Too Good to be True? - A Quick Property Analysis

[Brett Alphin]

Like many investors, I wake up every morning with several emails about potential properties to buy.  I then scour through these listings as a morning ritual. This morning I came across an interesting fourplex and did a quick analysis I'd like to share with you. 

Here's a screenshot of the actual MLS Listing:

What do we see here? Well, its a fourplex. Listed for sale at $230k. It has (4) 2 Bedroom 1 bath apartments that each rent for $950 according to the listing. The math here is important. What's the total income from this property? $950 times 4 equals $3,800. Sounds like an awesome operating income, right? So, I pull up my bankrate app to do a further calculation. What would it cost to finance the deal with a conventional mortgage? I also use the bigger pockets rental property calculator, but that's if my "quick analysis" looks good. 

So, here's the bankrate numbers:

Ok, principle, interest, property taxes, and insurance will ballpark around $1,100 a month. Wow! Adding a property manager at the going rate on average of 10% will raise the expenses another $380 a month. So, you're at $1,480 a month less vacancy, cap ex, etc. Again, this is a quick analysis. If it makes sense, you can jump on the bigger pockets rental property calculator for a more in-depth analysis. 

This is the point where I get excited! You have $3,800 in income, minus expenses of $1,480 a month. That leaves you a cash flow of $2,320 a month!!!!  Those numbers are amazing. Let's make an offer! 

Hold the phone! Stop the presses! Those numbers are way too good to be true. What's the catch here?

The next step in my process is to check the rental rates on rentometer.com to see if the rent listed on the MLS is accurate.

So, here's what rentometer says:

I find rentometer to be fairly accurate plus or minus a hundred bucks or so. Looking at the average rent for the area for two bedroom apartments, the average is $700 a month. There's a big difference between $950 x 4 units and $700 x 4 units. $1000 a month less to be exact. So, that takes our cash flow from $2,320 to $1,320 a month. 

A quick search on Zillow and I find another clue to actual rent amounts. 

$745 a month? But the MLS listing says $950! Always thoroughly check the numbers. Fudging the numbers to get a property sold is not a crime. Not running your numbers correctly should be. So, lets just say $745 a month is what people will actually pay in the area. 

$745 x 4 = $2,980 a month. Minus expenses and property management of $1,480 as calculated above you get a solid $1,500 a month in cash flow. 

That's still a great amount of cash flow, so, what's the neighborhood like?

This fourplex sits in the neighborhood of Barton Heights. Barton Heights is located just north of downtown Richmond. Schools in the area are not very good. Lowering the property's value and the quality of tenants you can attract. Good tenants tend to live in areas where the schools are good whether they have children or not. 

I then look on CrimeReports.com to see what kind of crime is in the area. It's a high crime area, and there's a registered sex offender, literally, living right next door. Again, this hurts the property value, the quality of tenant you can attract, and the amount of rent you can charge.

Like the great @BrandonTurner said in  "The Book on Rental Property Investing": You can change a lot about a property, but you can't change the neighborhood. 

Conclusion: 

I don't think you can actually get $745 a month for a 2 bedroom apartment in this neighborhood. I think you'd be lucky to get $500 a month. At that rate you'd have $2,000 a month in income. Minus the $1,480 as we calculate above. You're left with only $520 a month. And that calculation doesn't include cap ex, vacancy, etc. Looks a lot different now doesn't it? Even if $520 a month cash flow on a $230,000 investment sounds good to you, that still doesn't account for the hassles of investing in a class D neighborhood either. 

Lastly, if it's a good, cash flowing property, why is it vacant? Why are they selling it?  

I hope this quick analysis helps at least one person, and maybe even stops someone from buying a bad deal. Heck, this might still be a good deal for some people. Everyone has their own criteria. But, most of the time, when the numbers seem too good to be true, they are. Proper analysis of deals is crucial to being a successful real estate investor. 

[Jon Deavers]

Hey @Brett Alphin

Great analysis on the property. I saw this one on the hotsheet and sneezed a little at their estimated rents too.

That area is actually pretty supportive of closer to $650/$750 for 2 bedroom units in decent shape. The issue on the listing is that the $950 per unit is not for any existing leases, it's the owner's (presumably) opinion of the rent there. 

One thing I'll add is to make sure to compare apples to apples when it comes to rental demand. While it may be true that schools aren't very good in that district, when compared with a GoodSchools.com rating in the rest of Richmond city (surrounding counties are a different story) there isn't much of a statistical difference in quality anywhere inside the city limits which levels the playing field a bit.

So that brings it down to whether a potential investor is comfortable landlording in Barton Heights. BH is an interesting neighborhood. When originally developed in the 1910's it was a luxury bedroom community for the downtown financial district and over the last 100 years has fallen into disrepair. BH and Highland Park are separated by the main commercial corridor of Brooklyn Park Blvd which is seeing an accelerated rate of commercial rehabilitation. BH is lagging behind the HP  neighborhood in residential renovation but the change is going to bleed over in due time. 

The nice thing about Barton and Highland Park is that there has always been a high demand for quality units there. I've seen tenants in those neighborhoods set up house and stay for years and treat the property very well, making it a home. Yet, the spotcrime statistics don't lie. So, in the end, I think you can buy good deals in this neighborhood and attract fantastic tenants and the key to that combo all comes down to tenant screening. Diligence and consistency in that process is the secret to success to investing in BH.

For a little more perspective on the level of revitalization headed to Barton Heights, check out this article. You can see the bird's eye view of this property on Google Earth by looking for the intersection of Lamb Ave and Roberts St. It's pretty impressive!

http://www.styleweekly.com/richmond/rotting-mansio...