$400,000 4plex in Escrow! Good Deal or Bad Deal?

Question

Hi,

This is my first post on Bigger Pockets and I'm excited to be part of the Bigger Pockets community.

I'm a new investor and have zero hands-on experience in multifamily properties. I've read a few real estate books and watched countless BP podcasts. I'm currently in escrow on my first 4plex multifamily deal; it's closing in less than 15 days! I'm excited and nervous at the same time!

The property is built in 1980 and is located in Bakersfield, California. It is in a C+ neighborhood and is at 100% occupancy. It is being sold at a 8% cap rate. Each unit is rented for $900 (market rent for the area is $950-$975). The property is in need of a new roof soon and minor repairs (inspection completed/roof should last a few more years). There is some termite damage to one wall in one unit (repair cost $600). I would appreciate some feedback on the deal and any ROI calculations after factoring in costs for property management, maintenance, gardening, utilities, repairs, etc.

Here are the numbers. What do you guys think? Thanks in advance!

Built: 1980

Type: 4 Unit Multifamily (3 bedroom/1 bathroom)

Purchase Price: $400,000

Market Value (appraised): $400,000

Down Payment (25%): $100,000

Loan Amount: $300,000

Interest Rate: 30 Year Fixed 5.0% (5.074% APR)

Principle & Interest Payment: $1,610.46

Property Taxes / Insurance : $645

Estimated Closing Costs (1 time): $10,307

Lender Credit: ($1,375)

Total Cash Needed to Close: $108,932

Total Monthly Payment: $2,231

Monthly Rent: $3600

Sanjeev Advani · Answer

@Jimmy S.

I completely agree with your breakdown for Bali S..

However, your assumptions as far as expenses seem quite high for this area, but like you said, based on the vendors that are used, the property can provide some good returns on cash.

Sanjeev Advani · Answer

Hi Bali

Congrats on getting into investing!

Based on your previous information given, I would say that there are a few things that you can watch for.  First, when buying in the C and lower neighborhoods, make sure that when finding new tenants, those tenants are very well checked to make sure they will be good tenants.  In the more marginal neighborhoods there can be difficulty getting rent paid, and even worse if some tenant you put into your building destroys it then you will be stuck with the bill on the back end.

The numbers will always seem better in these marginal neighborhoods, but these hidden costs (i.e. move out repairs, etc.) can add up a lot and eat into your final profits.

Next, make sure to check the market rents against the actual market.  I have had clients that have gotten into properties and were told they could rent for 'X' amount of dollars and soon they find out that the market rents are actually lower, in some cases even by $100/month

Having to replace the roof is a large expense that will also eat into your profits, however, the numbers will look good for the first few years.  Make sure to look into how much the roof will cost.  We have contractors that we work with that can help you get this done

As far as ROI calculations, those numbers will vary against the type and size of property, but can be pretty simple to determine.

I think in the long term the deal has some inefficiencies that could be figured out to grow your ROI, but this could be a good deal.  I haven't formally run any numbers yet however.

If you want to discuss further please feel free to PM me

I hope this helps, and I hope that you enjoy your new journey into investing!

Jimmy S. · Answer

Hello Bali,

First congratulations on getting into REI and starting out in multifamily!

I was a property manager a few years back in C neighborhoods in the Midwest with a great value add components to them when looking at a purchase.

As far as your numbers are concerned, here are several things you should take into account with the run up to the closing:

• Deferred Maintenance: are these all sub-metered (water/electric/gas)? Other than the roof, what is the estimated life of the other major capital expenditures (CAPEX) you'll need to complete [HVAC, water heaters/boilers, appliances etc]?
• Ongoing Maintenance: Some property management companies will bill out for their maintenance techs when they go out to your property when a tenant calls. You should be able to set how much they can spend on given repairs (ie. Up to $50 to repair a leaky shower head, don't call you, the owner, but if exceeds $50, call me for approval). Go back to your inspector and talk through what they saw and see what needs to be immediately addressed to lessen the chance of tenant complaints from the beginning of your building takeover. 
• Reserves: For the CAPEX items mentioned, I would say you should be taking out at least 5 to 10% of your monthly payments to set aside when these items will go out on you. 
• Property Management/Leasing: With the amount of units, I wouldn't be surprised you're getting charged from 8-10+% per month with some type of leasing fee when a unit goes vacant. Also what is included (making payments to the bank, negotiating rates when vendors, etc)
• Repairs: When taking over a property, your inspection should have uncovered alot for you to estimate what type of unit turns / renovations / repairs you'll need to do. I'm not familiar with the California market but I would say for a 700-800 sq ft unit, estimate around $1500/2000 per unit for a very light rehab (paint/flooring/appliances) to $10,000+ for a very heavy rehab (drywall/fire/water damage/counter-tops etc). 
• ROI: With the total cash invested for the closing at $108,932 and your monthly rent at $3600, lets break it down adding some of the costs we mentioned.

