9 unit multiplex in Another Small Town

I know i’ve posted a lot of multiplex here recently, but I actually looked at way more. The past few weeks I’ve probably looked at 100 listed multiplexes.

This one might be the last one I will look at for a while, want to focus back on flipping properties. This 9-unit building was taken by a private lender, and it was in a bad condition when he foreclosed it. So he spent 40k on fixing it up and held it for over a year now. So he is pretty motivated.

The funny thing about this one is, the actual income is at $68k for the past year at 5% vacancy, the expense is $43k. a 63% expense ratio.

I thought it must be poorly managed, I can make an offer and drop the expense ratio down to 50%, therefore increase value and create equity. but the biggest problem is that owner pays hydro, and hydro cost range from 19k to 22k a year!! Changing the heating system seem out of the question, it was quoted at 100k fix. Also there are only 3 meters for 12 rooms, so can’t make tenants pay utilities. Does that mean this deal is dead?

EDIT: Actually, Jay mentioned back-charge utilities might be a solution to this.

The property was listed at 350k, at first I said I will make an offer at 265k, but after i saw the astronomical hydro bill I backed out then made an offer at 190k.

The seller countered at 230k, however he did say he is going to finish up a roofing job that was going to cost another 10k.

The actual net income I confirmed last year was at 22k, and gross was 63k. So the make or break of this deal is if I can actually reduce the hydro bill cost.

My worry is that even if I implement back-charged utilities, some tenants may leave due to the increased rent they pay. The best scenario right now is if I can get them to pay the 22k hydro bill, I can reduce the rent by 10% or 6.8k a year, with a net saving of 15k a year without changing the vacancy rate.

A 2nd concern is that some tenants don’t have a lease in place, bank needs 1 year lease in place. This is a catch-22 problem, If I ask the owner to get them to sign a lease, then I won’t be able to change the current rent set up and back charge; If i don’t get the lease then most likely it will be very hard to finance.

Is there a way to include a clause so that leases can be changed if building is sold, but 60 day notices will be given to tenants.
Or have some of the tenants sign lease that last a year but have 3 or 4 months left until expiration.

hmm what to do what to do?