Would You Do This Multi-Family Deal?

Question

Hello, all. I am looking at my first deal and it is a multi family opportunity. I'd like your feedback on this deal. I am new to investing and have limited knowledge of construction and rehabs.

A key question I have is how much cash flow is ideal for a multi family? What cash on cash return makes sense.

I would like to house hack and start with a property that doesn't require a full overhaul. I am considering a multi-family. I assume I buy it at a 10% discount and invest $40K into the property to increase rents by $100 on 3 of the units and by $300 on the largest 2/2. The home has a 1/1 carriage house that I'd like to rent out on Air B&B to make more money on it. You thoughts are welcome.

Jason Monroe · Answer

I am confused I always thought vacancy and rehab for turn over as different buckets on a ledger. One is capital improvement and the other as vacancy. If your looking at a building with below market rents there is a liklyhood you have entrented tenants. They have been there for a while and it might need more than just some touch up paint. In order to get market rate rent you might need to some amount of improvement on a unit. Those improvements tend to have a useful life of 5 to 7 years. Thus you want to build that into your cost model.Also Jason Chen wants you to articulate your strategy. Are you looking at repositioning a property and 1031 out of it or use it to provide for your retirement.

Jason Monroe · Answer

I think it's been said on other posts, but perhaps should be said again if your average rent is below $1,000 and you're looking at raising the rent perhaps north of $100 that represents a 10% change or better. The tenants may not accept an increase of that magnitude. Your cost estimates should also include scenarios that has you needing to turn over some number of units because the tenants have left as you look to increase the value of the property.

Jason Chen · Answer

the 6/4 duplex deal is way better than this one

Steven L. · Answer

@Erania_Brackett - good for you in getting familiar with the numbers. I am at the same stage. In Illinois, I have found that homes converted to multi-family don't work unless you can buy at a huge discount. Additionally, on any like form factors, my concern is that the electrical and plumbing are/are not upgraded to support multi-family. Unless I am missing something, the proforma numbers provided (dubious), specifically the NOI, has something that is off: Income (3,225*12) - Expenses (2,310*12) approximates = NOI of $10,980 vs. the $27,595 provided. Also monthly cash flow * 12 / total cash needed = the provided Cash on Cash ROI of 20.45%. I don't think this is the correct way to look at the numbers. Monthy cash flow (and thus Cash on Cash ROI) needs to carry P&I. Something like this at 25% down.

Jason Chen · Answer

I could tell just by the general shape and structure of the house that this isn't going to be a cash flowing property. In fact, it's not even a good deal. In double fact, it's a terrible deal.This house for this price is a classic career-ending deal, even if you plan on living in it. I've seen similar types of homes in my city of Ocala, where these houses were built in the 1870s (literal Civil War era time). Some investor thinking he is smart buys one up for $300,000, puts $50,000 in renovations into it, and lists it for $475,000, only to have someone offer him $200,000.Just LOL @ paying $370,000 for something that literally generates you ZERO cash flow. Is this in Mobile, Alabama? Even worse of a deal now, as you can forget about price appreciation helping you out. If you value your future and your money, I would run away from this deal as fast as possible.......but for $75,000 I would buy it

Anthony Dooley · Answer

According to this, it doesn't cash flow. I look for at least 10% cash on cash return on my down payment, but different markets are better or worse. Pro forma projections are normally pie in the sky, so I don't even look at projections.

Erania Brackett · Answer

Thanks, all. I've let this one go. I'm now looking at a fixer upper (to put it mildly. I am looking at a property that is a short sale. I may need to put significant $$ into it to bring it to a level that I can rent it and have positive cash flow.I'll share my analysis on this one soon. I have a contractor coming today. I hope to find out if this property can be converted from a 2 plex to a 4 plex. If I can get it for 50-70K and invest 100 - 150K, with a 4 unit, this one could be worth it. Lots to do.Thanks for all of the super helpful advice.

Erania Brackett · Answer

Jason, I agree. Many of those tenants have been there for at least 4 years. I walked the units and they will need some work. My plans are to find a property that I can hold onto to find retirement, either by selling it later or using rental income as retirement supplementation. Yes, for a short time, I'd like to landlord provided the cash flow is good and I have good equity. Does this help?

Erania Brackett · Answer

Jason, thank you. I will have to build in a higher vacancy rates for units that have existing tenants.

Erania Brackett · Answer

@StevenL. Thank you. Your analysis is yielding very different results. I agree my numbers are off. I'll double check. Thanks for running these. I'll update the calculator and post. I did come across a 6/4 duplex that is a short sale at 109. I'm thinking of converting to 4 units and maxing the property potential. It needs a ton of work however and an overhaul to create the 4 units.