Small multifamily properties such as duplexes, triplexes and fourplexes can be more difficult than they might seem on paper to make profitable. Some investors shy away from this kind of real estate investment because there are so many unknown variables and risks, particularly if you are a new landlord. The purpose of this article is to highlight some actions to take and some things to anticipate as a current or prospective small multifamily property owner, so that you might have greater success in positioning your property to generate the best possible return on investment.
To start, know that there are good tenants at every price point. Just because the unit can only command $500 per month does not mean that you are destined to get poor quality tenants. You or your property manager (if you have one) need to make sure that you maintain a certain consistent screening criteria across the board. You may not have the same application requirements for a $500 per month unit as you would a $2,500 house – but you should still have a great level of confidence that based off of the data you were provided (credit, income, rental history, eviction history, criminal history, job tenure, etcetera) that your new tenant will pay rent in full and on time, maintain the unit, and be good neighbors to the other occupants. For the small multifamily properties that our company manages in Colorado Springs (and surrounding areas) our data shows that tenants who occupy these units have a longer average occupancy term. That’s good news – find good tenants, and treat them like royalty! Just make sure you’re not stuck with long term tenants who aren’t going to promote the success of your investment. The most important thing to know about tenant occupancy when purchasing a building is that the former owner or manager probably did not know how to properly position the building, particularly if it was managed by the owner. So prepare to deal with poorly qualified tenants and higher lost rents for the first year or two until you can secure better tenants – this also hinges on your ability to get and keep the property in a good state of repair.
Property condition and the approach to maintenance is extremely important. The first thing to know is that if you do not have high standards for maintenance, regardless of the building location, you have zero chance at securing and keeping good tenants. Also, know that spending 10% - 15% of rents recieved on maintenance each year is not unheard of. If you want to avoid some of the risk associated with this, you can get a 12-14 month home warranty on these kinds of buildings for a little over $1,000. I personally have had the most positive experiences with Blue Ribbon Home Warranty; and no I do not make money for mentioning their name in this article. If you are handy and have the time, you could lower that amount substantially.. just be very careful. So often I see landlords alienating good tenants by not having the proper time, tools or training to perform repairs correctly and during reasonable hours. If you opt to hire out maintenance which can be handled by a non-licensed handyman, spend some time shopping for a very affordable handyman who does good work. This can be difficult, but they are out there. Spending top dollar ($50+ per hour) for handyman services will quickly kill your margins. Also as a rule of thumb, never hire the big corporate name companies to do work on your property; they are generally two to three times more expensive. The one exception to this rule might be remediation and disaster restoration companies, because that is not the kind of work for which you want to use the cheapest vendor – one word: LIABILITY. Also, it might not be a bad idea to considering joining a property management focused trade association to find good vendors.
Another very important thing to help small multifamily buildings be profitable is to thoroughly review how the utilities are billed. Many building owners do not charge tenants for the utility services which are not separately metered. Often you will find that the building owners will just let these utilities and the trash service be “included in the rent.” Taking this approach is almost as bad as throwing dollar bills in the trash. Why? Because every tenant who comes to rent a place expects to pay extra for utilities. What I see most often is, essentially, free utilities for the tenants. If the rent is marked up to account for the actual average utility cost the landlord would suffer longer vacancies and miss out on potential tenants who think the unit is overpriced before they ever called to ask if anything is included. Also, when people do call to ask about the unit, note that saying, “oh and the utilities are included!” is just an added bonus for the prospect – not normally a deciding factor. The landlord could have told them that they will need to pay the municipality for X utilities, and then pay him or her direct for the rest with no issue. Another reason this is uncommon is that landlords don’t like having to track the amount and then chase down tenants to pay in arrears. Well, there is a very easy fix to that. Total the utility services that you are paying for the year and figure out how much it breaks down per month for each unit. Then use this average rate to figure out a flat amount that will be charged to every tenant each month for those utility services which they will need to pay along with their monthly rent in advance. No tracking. No splitting. No hassle. This is something which would be addressed at the point of lease renewal, so it is of course important to know when the existing leases expire before you jump into a building purchase.
Contrary to popular belief, I believe that it is possible to be a happy, low stress landlord – but not if the landlord fails to take the correct measures. These multifamily buildings can be profitable if they are properly repositioned.