Analyzing A Deal: The 5 Unit I Missed Out On

Last month Mrs. C. and I went to look at a 5 unit building. This property had sat on the market for a month and recently had a price reduction.  We decided to look at it, although at the moment we have ZERO life energy to give to a new project. The property had a list price of $69,900.


The Building Itself:

We aren’t supposed to get emotionally attached to houses, but man, I love this building.  This house was likely built in the late 1800s or early 1900s. It’s all brick, 2 stories, and has high ceilings.  I bet it’s 9 ft ceilings on both levels.   The windows on the front of the house have arches with decorative capstones.  There is a nice bay window.

The house is so old in part of the basement there is an old brick laid cistern.

This house likely was originally a single family home of a very wealthy individual.  At some point in history it was cut up into 4 units, and then an addition was made to make a 5th unit.

It looks a lot like the brick house in the Sesame Street book “The House That Biff Built

On the downstairs level there are 2 1 bedroom units and 1 studio unit.  On the 2nd floor there are 2 studio units.

The Lot:

The lot leaves much to be desired.  There is very little room.  The back of the property is overgrown and unusable.  Currently there is a wrap around driveway, but one side of this actually belongs to the house next door. That house has been abandoned for decades, but it looks like someone is starting to work on it again, so this part of the drive will go away.  There is not enough room for parking for 5 units with 1 car each.  The only real option going forward would be to purchase the adjacent lot on the other side of the property that is currently owned by the City.


The Current Monetary Structure:

The owner of the building purchased it roughly 40 years ago.  I tried to look up what is sold for, but that is not in the public records database.  I would guess it was a very low amount.  In the mid 80s a reasonable guess for this property is probably $20K, but no way of knowing for sure.

The gas, water, sewer, and trash bills are paid by the owner and the tenants all have separate electric meters.

The main financial issue with this property is that the rents are severely below market rate.  One of the large apartment complexes in our area posts their rents online, and they are currently renting out 1 bedroom apartments for $793.   This apartment does provides water, sewer, trash, but not heat, so this small multifamily is ahead by about $30 a month.  This apartment complex does provide fridge and stove, while the tenants in this building were responsible for their own.  That should make it about a wash on value. A recent listing for a 1 bedroom in a similar small multifamily home was listed at $625 a month.

Total rents collected for the last year on this building were just under $19,000.   $19,000 divided by 5 units divided by 12 months is $317 per month average per unit, Each unit is being rented on average at only 40% of market rate. This is a big problem.  Landlords think they are helping their tenants by subsidizing their rent, but they are creating a false reality for them.  These people are screwed when they find out what the rental rates currently are.

This building is barely profitable.  When you factor in deferred maintenance, property management, and debt service, this thing would lose money every month right off the bat.

On our last apartment building we gave all the tenants a 60 day notice and offered them a buyout for each week earlier they left and their entire security deposit.  The earliest tenant got around $1,500.  Some people were not happy with this. (By law we were only required 30 day notice with no cash payment).  I also did not like how it played out.  It was made worse that we closed I think on the 27th so rent was due just a few days after we closed and at the same time we were telling people we would be terminating their month to month leases.

What I would have done on this building is let the tenants know the reality of the situation, and that I am not forcing anyone to move out.  In 90 days there will be a $50 rent increase, and then every 6 months there will be a $50 increase per month until we reach market rate rents.   I would also include a buyout option if they leave within the next 90 days. I would return their full security deposit and give them $1,500 cash if they moved out with no issues within 90 days.  Although this would also still make me the evil landlord, I feel that this is a better way of going about it.  Most likely these people will all get a 30 day notice to leave once the new owner takes possession.

My Plan For The Building:

I would transition the 5 units to all being on Section 8.  There is a lack of Section 8 rentals in our market.  1 Bedroom FMR (fair market rent) is $736 in our area and studio are are $718. This would equal total gross rental income of  $3,626 per month.  With all utilities except electricity included, we would only lose $40 per unit for electricity allowance, dropping the total rent to $3,426, this would be $41,112 total rental income for the year, over double what the property currently brings in. FMRs typically increase every year.  For our area in 2019 a 1 bedroom was at $619 vs $736 today, and a 2 bedroom was at $801 vs. 957 today)

With Section 8 FMRs being $718 for Studios $736 for 1 bedroom and $957 for a 2 bedroom, changing the configuration of the units downstairs from 2 1 bedrooms and 1 studio to 1 2 bedroom and 2 studios would increase total monthly rent by roughly $200, or an additional $2,400 a year. This would be a very easy change to make. Add 1 door way and 1 wall. New gross income of $43,512 per year.

