First 4 Unit Looking for Feedback

[Dayton Bourassa]

Hey community,

It’s taken longer than expected but I’ve been moving forward with a potential off market deal with a 4 unit (garage could be rented as alternative space). 

I created my own spreadsheet to compare and identify the performance of the property. Let me know what your thoughts are on the spreadsheet and numbers at hand.

This is in the middle of Central Maine in a high demand location. I’d like to build a team and have a property management company involved that way I can utilize my time and efforts on other things besides maintenance. Looking to hear some feedback as I dive into this more seriously.

[Nathan Gesner]

Quote from @Dayton Bourassa:

First, the spreadsheet looks nice.

Second, I don't see anything planned for ongoing maintenance or capex. Unless this is fully renovated, you can expect an average of 10% for maintenance and you should set aside another 10% for capex. If you do that, you'll have around $400 profit per month and your numbers won't look good.

I also noticed your rent rates appear to be based on projected increases, not current rents. This property is probably a loser on day one, especially if you set aside money for maintenance and capex. It may take you a year or so to get the rents to market rates, and even then a 10% return may be more accurate.

[Jonathan Greene]

A pretty spreadsheet doesn't matter because none of us know how accurate your numbers are, your level of experience, how many times you have seen it in person, and what other property anomalies exist. Is this your first property?

When someone says "high demand area" that is usually something someone who doesn't live there says based on something someone told them. Do you live there and know the area?

Also, if it's your first property and it's only four units, why are hiring away your cash flow right away? You won't learn anything getting property management in place right away. You will still need to manage the manager to have any shot and then you will realize you could have done it yourself.

[Drew Sygit]

"High demand area" and "off market deal" are red flags for newbies!

How do you know these claims are true and someone just isn't trying to sell you their problem?

[Dan Weber]

What town in Central ME? I'm wondering if the rent projections are accurate. If they could be bumped up a little then you could have a little more breathing room. The annual insurance cost of $300 is way too low, I'd add another 0 to that. I would price out the insurance either before going under contract or during due diligence. As others mentioned, I'd also include some % for ongoing capex and maintenance.

[Gregory Schwartz]

I'm with @Nathan Gesner on this one. I still underestimate how much it will cost to maintain my properties. I'm about to have to replace siding, $30k+ on one fourplex. Water heaters are always being replaced ($1500), disposals fail ($200), and appliances ($500-1500).

Use water heaters as an example. They last about 10 years. So on average, you'll replace one in your fourplex every 2.5 years or every 30 months. That's $50 every month set aside just for stinking water heaters. 

Also, I might have missed it but I don't see vacancy taken into account. 

I still think you have a good property! Just make sure your accounting for all the variables when you run your numbers. 

Good luck!

[Dayton Bourassa]

Thank you for the honest input and feedback! This post was not intended to show if the spreadsheet looks nice or not. It was more intended to run it through the community to see what other ideas or info could assist in helping search for my first property. 

I do understand Capex would have been good to put in there, and the 10% general rule of thumb will be something I will keep in mind! I ultimately finished crunching the numbers between this spreadsheet, the sellers 1040 forms, some minor things needed within the property for expenses, and purchase price. With the expenses where they were at, and the purchase price being higher than I would want it, ultimatly I had to walk away. I still was able to take the things that I ran into for great knowledge for the next one. The property was off market because it was shown exclusively to me before hitting the market. And the location was not claimed by the seller to be in a high demand location, but in one within my area.

It is not great practice to utilize property management as some have stated initially with your first investments. This can hinder learning, and also cut into very useful profits for growing and expanding. Unfortunately I work offshore and I leave for weeks at a time, so over the course of one year, I am gone for at least half of it. This is where I can not tend to maintenance, or emergency calls from tenants. My strategy has to incorporate someone else managing those things since I am unable to. Otherwise, I would absolutely be managing myself to reduce management expenses. I could possibly think of a hybrid where the maintenance and emergency calls are handled by someone else and the remaining things a management company would normally do I could do myself. This is my first one, and the approach from offshore I am learning the ways. Interested in hearing other peoples knowledge and approach. In the meantime I will be continuing to look for the first one to get started!

[Drew Sygit]

@Dayton Bourassa one issue you haven't addressed is whether these properties, and the corresponding tenants, are Class A, B, C or D.

Why this matters?

Read copy & paste info below:

If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

So, when investing in areas they don’t really know, investors should research the different property Class submarkets.

Here’s our OPINION for the Metro Detroit market (use as a template for your target area!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases.:

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+, zero evictions in last 7 years.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680, some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620, many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

[Travis Biziorek]

Beyond the capex/repairs/vacancy line item not existing I saw a couple other red flags in your numbers you may consider correcting in the future.

Insurance seems extremely low at $25/month. I have a portfolio in Detroit (similar climate) and pay $75/mo for a SFH and ~$125/mo for my duplexes. That's the cheapest I can get with replacement cost and a $5,000 deductible, no loss of rent coverage, etc.

