2 four plexes and what I should consider before making an offer

[Nick C.]

I have been listening to bigger pockets while at work for the past three days and I'm all fired up and ready to go. I just want to make sure and throw this out there to get some feedback before I sink and really mess up. Listed on the MLS is a package deal, two four plexes next to each other for $199,000 (been on the MLS now 2 days). I looked and these were bought by the current management company for $195,000 in 2002. These each contain three studio apartments and one 1 bedroom apartment. I believe it will meet or be close to the 2% rule in a B class area as I can see the studio apartments generating $400-450 and the one bedrooms around $550 each. Is this something I should consider and what other factors should I dig into deeper?

[Roy N.]

@Nick C.

You need to collect far more information before you would know whether you have a deal worth pursuing:

• who are the clientele;
• how does the rent role compare with the local neighbourhood;
• what is the economic vacancy (physical vacancy + turnover + uncollected rent + evictions);
• what are the operating costs;
• what is the physical state of the assets (roofs, HVAC, envelope, appliances, parking, etc) and how much near term re-investment is required or likely;
• what is your target rate of return.

You want to obtain real numbers (not rose-coloured prospectus projections) for the past 2-3 years and use them to carry out your own discounted cash flow analysis of the property.

Also keep in mind that properties freshly on MLS - particularly during the hopefulness of spring - are rarely priced appropriately to be a deal. Additionally, what the present owner paid for the property fifteen years ago has little bearing on its present value ... though it may influence the owner's expectations.