Surprise! Quasi-8-Plex

[kork13]

Soo.... Crazy & out of the blue, but my aunt & father approached me with what seems to be nothing short of an incredible investment opportunity. Forgive me for telling the story:
My aunt lives in southern Oregon, and is an active RE agent. An older man (former carpenter/tradesman) she has befriended of late is suffering from what is effectively a terminal medical condition (sounds like bone cancer), and he expects to have relatively little time remaining (his doctors have begun to discuss hospice care, but he's too active & involved with his life to go for it. Among other things, he has owned/maintained/managed a quasi-8-plex (consisting of studio apartments & single rooms) for many years. However, he also owns a productive gold mine in CA, and wants to go live out his remaining days at the mine. So he offered to sell the property to my aunt on the cheap to keep it away from his "[expletive] children" or a commercial investor, and rather get it into the hands of someone who will maintain & manage it with the same level of care that he has for many years (some emotional attachment to the property, a la years of sweat equity).

While not struggling, my aunt doesn't really have alot of dry powder, financially speaking. So she approached my dad, who also suggested she bring me in, to partner on the deal together as a 3-way split. While I have some questions, and definitely will do some careful due diligence, it seems almost impossible to not become a win over time.

The property's basics:
- 8 separate living quarters, mostly studio apartments & a few single rooms in a larger unit, all furnished. Rent includes all utilities, etc.
- Estimated market value: $350k, ± $30k
- Offered sale price (from owner to my aunt): $75k ... !!!!
- Full occupancy income: ~$5100/mo gross, ~$2500/mo net. Occupancy rate is reportedly around 85-90%.
- Owner reports no significant maintenance/repair issues, but we intend to get thorough inspections done.
- We're also going to request the books on the house as part of due diligence.

Future plans/thoughts:
- We'll need to establish an LLC for the 3 of us as a holding/operating company, but doing so is pretty cheap in Oregon.
- My aunt lives in the same city, and would be the primary POC for its day-to-day management. I'd likely take on some of the "back-shop" management, like finances/taxes, insurance, etc.
- The seller plans to stay for another month or so, help with the transition, and apparently has a suggestion for a good handyman to live there as a foreman & handle most maintenance/repairs.
- Our thoughts are that we would make our target market the traveling nurses that are often present (the area has alot of geriatric care requirements that are filled heavily by traveling nurses). The hospital is a mile away, and would be a great fit.

Really, this thing just feel into our collective lap, so we're currently just looking into it as a very interesting opportunity, hoping that it truly is as good as it seems. For now, we're in the "Look before you leap" stage. The very low ask (relative to current value) is a red flag, but he says he only owes $40k on it, and just wants to get that paid off plus some walking-around money. My aunt is going to explore a little further, and if all remains good, get an actual purchase contract written up to get the process started.

Welcome any advice you guys may have to offer. Especially looking toward riverwed070707 -- I believe you have a few multiplexes?

[jenn_jenn]

Wow, sounds like a great opportunity! I trust that you’re going to do the appropriate due diligence.

The first thing that comes to mind is just making sure that the three of you have alignment on how you’re going to split and manage things. How will your aunt be compensated for her role as the property manager? How much will you keep in sinking funds for maintenance and repairs? Just make sure you are all aligned on all of the details.

We rent our condo primarily to travel nurses and it has been great. They prefer furnished rentals so that’s something to keep in mind and it’s very different than renting long term unfurnished leases. It’s different than Airbnb but, if you’re going this route, you can leverage a lot of the great online tips out there (e.g, have a welcome book, make sure to have detailed instructions for cleaners, keep inventory, make sure to have appropriate furnishings and extras like hangers and Tupperware). Furnished Finder and local Facebook groups have been great resources for listing our condo and advertising to travel nurses. Happy to share our experiences further if you’d like dive into the travel nurse market further!

[riverwed070707]

Can I get in on this deal?! I agree asking $75k on a $350k property seems fishy. Don't cut corners in your due diligence. This means hiring a real estate attorney to do the title search, make sure there are no liens, and draw up an airtight purchase agreement. Don't pay any money direct to the seller in advance, you'll close at the attorney's office and no money should change hands before the papers are signed.

You can get an inspection but even if it needs work, I can't see how it wouldn't be worth it if the numbers you have are accurate.The net income is low relative to the gross... for me - typically - net is usually about 50% of gross WITH a mortgage but without property management. If you have neither, I can't comprehend what would be eating so much of the income.

2 other big considerations. 1) I'm sure you're aware doing business with family can be sticky. Be sure its abundantly clear who is responsible for what, how profits will be divided, what happens when repairs are needed, who's handling the money, who's linking up tenants, etc. 2) I LOVE multi-family investment properties but I'd hesitate on the "single rooms" part. Does this mean there is shared common space between unrelated tenants? I'd probably look for a way out of that situation as it sounds like a drama nightmare.

Happy to chat more if you have specific questions!

[scfr]

Yes, it sounds like potentially a great investment!

