During the recent real estate boom, selling small small multi-family housing (duplexes, triplexes and fourplexes) was almost as easy as simply sticking a “For Sale” sign in the ground and getting the property on the MLS.
But the rules have changed for everybody.
When investing in larger apartment buildings, one of the first questions a buyer asks is, “What are the rents?” In other words, how much revenue does the building generate every year? If the property doesn’t generate enough money to cover its expenses and mortgage, it obviously isn’t a good investment.
That principle is increasingly true in the small multi-family market. In addition to location and condition, more buyers are comparing the rent of one building to another.
A client recently looked at three gorgeous duplexes, all next door to one another, all in a fabulous location. All were three bedroom units, with separate utilities, fireplaces, built-ins and good tenants. They were slightly different in size, but almost imperceptibly so. The only obvious difference was one had two bathrooms per unit. All three properties were in a short sale situation.
O.K., slight detour here. What’s a short sale? Think of it like this. If I borrow $100 from you, and when it comes time to pay you back I only have $90 on me. In that case, I may ask if even though I’m $10 short, if we can still call it good.
In this case, the sellers of these properties may or may not be behind in their payments. And their motivations for selling may or may not have anything to do with financial duress. However, they recognize under current market conditions they can’t sell the property for what they owe on it. So they’re talking to and working with the bank to find a way to pay back as much as they can.
Back to the buyer. Three comparable properties, virtually next door to each other. One was listed at $369,000, one at $395,000 and the third at $409,000. All had taxable values at or above $500,000.
Which one did he write an offer on?
The cheapest one, right?
Would it help if I told you the first grossed $30,000/year in rent, the second $31,200/year and the third $38,400. Now which one did he want to buy?
The one with the highest rents; which was also the most expensive.
While it may seem like $7000-8000 a year in rent isn’t that important (after all that’s “only” $650 or so a month), it made the difference as to whether the property could support itself financially. The less expensive properties didn’t generate enough revenue to even break even. As a result, the buyer would have to reach into his pocket every month to make up the difference.
Due to higher vacancy rates the last five years (everybody who could bought a house), landlords have been forced to keep rents low. The poor housing market has turned rentals around, however. Now, more people have been forced to rent. So rents can be raised.
It’s important to keep your rents as close to market value as possible. It will make all the difference when it comes time to sell.