is this a good deal?

Question

Hello BP,

I am interested in a 7 unit complex currently on market for 160,000.

7 unit complex, six 1/1 and one 4/2. currently, four 1/1 are occupied at 400 each and one 1/1 occupied at 200 for custodian on site

current rent = 1800 (with 3000 total potential;400 from 1/1 and 800 from 4/2)

PM = 350 (i think it's high)

Taxes = monthly 110

utilities = 120

insurance = 120

current NOI = 1100 (~2100 fully occupied?)

25% down 40k and finance 120,000 (~650)

1100-360 (10% vacancy and maintenance each) = 740

with 2 units vacant, still 90 dollar positive cash flow

seller states that the two vacant rooms are rent ready.

Is this a good deal?

Shaun Reilly · Answer

Hi @Ethan S.

I agree with your thought that the PM seems high.

That is almost 20% of collected rents on top of a half priced unit to live in!!!!

I won't dig into the expenses as it looks like you have them at about 60% of the current rent so that seems reasonable.

Have you explored financing as you said you figure on a $650 payment.  Looking at that you are looking for a ~5% rate with a 30 year amortization.  I don't do commercial loans but that SEEMS pretty ambitious.  Also note that even if you get that kind of amortization you won't actually have a 30yr loan, you will have a balloon at some point in like 5-15yrs (Much more likely in 10 or less).

If this is just conjecture you should nail down what you can get.  BIG difference in the cash flow picture.  Just by getting a 5.5% loan with a 25 am schedule that $90 is now break even.

A general concern I would have is the six 1/1 and a 4/2.  TOTALLY different clientele there.  The 1/1 you would generally expect single people and maybe a couple with lower income.  In a 4/2 you are renting to a family.  If the family has younger kids that will NOT be a desirable place to them.  Nobody is going to be excited to live in a place like that with their 7 and 10 year old daughters with 6 creepy single guys in the other apartments.

William T. · Answer

@Ethan S. Hello Ethan, this should have been posted in Real Estate Deal Analysis but that's ok....  I am glad to see you are working on your first purchase.  In your spare moment, please review the beginners guide here on BP.

https://www.biggerpockets.com/real-estate-investing

OK...using the 50% rule, I would not make this purchase.  I am calculating your mortgage payment to be approximately $1200 a month and $1300 with a negative cash flow.  This is based on your numbers and the spreadsheet I use for wholesaling.  Please review the thread below for explanation of the 50% rule.

https://www.biggerpockets.com/forums/52/topics/18371-help-me-understand-this-deal-and-5-2-rule

Bill Gulley Can you please advise on this thread with your great wisdom?

Will Barnard · Answer

Sue thing.

You also have to make sure your target property matches the criteria of your investment goals. In other words, are you looking for cash flow only and can care or less about future appreciation all the while retaining high managerial responsibilities, or do you want something else for your goals?

Keep in mind that having units with this low rent likely means it is a C- to D class property and all the things I mentioned herein would apply to that type of building.

Or, would you rather entertain having perhaps less doors, more cost, but higher rents acquiring a C+ to B- property with better quality tenants, better quality building, in a better area with opportunity for potential appreciation, but combined with real cash flow. The real cash flow is up to you. You must buy right and manage right. There are no other secrets to it.

Ethan S. · Answer

@Will Barnard Thank you for the analysis. spliting 4/2 definitely souds like a better deal in both finding tenants and cash flow. I will definitely look closely into deferred maintenances and see how much that will add up also. Thank you again!

Will Barnard · Answer

A couple scare factors.

1. $400 per door rent rates, even for a 1/1 typically means a not so good to bad neighborhood and at that level, you need to be above the 2% rule to even look at it. This would likely have low appreciation and high management responsibilities.

2. PM is way too high, but that is good, you fire Nd lower costs. This item is actually not a scare item for you.

3. Deferred maintenance - always an issue with this type of purchase.

4. Unit mix is poor. To rectify, can you possibly convert the 4/2 into two 2-1's giving you 8 total units / 6 1+1 and 2 2+1 ? This would likely get you $600 per two bedrooms for a total gross potential of $3800 monthly.

Shaun Reilly · Answer

Glad we could help!

Good plan to get more education.  BP has a lot of resources so use them!

Keep asking more questions on the forums and you get lots of great real world knowledge very quick.

Ethan S. · Answer

@William T.  Thank you for your response. It does seem like the margin is very slim if any.

@Shaun Reilly The property is located in downtown Las Vegas. The property definitely doesn't look like the Bellagio so I am guessing there's also big fixes once purchased. I definitely underestimated the mortgage payments for commercial loans. As you mentioned, now I can see why 4/2 would be vacant as neighborhood is not too nice either in addition to the creepy men nearby.

Time to listen to more podcasts and educate myself more!

Shaun Reilly · Answer

Oh I also meant to ask where the place is located?

I'll go out on a limb and guess not in Anaheim.  :)

is this a good deal?

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