it’s important to have healthy cash reserves. Tenants can subsidize your down payment which can delay your cash out of pocket.
Some people refuse to do that which is valid. Of course, the people who told me that three years ago still have yet to buy a property. Keep in mind that you can’t change the market, so you need to be realistic about it.
What are the metrics you use to analyze multis?
Jenny says: Taxes and insurance will both vary based on what part of town you’re in. Utilities can vary widely and will depend on how the unit is metered. In a very general sense, multis are usually individually metered for electric and gas but not water and sewer. For a fourplex, $2600 a year for water and sewer seems to be the going rate. Property management is usually 10%; for multis it’s often 8% with another 2% in additional costs. I tend to budget 8% for repairs and maintenance and 5% for vacancy, but both will vary depending on the area and condition of the property. $600 for snow removal and landscaping is usually a safe estimate.
Pay attention to whether the multi is part of an HOA or covenant. While that might add an extra cost, it usually also covers something else, like trash or snow removal.
How do you estimate insurance costs?
Jenny says: It depends, but I’ve seen $2500 or more for fourplexes. If you want to be conservative, estimate in the high $2000s.
Chris says: Insurance isn’t going to vary that much from property to property. You might get different estimates depending on the company or how you structure the deductibles.
The biggest thing I’ve seen that can affect the rate is whether or not the property is in a flood zone. In Denver, this is very rare, but occasionally properties that back up to a gulch require additional flood insurance. You can use a rough ballpark estimate; $200 at the end of the year isn’t that big of a deal.
Property insurance is part of due diligence, so get a quote ASAP once you go under contract. You can use that quote as a reason to cancel the contract if you don’t like what you get.
How fast should I submit an offer when a property comes on the MLS? Will I be able to see the property first?
Jenny says: Most fully occupied multis don’t allow showings prior to an accepted offer. You don’t want to jump on a property without thinking it through, but if it fits the general ballpark of where and what you’re looking for, you’ll want to get an offer in quickly. We can write into the contract that there will be a separate viewing period that’s within the inspection period. Before that, the best we can usually offer is to drive by it with you.
What do you normally recommend for contingencies in a contract? In a hot market, what’s the balance between making sure you’re being protected and getting your offer accepted?
Jenny says: It depends. Earlier this summer, we had to do limited inspection objections and appraisal gaps to get our offer accepted, though that’s starting to change. To show that we’re more serious, we’ve had to limit some objections and draw the line at anything less than $1K to fix. If an outlet is broken, we won’t object to it, but if the boiler is about to die or the roof is shot, then we’ll object.
Some people waive everything, which I don’t recommend. This is a large investment, so you need as much information on the property as you can get. This means that sometimes the seller will go with the buyer who waives the inspection, which is a risk for the buyer.
Chris says: There’s a balance between how much due diligence to do upfront and what to do when you’re under contract. Since contracts in Colorado are so buyer-friendly, if a property passes the sniff test, it’s best to get under contract and then do a deep dive. Once you get the inspection reports, lending numbers, title reports, and rent comps, you can underwrite the property. If it still makes sense at that point, that’s when you’ll really move forward.
Don’t stress about fully underwriting a property before going under contract. Because of how fast the market is moving, get good at identifying the basic rules of thumb and then do a deeper dive. If you need to terminate a contract, you’ll only be out a few hundred dollars.
How long is the due diligence period between the offer and closing?
Jenny says: It’s negotiable, but generally due diligence is the first week to week and a half, with the inspection on the later end. Your first round is getting the rent rolls, utility verification, lease review, and all other necessary paperwork. After that, you do the inspection. There are smaller events in between, like getting the insurance quote and estoppel certificate, so we’re constantly working the whole time you’re under contract. I like to think of each step as a mini finish line to get through. Usually, contracts fall out from due diligence documents or the inspection.
Our team likes to schedule the inspection ASAP so you have time to get other tradespeople into the property. If an issue comes up with a specific part of the property, it’s useful to have an expert, like a roofer or HVAC technician, give you a better idea of the big picture so you can make the best decision.
Is there a difference between an inspection for a single family home and a multi?
Jenny says: The biggest difference is how the heating system is set up, whether you have one boiler or multiple furnaces. Otherwise, think of it as a really large house, since it has one roof, one crawl space, etc. It’ll take longer because it’s bigger, but there aren’t any more intricacies to it than that.
What do you think is going to happen with property taxes in the next couple of years? Is it tied to rising property values?
Jenny says: Assessments occur every two years, and I’ve seen them go up on the most recent go-round. They’ve jumped up a lot and are tied to what properties are selling for, so I imagine that will be the trend over the next couple of years, as well.
If you would like to connect with Greg, you can email him at firstname.lastname@example.org.
A good way to network with other investors is to volunteer to help out at investor-centric gatherings. Be the person who sets up chairs, helps with registration, or runs the mic. That way, you’re getting your name out there and connecting with the organizers instead of just being a passive participant.
If you would like to be on the show, reach out to us and we’d be happy to answer your questions!