Finally got my first deal under contract, but start self doubting

[Grace Wang]

I saw a expired listing for a 4-plex on MLS, and the asking price was 285,000. The first thing jumps out at me was this is the first 4-plex in the area that is under 300,000, The quoted rental income was 780/unit/month ($ 3120). With 50% rule, a potential cash flow would be roughly $560. It meets my criteria such that we will end up $100-200/unit/month cash flow.

I called up the listing broker and asked why it didn't sell? He said the last offer was a full price offer, but requesting the seller to do new exterior/interior paint and new carpet. The seller refused and the deal fall through. When I tried to offer a low ball price of 220,000, the broker instantly said "save yourself some time, it won't work" and hang up. 

I went to the pierce county assessor (the property is located in Tacoma) and found out the owner's name and address. He actually lives in one of the unit. Luckily there is his phone number on MLS. I called him directly and expressed my interests knowing more of the property. Long story short, after two weeks of back and fort. We agreed on price of 268,000 (17,000 off the original price). I am thinking it can be deal.

There are also a couple upside potential beside the cash flow:

1. The current rent is below market rate (the building next door, exact style, same year, but more updated), is asking $890/month

2. The seller is paying for water/sewage/garbage, the building next door is charging tenant extra $75 /month for utility 

3. The building condition is good, no immediate repair /updates required if I am planning to rent at either current rate or up to $800/month. If I do some updates such as new carpet, new paint, there is room for rent increase. 

But then I ran the number again using the BP calculator:  counting 8% vacancy rate, 10% for each maintenance and Cap expenditure,  10% management fee, and $10,000 for new paint/carpet it will leave only $168/month with the current setting. 

If I start charging tenant $75/month for utility and increase rent from 780 to 800/month, I will be getting $500 cash flow, but the cash on cash return is still only 7.77%.  I could potentially do more updates and increase rent to match the building next door, but it will take time, and I might lose tenant. 

 I am kinda doubting if this is a deal or not now? 

Any input would be very appreciate! 

By the way, address: 7611 9th AV Ct E, Tacoma, WA 98404

Thank you!

[Grace Wang]

Hi Narayana, 

Yes, we closed on the property. It is hard to say how well it will turns out right now. It is a rough neighborhood, a lot of section 8, management intensive. The previous landlord didn't take care of property at all, we end up have to replace the roof, redo the upper siding, and rebuild a balcony, as well as new exterior paint, and clear out a lot of junk. It has been 4 months, and we just finished renovating the exterior. We got lucky that the inherent tenants are paying rent on time, so that we have instant cash flow coming in. The renovation process will be slow though, since it has to wait till there is turn over. 

With the exterior renovation, we were able to increase the rent close to market rent. Since the other property around it didn't bill back the utility, we didn't do that neither, just charge a flat fee for utilities. 

Anyway, with $32,000 renovation so far, we probably looking to spend a total  $60,000 eventually (with interior renovation for the rest of the units and replacing all the windows). 

Assuming 8% vacancy rate, since we did a lot of big ticket items upfront, we will budget 5% for cap ex and maintenance, and 10% management fee. It would result in roughly $1000 cash flow /month, and ~10% cash on cash, and 7% cap rate. 

However, we don't have concrete numbers for another year. I will let you know how it goes. 

It is definitely a difficult project, but I did learn a lot. Looking back, I should have bought the property a lot less, maybe for $190,000 for it to be a BRRRR. However, I still don't regret buying the property, since there are a lot of value lessons I would not learn otherwise.