My caution would be to seriously ponder the "expletive children" comment. I have dealt second-hand with the family ugliness that can occur surrounding inheritances. Are you prepared & willing to deal with worst case scenarios that might occur when the "children" learn what has happened? When dad is no longer around to explain his reasoning either to the children or the courts and they decide to threaten or sue the 3 of you for financial elder abuse by claiming dear old dad couldn't possibly have been in his right mind and the 3 of you took advantage? It could get explosive.

I don't know how many children are involved. But it seems a bit extraordinary that a father would feel that way about all of his progeny.

Are there steps you could take now to mitigate those worse case scenarios? For example, involve an elder care lawyer to sit down with all parties to clarify and document everyone's wishes?

[bjl584]

Sounds like a good deal, but I too am suspicious of the numbers and the selling price.
Just due your due diligence and make sure you hash out the arrangement with your family before diving in.

[disneysteve]

I'm not a real estate guy so I can't speak from that angle. What stands out to me about this deal is two things.

One, do you want to be in business with your father and aunt? Mixing business with family can be a really dicey situation, especially if anything goes wrong down the line, one person feels they aren't getting their fair share, one person wants to get out of the deal, etc. You also need to know how the other two, especially the aunt probably, has things set up if she were to die. You don't want her leaving her share to someone else and you end up with a partner you may not be so happy about.

Two, same concern as scfr about the kids. When they find out that he sold a 350K property to you for 75K, you can almost guarantee that they will contest that after he dies. That reduces their inheritance by 275K. People have fought long legal battles for far less than that, so you need to be prepared to deal with that issue because it's almost certain to happen.

Personally, I'd stay far away from this but I'd also never buy rental property in the first place so I'm not sure how meaningful my opinion is here.

[LivingAlmostLarge]

Fantastic deal and I would jump on it.

But be careful. Mostly because what if the kids sure because the dad is "demented" or not in his right mind? I would listen hard to riverwed and others who do invest in real estate.

I also want to know with a $40k mortgage what is eating the gross income? Property taxes? And dont' forget filing taxes in oregon with the LLC. Also oregon is definitely renter friendly. Do they have rental agreements? Will it be impossible to move them out? What is a quasi 8 plex? Not up to code when you buy it?

When you buy it will that cause the city to investigate and then shut down your multi-plex for illegal zoning? Did you see the airbnb fight in mattapan massachusetts?

[kork13]

I've had the same thought about his children contesting the deal in the future. Sounded like he has 2-3 children -- 1 on decent terms but she lives far away & is totally uninterested in the property, the other(s) on less amicable terms. We'll have to see how best to work around those issues -- I expect some form of attested statement of mental fitness will be in order to protect ourselves.

Getting current rental agreements during due diligence is a good idea -- adding that to my list. I don't know yet how he has been advertising/filling the units, whether independently or using a service (AirBnB, or otherwise). I expect he's not deep into AirBnB, just as a generational assumption.... But we'll see.

Likewise, I'll need to do some research into Oregon's tenant laws & laws relevant to multiplexes.

I'm honestly less concerned about going into this with family, just knowing the personalities involved. All 3 of us are fairly easy-going, intelligent, responsible adults ... And all 3 of us have collaborated among eachother on various other financial/rental type stuff before without issue. I'm also planning to draw up fairly specific partnership agreements with rights, responsibilities, authorities, compensation, and so on.

To clarify the gross vs. net income questions -- the units are fully furnished, and all-inclusive. So his expenses include not only his PITI & repairs/mx, but also covers all utilities, trash, internet, lawn care, etc. Again, I haven't seen the books yet, but we'll get a good idea of all that stuff in time.

I'm still waiting for information about the property from my aunt -- I don't even know the address yet to start looking at it, let alone the other stuff.

[LivingAlmostLarge]

Something I'd think is with his age if he's illegally renting it out or grandfathered in when he sells does the city reset zoning and laws and it's not rentable under the same circumstances

[disneysteve]

I've had the same thought about his children contesting the deal in the future. Sounded like he has 2-3 children -- 1 on decent terms but she lives far away & is totally uninterested in the property, the other(s) on less amicable terms.

She may be uninterested in the property but she's likely interested in the value of the property. 3 kids, $350,000 property, that's $116,667 each when he dies. Your deal will drop that to $25,000 each when he dies. I guarantee at least one of them will not be okay with that outcome. You can get whatever paperwork you want beforehand. That won't keep someone from suing you. They may not win but you'll still have the hassle and expense of fighting it. Just something to keep in mind.

[LivingAlmostLarge]

She may be uninterested in the property but she's likely interested in the value of the property. 3 kids, $350,000 property, that's $116,667 each when he dies. Your deal will drop that to $25,000 each when he dies. I guarantee at least one of them will not be okay with that outcome. You can get whatever paperwork you want beforehand. That won't keep someone from suing you. They may not win but you'll still have the hassle and expense of fighting it. Just something to keep in mind.

Not just that but they may contest the entire estate saying he was not in his right mind at the time...because he's doing stuff like that