Buying a Multi Unit Investment Property in Washington DC

Floor plans multi unit Washington DC

Two weeks ago my wife and I set out to purchased a 3 unit building in Washington DC. If you know me you know that I love real estate especially in Columbia Heights Washington DC. I purchased my first property in CH back in 2003 and have been fascinated with this neighborhood and obsessed with trying to buy more property here ever since.

The problem with this neighborhood is that every thing is really expensive and its very hard to find a deal let alone a steal.

It has been over a year since we purchased our last house and it is time for us to pick up another property. I started searching just for kicks a couple months ago, but we were not really in a good position to buy. However two weeks ago I noticed this multi-unit and it looked very interesting.

Its located on the corner of 14th and Taylor. I called up my realtor and said we need to see this asap! I have always wanted a multi-unit and this looked really good. When it comes to being a landlord having having 3 units in the same building is so convenient. Plus the fact that you are getting 3 units for just a couple hundred thousand more than what some single family homes are going for made it seem like a decent deal.

So the next day we checked out this property. I think I pretty much knew right away that I wanted this building after just walking around the outside of this impressive 4 story building. After checking out the top floor 2 bed 2 bath plus loft I was sold. Although it was not updated the top floor unit was in very good condition. It was in move in condition and would not need anything except maybe a dishwasher, but even that could wait a year or two.

We next went down to unit 2 and that was in the same condition. I was really getting excited. After we came home we spoke about briefly we new right away it was time to put in a offer. We called up our agent and told her to come back. We quickly ran the numbers and made an offer of $815k with the seller paying 25k at closing. A couple days went by with no word from the seller and then we received some feedback. The seller wanted to counter at $825 with 25k back in closing help.

I was ecstatic! I was really excited to be very close to buying my first multi unit property.

Now comes reality! I want to first make it clear that we were very interested in buying this property and had all intentions of carrying out our obligations. However with the seller taking their time it gave us time to really thing about this property.

We started running the numbers again, but this time took a hard look at operating expenses. With a house you really do not have that many expenses except Mortgage, Insurance, Maintenance.

There were also some unknowns. One thing I failed to mention was that we never were able to take a look at the lower level 3 bedroom 2 bathroom unit. It was the only unit that had a tenant so on that day we were not able to check it out. We assumed that it would need work before renting it out, but just had no idea how much that would be. I am assuming a total make over which could have been anywhere from 20-50k. I guess we should have looked at it before making our final decision, but how bad could it have been? (joke!!!) I am sure it was probably really bad!

So with all that said and not even counting how much it would take to fix up the lower level unit take a look at the numbers below.

With this building we had
Mortgage – $4000 even after 170k down payment
Insurance – $3000-3500 per year (note:we only pay $600 per year for our house)
Maintenance – ? this was really unknown, but for budget purposes we assumed $10,000 (this sounds high, but its a 4 story building that is almost 100 years old so you have to figure you will have issues though out the year.
Trash Removal – $2400 per year (note:trash removal on a single family is on the city)
Water – ? lets assume $200. While we can try to pad our rent to make up for this, there is only so much we can charge for this unit (with a single family tenant pays water bill

Total
Mortgage $4000 + Insurance $250 + Maintenance $833 + Water $200 + Trash $200 = $5483

Total rental income 3 units x average of $2000 rent = $6000 = cash flow $516

So I know those are rough numbers and I made a few assumtions, but I think I am pretty close with this.

So as we started to put it all together we saw that there was not going to be as much cash flow as we thought. Now this is not the biggest problem. The larger problem was that we were going to have to put down 170k down payment. We would have been able to come up with money, but would have had to borrow it which would not have been a great idea. Also, that is a huge nugget of cash to put down with so little short term return. I am a big believer of being in the for the long run, but this does not leave any room for error.

With a new baby being totally leveraged is not the best thing. The stress of worrying about what if something happened and we needed some cash was not a good feeling.

One other hesitation was the distance to both the Columbia Heights Metro and Petworth. It was 11 blocks to CH and 7 blocks to Petworth. I think it would have been a great long term investment, but coming off so much cash was a bit scary for us. So with the seller dragging there feet we decided to pull out of the deal and walk away.

It will be interesting to see this area of Columbia Heights develop and I am sure that this building will sell for at least 1 mil or 1.2 mil in a few years. The other long term plan we had was to turn this building into condos. 3 units at ~500 = 1.5 mil so if you purchased it at $825 put 200-250 into renovations you would have a profit of 200-300k.

What do you think? Was this a good deal? Would you have purchased this?

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3 Responses to Buying a Multi Unit Investment Property in Washington DC

  1. friend says:

    Be careful to account for the costs to get it rented, the amount of time all the units won’t be rented (and you’re covering the full cost), the unexpected expensive repairs which WILL occur. This can significantly change the total cash you end up with over multiple years.

  2. admin says:

    @Friend

    You are 100% on correct. I didn’t include that, but it was definitely on our minds. I think the above situation was with everything going our way with no kinks! And you know that never happens. We figured it would take as much as 6 months to get the bottom unit in shape so accounted a bit for that, but if the top units didn’t rent quickly we would have been out of a lot of cash. The one great thing that CH has going for it is a very high rental demand. If you put a add out on craigslist you typically get tons of responses very fast! However, with it being the winter it is a bit slower right now.

    With the new baby I barely have enough time to take a shower, so couldn’t imagine trying to rent this property right now.

    With all that said, I am still looking for the right property and will be ready to pounce when we find it!

    Jason

  3. friend says:

    In real estate the concept is reserves. If you can’t build up significant capital reserves while renting a property you are exposed to losses when they don’t go smoothly — which they almost never do in today’s market, which there isn’t much of one as long as foreclosure is what everyone is waiting for to buy.

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