So I have this idea of buying a 6 to 12 unit of apartment building. I don’t have any experience in real estate rental, but am willing to learn. I want to do this so that I can quit my relative high pay, but going nowhere job, I am a CPA, and good in numbers. My husband can fix common household issues…I can also hire a management company to do the managing. In PA, I am hoping to spend 300 to 700k on the building. One I saw is about $670k, and with yearly rent of $84k. Is that too good to be true? What is your experience? I am thinking that I can just hire a realtor to find a good building for me?, after all, the seller needs to pay commission, not the buyer?
My H is in real estate and he and I have discussed this issue many times. I have ZERO interest in being a landlord so we have not done anything about it. I am much happier going to work in an office every day and not having to rely on the vagaries of strangers. However, as someone who is familiar with the real estate biz, law and ownership issues, I would caution you not to buy anything without fully investigating the laws involved. For instance, in NYC, it can be very difficult to evict a tenant even if you have a lawyer. What are the laws like in your area of PA? Are you going to be stuck with a deadbeat tenant for months? Are you going to be fined if the inspector finds trash on your property? How much is good liability insurance going to cost you in case you get sued by someone who slips on ice that your super didn’t remove properly? Are there open violations on the building and who is going to clear them.
Is the $84K rent roll going to cover your mortgage, including taxes and permits, is it going to cover your insurance premiums, the fees for the management company, the costs of building employees (you could offer free rent to get a super but you also need to check the requirements for them - in NYC, supers need to have certain licenses, like to run and service an boiler, you can’t just hire joe blow off the street), the costs of oil/gas to heat, maintenance on the units and, since you seem to think that you will be able to live off these proceeds and not have to work, your income? $84K is $7K/month - that means the rent per unit is probably pretty low, depending on how many units there are in the building. What happens if you get one or two of these deadbeat tenants and can’t make payroll or the taxes?
There is a lot more involved in this than just having the seller pay the commission.
I was a landlord for a house…and I hated every minute of it. I had terrific tenants who were friends…but every time something broke…it was my responsibility to pay for and fix it.
In addition, there were a few times I had the place empty between tenants.
Things to think about in a multi unit building:
- Who will you hire to clean and maintain the common areas...like hallways. What about snow removal? Lawn or yard care? Trash?
- What happens when something big breaks...and it will. I'm talking about your central heating system, plumbing, electrical?
- What are your state tenant laws regarding eviction? What will you do if you have to evict someone....and they won't leave? That happens too.
- Will you be easily able to finance this purchase? Rental housing has a different "bar" than primary residence when it comes to financing.
- What about property taxes and insurance? How much will that add to your costs? What happens if/when taxes increase?
There are folks who LOVE being landlords…but it’s certainly not something I would choose to do.
A long time ago, I was very interested in starting B&B. One of the first things I did, was buying a B&B guide for dummies (thanks g-d!). Once I read it, I knew it was not for me - it mentioned a lot of factors which I would never even consider. I did a brief check, and there are several dummies books for landlords, including some legal guides - I would definitely recommend buying those.
If I did consider being a landlord for an apartment building, I would probably sign a service and maintenance agreement with a reputable heating/plumbing/electrical company, which would also include emergency services. I would also have a RE lawyer on retainer, possibly through another contract…
Just the thought of having to deal with the hassle of a property infested with bedbugs would turn me off to wanting to own either an apartment building or a B&B. So many things to worry about…
Based on my experiences as a kid whose parents owned rental properties, I would never own them. For every good tenant, there are two tenants from hell. These properties take up huge amounts of time, unless you turn it all over to others, which my folks did not do. When my brother and I inherited the properties, we couldn’t sell fast enough.
I am sure there are people who enjoy having such properties. My father did–it was the dream of many immigrants from his home country. Go into the venture with your eyes open. You can work just as hard at something else with far fewer problems.
