Is the price right? (first fourplex offer)

[Jordan Hamilton]

I am trying to get into my first deal which happens to be a fourplex in Miami Florida (neighborhood of Allapattah). My strategy is to use FHA financing to allow me to put down 3.5% to basically get me in the game, live in one unit for 12 months, and get out of there to rent out the fourth unit. I am looking on the MLS for most of my deals that works with my price range. I have a total of 25k for a downpayment.

Currently FHA allows a max price of 550k for any residential property with 1-4 units (I am sure you already know this). The property I just made an offer on has an asking price of $550,000. All the units are currently rented out at $1,100 per month (month to month leases). All expenses are reported at $13,000 (25%) by owner. Vacancies were reported at 0%. My mortgage payment is 30 years at 5% ($34,190 annually - principle plus interest). With those numbers I would cashflow $2,969 per year with current rents from year 1.

According to most strategies out there for investors, it is best to bump up expenses to 50% and vacancies to 10% so if anything happens like an economic downturn or something breaks I wont lose my shirt.

So for my analysis I bumped up the expenses (to 50%) and vacancies (to 10%). With that said at that price of 550k I would negatively cash flow annually $-10,670 ($47,520 gross rent - $24,000 expenses - $34,190 mortgage). Its also worth mentioning that rents are nearly at the top of market at $1,100 for comps in the area. So I bumped the asking price down to the cap rate of that area 7.8% and got a price of $301,538 and made an offer at $300,000.

That puts my new price of $300,000, expenses ate 50% ($24,000), vacancies ($5,280), and mortgage ($18,649). I would cash flow $4,871 annually or $405 per month. Thats not a huge number but its something I could definitely work with assuming something doesn't go wrong like bad roof or plumbing (which owners says is in good condition). Its also worth mentioning the owner bought this property last year from previous owner for $490,000. After my analysis I can see why they might be wanting to sell so soon.

So my question is, did I analyze this correctly? What are your thoughts on my asking price and the way I got my numbers? Am I on the right track here?

Thank you!

Jordan

[Andrew Davis]

Hey @Jordan Hamilton,

Congrats on getting in the game! Your analysis is correct, as an investment that property is severely overpriced, however, in this market, I bet someone will pay 550 or close to it.

In your mortgage payment calculation, did you factor in mortgage insurance? That will increase your monthly payment at least $100 (all depends on your credit score).

Other than that, you analyzed it well, $300k would be a good price to pay for that property - depending on the area and current condition of course.

Keep looking and analyzing, and you'll find a good deal!