I would switch out the boiler and the water heater to super high efficiency models and swap out all the common lighting with LEDs. This would reduce expenses by around $1,000 a year and increase the comfort for tenants. I would pursue purchasing the adjacent lot from the city immediately and in the mean time cleanup up the back of the lot to make parking less difficult. If I was able to get this piece of land I would also put up 5 10X10 storage units and rent them out for $60 a month.  I would give Tenants the first option to rent, then offer to others, increasing yearly income by $3,600.

For some ancillary income I would put in a soda vending machine at the backside of the house.  I can get one of these for around $200.  In general we buy pop on sale for around 40 cents a can and sell for $1.  With 5 tenants I don’t think it would make a lot of money, maybe an extra $20 a month or so.

For Financing I would have wanted to do a 20% down 15 year loan.  This would be a down payment of $14,000 and a balance of $56,000.  The monthly principal and interest payment would be around $535 per month.

Why We Didn’t Get It:

The property had been on the market for a month and had a recent price reduction.  We are in a relatively tight cash position, as in the last 14 months between the down payment and rehab of our apartment building we have spent $115,000, we spent another $40,000 on the brick house we just completed, $49,000 and counting on the rehab house we bought last fall, and around $9,000 on flipping houses that were damaged by previous tenants.  With the recent price reduction we became really close to being able to make the down payment on this property.

With the apartment building we bought last year we were required to put down 30%.  30% on a full price offer is more cash than we have available.  I contacted our bank’s commercial lending department to see what options they could have to help me out…They made it sound like they would present me with options and then effectively ignored me all week and on Friday at the end of business told me to kick rocks.   This made it so that I could only comfortably offer up to what we could afford a 30% down payment and that put us around 20% under the list price. I should have talked to other banks, I did not anticipate another interested party, and figured I could wait until the following week to make an offer.

I had inquired to our bank about doing a bundle loan with 2 paid off properties I have with this one, maintaining over 60% loan to value and they still didn’t want to loan to me. It would have been great if they would have told me that on Monday and not Friday.

Unfortunately for us there was another interested party who also viewed the property and that person made a full price offer.  If I had financing lined up for a 20% LTV I would have offered more.  I was hopeful that the bank would have worked with us, and of course hopeful that no one else was interested in the property.  I did not feel comfortable making an offer without a firm base to know I could get financing.  In retrospect I should have inquired about seller financing and offered a creative deal.

This was a perfect opportunity for a seller finance deal.  The seller has owned property for 40+ years and wants to be done managing rentals.  The seller has a large portfolio and is concerned about capital gains taxes.  A seller finance deal would be a great solution here.  I don’t have to deal with the banks and can make a smaller down payment, while the seller doesn’t have to deal with tenants anymore, gets the price they want, and makes interest income rather than the bank.  Capital gains tax is also spread out over many years rather than an immediate hit.

I am learning more about DSCR (debt service coverage ratio) loans.  One of my major roadblocks to financing is my seasonal W2 job.  With DSCR loans the lender looks at the buyers credit score and the finances of the building, nothing else.

Lost Properties:

I hate losing!  To be honest with you when I realized we didn’t have a snowball’s chance to get the property I became really frustrated and saddened.  For our net worth being what it is losing a property for want of an extra $5K in down payment funds is super frustrating.  I had a big vision for this property and now it is gone.

My dad reminded me that there will be more deals in the future, Even though it doesn’t feel like it right now.

My wife reminded me that we have ZERO life energy to put towards a new project, and this property isn’t in our normal desired location.

In the past I’ve lost out on deals before where I also felt would hurt forever, but as with most things time heals all wounds.

