When buying income multifamily properties most investors prefer to have apartments that are leased. It means instant stability, instant income to cover the expenses and it means less hassle up front with having to market properties for rent, checking tenants out, preparing the units and organizing move in.
For the most part it’s often good to have units leased, but there are cases where it may be better just to have a vacant property.
Note: When buying 2-4 unit properties vacant properties are not worth less then ones with tenants. The value is not as dependent as with large complexes in the commercial realm.
When purchasing a property sold traditionally from an owner who has had it a while, many years and is not in financial distress then a property that is leased is a good thing. You can have some more assurance that the customers – tenants – have been selected well and are paying market or below market rents. In other words the property is stable and shall remain so with little hassle.
Then there are traditionally sold properties that are from new owners, or investors who recently purchased a property in distress on the open market or at a trustee sale with the specific intent of fixing it up, leasing and selling to a new owner.
I would be more weary of these properties. Besides checking the quality of the remodel which is a topic for another post, I would do extra due diligence with the tenants.
These flippers have a tendency of leasing properties to tenants at rents that tend to be over market. Sure the units are remodeled and it may be fair to lease for a rent that is higher then other non remodeled properties, but often the tenants willing to pay more then they should are less stable customers who often have to pay more then market rent because of their credit situation.
Most people won’t pay over market for long. These tenants may be gone when the lease ends or they may have a harder time paying rent and have to leave sooner. This is costly and a hassle, even if the eviction process is quick in Arizona.
Not all cases are like this: the key to keep an eye out for are over the market rents.
Distressed Short Sale and REO Multifamily
When an owner is in distress they are more likely to take tenants that are bad customers. They just put someone in that may or may not be able to pay the rent. These are last ditch efforts to keep a business going. Others will quit paying the mortgage and simply stick anyone in to ‘milk that property for at lease a few more grand’ before the bank takes it.
Not all owners are like this, but the decision to take this route is often born from necessity more the spite.
Then once the owner decides to do a short sale or let the property go to the bank, they also let management go and let the property go into disrepair, favoring keeping cash in the pocket rather then putting into a property that they are losing.
Many of these get taken over by a bank and banks can’t always throw these tenants out. So it is up the the buyer to be careful.
As you can see, there are many situation where it would be better to just buy that triplex orfourplex vacant rather then having to deal with problem customers.