On a quad, I'd expect you're paying at least $250/mo or more.

Lawn and snow removal also seems quite low. You're budgeting $90/mo. While I don't do snow removal at my properties, I do have the lawns mowed on a bi-weekly basis at $40/cut.

Maybe you've priced this out, and maybe the lawn is small and this falls in line. But I'd expect your snow removal runs a fair bit higher.

[Dayton Bourassa]

Quote from @Travis Biziorek:

Beyond the capex/repairs/vacancy line item not existing I saw a couple other red flags in your numbers you may consider correcting in the future.

Insurance seems extremely low at $25/month. I have a portfolio in Detroit (similar climate) and pay $75/mo for a SFH and ~$125/mo for my duplexes. That's the cheapest I can get with replacement cost and a $5,000 deductible, no loss of rent coverage, etc.

On a quad, I'd expect you're paying at least $250/mo or more.

Lawn and snow removal also seems quite low. You're budgeting $90/mo. While I don't do snow removal at my properties, I do have the lawns mowed on a bi-weekly basis at $40/cut.

Maybe you've priced this out, and maybe the lawn is small and this falls in line. But I'd expect your snow removal runs a fair bit higher.

 Yes, the insurance expense is something I am learning now as this is part of the "learning process" for me. As for snow removal and mowing, our transition months where the grass is dormant, and we aren't getting any snow is fairly substantial (spring and fall). It was a small yard. I did walk away from this exact property but it was good practice I think for me and I will be looking into some more in the coming weeks.

My next question is property management for something that strictly does emergency calls where I can not be present? With my line of work not being around all the time I was curious of this since I would be able to manage lease agreements, advertising if needed, long term projects, rent collecting, and reporting. Wondering if anyone has utilized an "emergency call/maintenance" management team?

[Josh Young]

@Dayton Bourassa

I would also be very cautious of thinking you can increase the current rent by 35%, I know you passed on this deal, but when analyzing deals it's important to be conservative when estimating rental income, if you are not conservative with your estimates then you need to account for more vacancy, which is essentially doing the same thing as being conservative. To be honest with you the numbers on this deal are very average and this is why you see a lot of investors complaining that it's hard to find cash flow and most properties that do cash flow require more money down or they are in a bad area that will not appreciate and/or will have a lot more problems.

Why don't you invest out of state somewhere that has lower property taxes, lower insurance costs, lower operating expenses, and more population growth. You can buy an almost new or brand new single family home here in Arizona for $250-300k, combine taxes and insurance of under $2k per year, rent for $1500-1800, will break even on cash flow with 25-30% down because there is no maintenance or cap ex since it's new (you will have these eventually but rents will increase by the time that happens). This is much less risk for your first deal and you will have steady rent growth and price appreciation.

[Alecia Loveless]

@Dayton Bourassa I see you have walked away from the initial property. Personally I love the New England market and think the future for growth and appreciation is huge.

Snow removal can be very expensive. I’ve got one property where my bill was about $3500 for the season. I’ve been trying to find a different plow guy for two years but it’s a small market and no one wants to take the account from my guy. It’s a small driveway too but he insists on salting like 3X per weather event and the price has added up.

Insurance costs have risen meteorically and will continue to rise in the future. I have a 3 plex where the rate was just $2900 and a 4 plex that’s about $3500.

You can find good deals still but just because something’s “off market” doesn’t necessarily make it a good one as you have found out.

Keep looking, you’ll find a good one soon enough.

[Dayton Bourassa]

Quote from @Josh Young:

@Dayton Bourassa

I would also be very cautious of thinking you can increase the current rent by 35%, I know you passed on this deal, but when analyzing deals it's important to be conservative when estimating rental income, if you are not conservative with your estimates then you need to account for more vacancy, which is essentially doing the same thing as being conservative. To be honest with you the numbers on this deal are very average and this is why you see a lot of investors complaining that it's hard to find cash flow and most properties that do cash flow require more money down or they are in a bad area that will not appreciate and/or will have a lot more problems.

Why don't you invest out of state somewhere that has lower property taxes, lower insurance costs, lower operating expenses, and more population growth. You can buy an almost new or brand new single family home here in Arizona for $250-300k, combine taxes and insurance of under $2k per year, rent for $1500-1800, will break even on cash flow with 25-30% down because there is no maintenance or cap ex since it's new (you will have these eventually but rents will increase by the time that happens). This is much less risk for your first deal and you will have steady rent growth and price appreciation.

I mean with me being newer into the market and industry, I wanted to get my feet on the ground with local deals and local experience with a surrounding area and market I’m familiar with. If everything you say is actually true, I wouldn’t be opposed to it. I see you’re in AZ. Feel free to PM me and this could possibly be something I could move forward with in the future possibly.

[Sarita Scherpereel]

I don't typically comment on the numbers on properties that are outside of my Market of Chicago. I think for the best insight talk to local experts. Like @danweber who mentioned the insurance being too lo and the accuracy of the rental projections. BUT I love the eye-catching spreadsheet. Did you create it?