Evaluating Quadplex deal

[Austin Weber]

Looking for some more experienced advice/perspective on a quadplex I want to make an offer on. I'm new to this and looking to make this my first deal. This property is on the MLS currently listed at $540k. It fell out of contract a couple months ago but it had an inspection and appraisal done at that time. It appraised at $553k and the inspection showed lots of minor to moderate deferred maintenance, mainly needing a roof and some foundation repairs and a few water leaks inside that need addressed. It has tenants in place until 2025 paying $1150/unit. I've been trying to wrap my head around what an appropriate offer would be and the numbers just don't seem reasonable.
I’m coming up with: 

$4600 monthly rents

$450 insurance 
$950 taxes 
$690 Cap ex, Maintenance and Vacancy 5% each
$400 water/electric from current financials 
$130 landscaping from current 

Which leaves me right under $2000 for a mortgage payment just to break even, which is a purchase price of $375k with 25% down. Not including any repairs or renovations that’ll be necessary. I know I’d be able to adjust rents and/or pass on at least water and electric expenses down the road. 

My questions are: 

Does offering $375k to break even but cash in on equity make sense? It’s hard for me to think someone would consider an offer at this price but I’m not in their shoes. 
Would you offer higher, like $450k, and just eat the water and electric until the leases renew and you can adjust that out? 
Is this a deal that really just needs a large down payment to make sense? 

Any other thoughts are greatly appreciated!! 

- Austin

[Brian Adams]

@Austin Weber I just finished my DFW Duplex/Quadplex report if curious to see what folks are up to in the 2-4 family market up here!

I also did a quick underwriting on what you described and the building I assume you are talking about. As you say, it looks like pro forma rents are $1200/mo so you could push a little next year! 

The MLS rental listings for surrounding quadplexes all show the utilities as tenant responsibility, including water. That would make a major difference on the underwriting.

You didn't mention property management; are you going to manage it yourself? 

Assuming the repairs come of their current asking price and are ~$40,000, I did a quick underwriting and come up with a 5.7% levered IRR at a 10 year hold period and 6.5% interest rate.

But if the water are tenant paid, that jumps to a 10.8% levered IRR.

Either outcome is cash flow negative in Year 1, but that is not uncommon.

I think their price is probably pretty reasonable depending on the scope of repairs and deferred maintenance?