2005 (and 2009) 1st House: Next to my mother in law: In 2005 Mrs. C. and I were living in an apartment complex and began searching for our first house.  The house next door to her mom came up for sale.  It was a 2 story 4 bedroom house for $20,000, which was well within our budget.  I missed out on this because rather than putting in an offer immediately I waited for my dad to do a 2nd walkthrough inspection on it.  We lost out to another investor during this time period. This was going to be our first home and the location was super convenient.  4 years later the property came up for sale again and we tried to buy it.  We went into the real estate office to put in our offer and the broker told our agent that an offer was just accepted on it.

2006: 2nd House: Tax Auction Colfax: A large 2 story house came up for tax auction on Colfax Ave in 2006.  We still had not purchased a home yet and were hopeful that we could get it.  This specific house became the first one to receive an open house from the tax auction ever, because so many people expressed interest.  It sold for 3X what we had available to spend on it.  At the time I was frustrated, but it’s much easier to handle getting beat by a mile than by an inch.  Fun fact, that house has sat empty for the last 17 years.  Only the last couple months, here in 2023 has any work started on this house.

2019: A 2 bedroom that could be a 3, across the street from one of our rentals: We lost this one by an inch.  We owned a house practically across the street from this one and knew the people who used to own it.  We put in our offer and it sold for $1,000 more than our offer.  This is when I learned about escalator clauses.  We now frequently use these to be able to outbid the next highest offer up to $X dollars.

2020: 2 story for a friend: This house would have been perfect for a friend of ours.  This rental would have been walking distance to most of her family.  The house didn’t need a ton of work, and it was well priced. We ended up withdrawing our offer because in the paperwork it stated there was a Hud requirement for this property being a personal residence for any bids in the first 14 days.  I didn’t want to be on the wrong side of the law on an obvious infraction.  The Person who bought it ended up turning it into a rental immediately.

2021: Commercial Building: In 2021 before we purchased our tax auction house there was a commercial property that I was highly interested in.  This property had 3 separate sections: 1 with an apartment and a large garage, and 2 storage/ office sections.  It also had a billboard and was on a large lot on a commercial street.  We put in our offer and roughly 12 hours after putting in an offer (and we were the only bidder at the time)  A drunk driver drove into the building and caused substantial damage.  The sellers took the property off the market and wanted to repair it before selling.  We asked the listing agent to call us if it is relisted and even offered to buy it “As Is”.  A few months later it was relisted and showed “active backup”, meaning it had been relisted, and had a pending offer. We never received a call from that agent.  We were allowed to make an offer, but I don’t think the sellers ever saw it.  I also didn’t make as strong of an offer as I should have.  I was actively rebuilding a roof and didn’t sit down to run the numbers.  I let doing a $20 an hour job hinder me from expanding the empire.

2021: Tax Auction Tire Trailer: Not to far from us is a mobile home community where each mobile home owner also owns their own lots with wells and septic systems.  A property in this neighborhood came up at the tax auction and we thought for sure we would get it at a decent price.  This property was long neglected and was FILLED with tires, like hundreds of tires.  I thought we would be able to get it for $15,000 to $20,000 easily.  It ended up selling for just under $30,000.  

2022: Waukonda house: In 2009 we bought a property at the tax auction for $6,000.  We didn’t have enough money to fix it up and we ended up selling it for the same $6,000 we paid for it 2 years later, after closing costs we walked away with $1,700.  That hurt like hell.  Last year that house came up for sale again and it fit what we were looking for.  We offered mid 40s for it, but someone else paid over $50,000 for it.


Looking back on all of these lost deals, none of them would have been life changing.  I’m honestly really glad we didn’t get a couple of them.  The commercial building is the only one I would want today.  It’s listed for sale right now, but the current owners want about twice what it was listed at before, and the numbers for me don’t get us there.


This property would have been a big money maker eventually, but there will be others.  Mrs. C. is right that we have no time or energy for this project anyways.  I need to focus on adjusting how we deal with properties to greatly reduce our time spent rehabbing.  There will be other deals, and I will be more prepared in the future.  This has been a great learning opportunity for how bankers think and my self limiting thinking on financing will not be a barrier in the future.

John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. John is the author of the book For My Children's Children: A Practical Guide For Building Generational Wealth.

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