4 Family Calculation- Should hot areas get special treatment

[Nick Romano]

Hey Guys!  I Love these forums so figured I'd throw a unique calculation I'm working on for those of you who like the numbers:

The property is a 4 family in a hot suburb of Boston in the great state of Massachusetts.

By the numbers:

Purchase price: $650,000 (negotiating for less)

Down Payment: 20%: $130,000

Interest rate: 4.5%

Debt Service: $2,635

 Annual Rent:  $67,200  ($1400/unit expected to rise to $1600-$1700 in next 2 years)

 Water: $2200 (for all 4 units/year)

Taxes: $9,000 (seems high but that's what was in pro forma)

Insurance: $4,500

Other Annual Expenses:

Electric: $360 (common only)

Gas: $300 (common only)

Vacancy Expense: $2,016 (3%) (May be high estimate....)

Lawn: $360

Snow: $600

Pest: $600

Trash: $480

CapEx & Maintenance: $9,408 (14% of rent) (May be high estimate....)

I'll self manage to start until the rents get to around $1600/ea then consider property manager.

Cash flow is about $500/month (before raising the rents to market --$76,800 annually) 

New roof, driveway, electrical throughout, and one unit complete renovated (about $70,000 of upgrades) recently put into the house.  

So as you can see this property is just squeaking by on the 1% rule and 50% rule. But because its in a hot area does that give it special treatment? Also, does it make sense having CapEx at 14% of rent roll on a 4 family with high rents...maybe its too high and that will bring much better cash flow? I did some calculations of all CapEx divided by the life expectancy and price of repair which came out to a monthly total CapEx of about $600

That's all I have for now!  

Of course, you thoughts are so appreciated and can;t wait to hear what the BP community has to say!!!

[Debra Grumbach]

I think you are trying to make the numbers "work" because you want it.

With $130K invested, using your numbers, you are cash flowing about $479/mo. That's more like a trickle given that investment/downpayment. Your ROI is less than 4.5% annually, if all your numbers work. Personally I would want a 10-12% ROI which means you need about $250/door/month.

You state you think the $9K is high for taxes but I would disagree with it being a suburb of Boston. I lived in MA 25 years and sold real estate there for 5. There is NO benefit for them to list the taxes higher than they actually are. Call the town clerk where this property is if you want to double check. Easy enough.

Your estimate of $600/yr for snow removal is TINY unless you are doing it yourself but if you get a busy snow year, you will end up doing snow removal for about $2/hr plus the cost of gas with a budget of $600. Last year may have cost $600 hiring out but ask what it cost them in 2014-15 winter.

If you have someone property manage this you will likely be negative fast. I always schedule in a PM fee. What happens to your "cash flow" if something changes and you have to pay a PM? In your case, you go zero or negative. Don't you deserve to get paid to manage your own property?

Depending on the condition of the property you may be able to reduce CapEx to 10%. Sounds like maybe they put a bunch of money into the property this past year to sell it? Maybe that means you have a longer expected time frame for the next major repair? But if that's not the case and they are just bandaging things and spending 14% - RUN cause it will bite the next owner in the butt.

Unless you know for CERTAIN that you can raise the rents ASAP, don't factor that in. MA is VERY tenant friendly. If the tenants are on a lease you can't raise their rent until the lease is over. If you are going to go from $1400/mo to $16/$1700 - will you lose your tenant and have to find a new one? How long will it take to get a new one in place? Is it a "hot area?" Why aren't rents already higher if it is a good area? I am always skeptical when seller's or their agents state "rents could be higher." My question always is - then why aren't they? 

If you don't mind a little friendly advice - divorce your emotion from this analysis. Stop TRYING to make the numbers "work" and just see if they actually do. I think if you do that you will either find a way to get this price way down (or at least try to) or walk away from this "deal."

Good luck.