We own real estate rentals. It is not for the faint-hearted. You have to find a GOOD property manager (those are not so easy to find). The property manager will generally take 10% or more from the gross rentals off the top, reducing your net gain. You will also have to pay for all maintenance of the premises, insurance, and be able to handle the negative cash flow when you have vacancies. Real estate commissions are about 6% around here, which is a good chunk of change. When realtors find GREAT deals, they are inclined to purchase them for themselves.
Yes, you can save if you and your spouse do some of the repairs and maintenance yourselves, but depending on the age of the property, that can be a LOT of work. Do thorough investigation before you go that route–are you thinking that you will be buying properties INSTEAD of working as a CPA? How will your skills be used to help increase your household income after the property is purchased?
Perhaps if you don’t like your current job, look for one that you might enjoy more.
My two experiences as a very small potatoes landlord have me shaking my head at your plan.
Ages ago, when the real estate market was flying high, I went in with two work colleagues to buy and rent out a condo. It was to be our practice effort, with the long-term dream of a substantial and successful partnership renting out a bunch of units. Bottom line, the venture ended with one unit and we were thrilled to be able to sell it three years later. There were the two single guys who left the pace a sty and painted one wall black, the volatile father who threatened to shoot another resident of the complex over a parking spot–oh yeah, it was great fun. We made good money on the sale because the market was still on the upswing, but that was just the result of lucky timing. The rent covered expenses, but not much more than that. Somehow we remained friends through it all.
Currently our retail business building has an apartment on the second floor. Our tenants are great, but the previous ones, who we inherited from the prior owner, were a nightmare. When they stopped paying rent, we began eviction proceedings, and during the interim they had the colossal nerve to have a satellite dish installed on the roof without our permission. They had money for that, but not for rent! Fortunately they bailed before the eviction process was very far along. Finding decent replacements was not easy or pleasant, either.
If you are still interested, I’d spend many months doing research and sorting out the financial aspects before taking the plunge.
if you brought in 84k a year and had zero mortgage, after you paid for everything and covered loses like empty apartments(evictions and trashed apartments it happens all the time), general repair bills, taxes , your portion of electric(not to mention when you need to replace the roof, heating system or systems .how much do you think you would pocket? I have no clue but if you kept 1/2 that would only be 43k or so a year. is that enough to quit your job?
I’m a CPA and have had 4 rental units for 17 years. I would advise not starting with a 6-12 unit building. I think it’s more difficult to hire a good management company than you might imagine. There are lots of success landlord stories on cc, and way more horror stories. I did not believe my client’s horror stories…until I became a landlord. No one could tell me any story that would shock me. You can screen as carefully as possible, and you will end up with some of them 
Much depends on your local rental market. Are your prospective tenants well-paid, financially stable families with good credit? Or are they minimum-wage people living on the edge? Real estate in my state is cheap. Consequently, my renter pool contains those with awful credit and other instabilities that mean they will not be homeowners. There is little real estate appreciation for mine, but they are paid and we like the cash-flow they should provide in retirement.
Do you have the stomach for managing it yourself? Can you enforce your lease/stick to your guns? Is your state tenant friendly or landlord friendly? Eviction is a b___, and there are plenty of people who know how to play the game and drag it out. A lot of people did not learn to pay their rent before their Directv bill. If your husband is doing the fixing, they will be calling/texting you weekends, nights, and holidays.
Isn’t meth a big problem in PA? Having tenants that cook is one of our biggest fears. Landlord pays the cleanup costs here, which can go as high as $25,000 and the house is uninhabitable until it’s certified clean.
Keeping the above in mind, there is money to be made if one buys carefully. Screen even more carefully. Do credit checks and criminal background checks. Yes, a good management company will handle this, but they will also eat into your profit. Good luck!
I don’t know that we worry about meth-heads, but we just had another aged tenant die, leaving his apartment in a catastrophic mess at a bad time of year, and we were just notified of yet another bed-bug infestation in a different unit. If you are going to buy apartments, be forewarned that you need a tough hide. And H and BIL do not have a management company.
We had a property manager but STILL got phone calls about an awful tenant and the police were also called. We also had a tenant who died owing a YEAR of unpaid rent! We still count our blessings that we didn’t have as awful tenants as some others have mentioned on this thread and elsewhere. Being a landlord is definitely not something to enter into lightly.