• (- 10%) Property Management - $360
•  (- 10%) Maintenance - $360
•  (- 5%)  CAPEX - $180
• (- TBD) Utilities (who's paying what when it comes to Gas/Electric/Water)?

Add these above expenses with your PITI and minus them from your monthly cash flow you get:  $469 x 12 Months =  $5628 / Cash Invested = 5.17%. These are assumptions and could change with the companies and vendors you would be using.

Also, not knowing the area for the potential upside in rent increases and property appreciation, you could get in to reposition it and then resell.

Bali, congratulations and I wish the best to you. If you would like to reach out to me, I would be more than glad to discuss this deal in more detail!

Best,

Jimmy

Santosh P. · Answer

@Jimmy S. those are some great pointers! It's certainly useful to pay close attention to deferred maintenance!!

Bali S.

One more to add is vacaceny factor! Typically to consider 5-7.5% depending on local market. It's unfair to assume that all 4 units will be 100% occupied for 12 months while calculating annual ROI!

Congratulations for taking action after reading and analyzing!! Good luck for your REI adventure!!

Jeet Sangha · Answer

i just used the rental calculator with the number you gave us.

check it out

https://www.biggerpockets.com/calculators/shared/4...

Account Closed · Answer

@Devin Deswert. I don't drink, but thanks for the advice anyways. I have some time till retirement and I have time for trial and error but I'm averaging a 24% ROI on my last two deals for the past 4 years without calculating appreciation. I have positive cash flow coming in monthly that I'm re investing into stocks or real estate. If I had factored in all the same numbers above and advice for my last two deals, I'd be where most people are today; either not started or still trying to find "the perfect deal."

This deal is bringing in positive cash flow regardless of the expenses ~5% to ~13% returns on my investment. So I can either leave 100K in a bank earning 0.0025% interest and keeping looking for the "perfect deal" or I can buy this property and invest it into a what I call a "real estate savings account" that will provide me with an annual return of 5%-13%, pay off it's own mortgage, provide me with an asset, income I can reinvest, and liquidate if needed within ~6 months.

If I hold this property for only 10 years with the same expense ratios and not factoring in appreciation or rent increases; I can an expect a net cash flow of ~$56,000 to ~$130,000 and will have $57,000 of the principle paid off by 2027. I will be 37 years old with an asset worth $400-500K and a loan amount of $243K. I could then sell; get my initial invest out of my "real estate savings account," profit $107,000 (if sold for only $450,000), and enjoy the cash flow of $56-130K invested over the 10 years!

Account Closed · Answer

@Jimmy S. Thank you. I truly appreciate the reply and informative advice! It's great seeing different cost perspectives on the deal so I can play with different numbers. My calculations were slightly different and I would also agree with @Sanjeev Advani about some of the costs being on the higher end.

Looking at the current lease agreements the tenants are long term tenants and the area is in a Landlord friendly area. The units are in need of no "major" repairs except roofing ($13,000) i'm assuming within 5 years.

Update: My lender is asking for a 3 year roof cert. I'm currently waiting on a roof certification before proceeding with the deal. If the roof doesn't get certified then I will ask to renegotiate the deal.

My proforma calculations for 2017

Monthly Payment: $2231

Rent Income: $3800

• Property Management (negotiated): 5% -($190)
• Vacancy: 3% ~($114)
• Gardening (negotiated): -($75)
• CAPEX:5% ~($190)

Monthly Cash Flow: ~$1000 (depending on vacancy/capex)

Annual Cash flow: ~$12,000 (depending on vacancy/capex)

NOI: ~11%

Jimmy S. · Answer

@Santosh P. thanks for the comment! As for vacancy, absolutely needs to be in there! I know something looked a little light on the analysis.

@Sanjeev Advani thank you and I agree with your statement. Definitely some room in there to increase those returns with who you use at your property manager and other vendors.

Josh Justiniano · Answer

100k a unit in bakersfield is pretty high. I'd shoot more for around the 50 to 75k range, especially for B to C areas.

Judging by the appraised value you're probably in a better area than a C.

I'd shoot for more around 1.1% to 1.3% rent to purchase price ratio in Bakersfield. To find those you have to go off market.

Say, rent is 950 and you're getting the units at 85k or something. I'd feel much better. And judging by the fact that it appraised at the value of the contract makes me nervous. No room for error. I'd proceed with caution. See if there are any value adds like storage space you can put up, or maybe something like in unit laundry. Something like that to get that NOI up so you have more of a margin.

Best of luck.

$400,000 4plex in Escrow! Good Deal or Bad Deal?

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