Posted by Eric C on July 27, 2005 at 16:05:24:
Hi Vic ?
Wow. Where to start?
Do you have experience in owning/managing multi-tenant buildings?
I?m going to guess no ? please feel free to correct me if that?s not the case.
I guess my first question is – what small town? I don’t mean to be rude and you don?t have to answer, but it would make a tremendous difference if the town is close to a larger one or if it is isolated (think Loving County!).
Good tenants have good jobs unless you are targeting HUD or some other group that will be getting ?assistance?. Most of that ?assistance? comes with strings and you need to realize how that affects you as the building owner.
You say the rents haven?t been raised in four years ? why not? Could be that there isn?t a real big supply of qualified tenants in that community (see my point about the jobs) or it could be the current owners are keeping the rents low to make the building more attractive to prospective buyers.
The expenses may be low, but the building was constructed in 1980. That?s kind of an oxymoron don?t you think – a twenty-five year old building with virtually no deferred maintenance? It can happen, but it?s not very likely. Got more specific information as to HVAC, appliances, plumbing, etc? And what about parking lot, roof, windows, exterior doors, and other wear items? Trust me, this is the short list.
The distance factor isn?t too bad; especially for Texas, but it will cause you some problems sooner or later. For one thing, you should price this thing as if you were going to employ a resident manager or charge (very well) for your time (I prefer to have someone on site) because it is definitely going to take some of your time.
Are you a member of the Texas Apartment Association? If not, you need to join up immediately. They have tons of information as to current regulations, trends, marketplace data, leases you can use, and even the script to read to the Judge when you evict someone. Here?s a hint that will save you some money and headaches ? do credit screening and criminal background checks on all prospective tenants BEFORE you give them a key.
Don?t get me wrong. I like small towns and I?ve written several posts about them in the past (check the archives), but they?re not for everyone.
Ray has an article on due diligence that is timeless. Read it and then read it again.
If you?d like more information, just ask.
Take care,
Eric C
PS ? just in case you think I?m too negative here, I should disclose that I purchased a similar building for my Mom a few years ago ? an eight unit. It was built in 1979 and as is the case with most of the buildings of that era, it has more than a few flaws. Some are correctable while others are not. Her building is located in a Hill Country town of about 6,000 plus. And yes, qualified tenants are still a problem. (Average turnover according to the Texas Apartment Association is 65 percent!).
Her building does have some advantages. It is paid for (I purchased it from a bank) and does quite well overall.
However, raising rents will always be a problem because of the job situation (or lack thereof) and because a very high percentage of rural residents in Texas are on some form of ?assistance?. (Last time I checked, it runs as high as 80 percent of residents in some counties). Those who qualify for ?assistance? will usually have some form of low-cost housing available to them and that tends to keep the tenant population somewhat segmented and rents low. We don?t rent to those getting rental ?assistance?.
Insurance is beginning to be a problem. It is harder to obtain adequate coverage and it is costing far more to do so. Another troubling point is higher property taxes. Local governments have been quick to raise rates and since most people think their properties are also increasing in value, they aren?t really screaming ? yet.
Good luck with your purchase.