Our prior property managers were crooks and did not meet our needs–they charged us for fire extinguishers and others things which were NEVER put on the premises. They were always asking for additional funds as they claimed rentals never were enough to cover all the repairs. The current property managers (whom we hired after the prior managers let the tenant get a year behind in the rent) are much better at communicating with us and do the maintenance and repairs that they charge for. We never get phone calls any more from the tenants–the property manager handles it and takes his percentage for management fee. We never get asked for additional funds, as repairs and maintenance comes out of rental collected.
As one who has owned rental houses, many small apartment buildings, a couple 50 +/- properties, and a 100 unit complex, I can confidently tell you that the more units at one address, the better, for simple “economy of scale” reasons.
My advice: Take the gross annual rent, subtract a reasonable vacancy factor, and then subtract your best estimate of the actual annual operating expenses, starting with what the seller reports to the IRS.
This will give you the Net Operating Income (NOI).
Then divide the NOI by the purchase price to determine the capitalization rate. The higher, the better. If it’s lower than your cost of funds, beware!
But OP is completely green.
Don’t “learn” on a $670k investment with no experience and hoping your husband, who’s good for “common household issues,” can manage the range of repairs. He likely doesn’t know code. He may not know how to multitask if several jobs come up together-or even when to throw in the towel and call an expert. Double that if the costs for repairs start to add up and he wants to save some money.
Why not find a friend or client in the business and see if you can observe. Cut your teeth first.
My grandmother was in it and loved it but was a tough business woman and wanted real estate (and building) as her line of work, wasn’t using it as an escape.
@SincererLove I’ve owned a 6-unit apartment building for over 25 years and I’ve always had an experienced property management company handle things. They know renter rights laws (which are complicated here) and follow them, handle all rental collections/notices/vacancies, arranges for repairs and follows up to ensure they’re done, etc. We coordinate together on vacant unit/other remodeling/large work items and when on the same page he handles it (whether it’s hiring a crew for extensive remodeling or contracting with a company to do specific work). Known items on the ‘to do’ list for this year include submitting permits for a building earthquake retrofit (mandatory requirement in our city) and completing the work within the following two years. A new roof will probably be necessary within the next few years, too.
There is a lot that goes into properly managing a property and keeping tenants and yourself (the owner) happy and a lot of work that goes into maintaining your property.
IMO since your just starting out….I’d suggest you start small. A 6-12 unit building is too big to start off with if you plan to do the property management and property repairs yourself.
Echoing all above plus adding something about the financing: lenders will ask for a complete rent roll with expenses. They calculate a “DSCR” (debt service coverage ratio) which is the inverse of a residential debt-to-income ratio. Basically if your rents are $10,000/month and your expenses (principal, interest, taxes, heat, electric, water, sewer, insurance) are $8,000/month, then your DSCR is 125%. Lenders look for anywhere from 125 to 140%. Plus commercial loans often have prepayment penalties and are sometimes balloons.
@Classof2015 makes a good point, and DSCR is a helpful tool, actually is calculated a little differently. It’s Net Operating Income/Annual Debt Service.
So an example of a 6 plex might be:
Gross Potential Income $54,000
Vacancy allowance $4,000
Annual expenses $20,000
Net Operating Income. $30,000
Under this scenario, a 125% DSCR would allow for $24,000/ year in principal and interest payments, because
NOI/debt service = DSCR
30,0000/24,000 = 125%
More than one real estate deal is killed around here because of codes. The current owner may be grandfathered in and a new owner would be required to spend big bucks to bring things up to current code. It’s something that is not always apparent without research.
Thank you for your responses. I appreciate your feedback. I will definitely go in with both eyes open!!
I feel that I am at crossroads on my career, I happen to live in a city where there is not a lot of job positions and my company are going to rounds of layoff now. I want to be prepared…I am looking but not a lot out there. My other option is to be a day trader, which would be even more risky!!
At least you can just stop being a day trader if it doesn’t work out. You could get stuck with an apartment building for a long time.