Am I being too conservative in my analyses?

[Heather R.]

Hello,

I am currently evaluating a few markets, Indianapolis and Tacoma WA to purchase a small multi-family in the next few months. I live in Seattle so Tacoma has been on my radar due to its proximity. Appreciation in the Tacoma market will likely outpace Indianapolis and the properties are much more expensive. In Tacoma, competition has skyrocketed and everything is going for asking price or above. 

I went to look at a fourplex yesterday in a good area, the building needs some work but nothing major I can see. I have been running the numbers and it just doesn't make any sense to buy based on them - am I missing something? Am I being too conservative? Or is this truly not a good deal?

Building - 4-plex

1-bedrooms, 750ft

Laundry in basement (not coin op)

Storage in basement

Parking

Asking price: $389950

25% down: $97487.50

Amount financed: $292,462.50

At 4.5% interest rate, mortgage payment would be: $1481/mo

Current rents: $650/unit

Based on market, could potentially move to $750-800/unit with some updating

Using $750 (to be optimistic) - $3000/mo in income

Property management @10%: $300

Leasing fees: 1 mos rent: $3000/yr or $250/mo (if all the units needed to be leased during a year @ 1 mos rent per)

Capex reserve @10%: $300/mo

Maintenance/repairs @5%: 150/mo

Vacancy @5%: $150/mo

Property taxes: $452.83/mo

Electricity (for basement, laundry): estimating $100/mo

WSG (currently landlords responsibility): $320/mo (estimated based on Tacoma's pricing)

Insurance: $70/mo

Total monthly expenses: $2092.83

$3000 (income) - $1481 (mortgage) - $2092.83 (expenses) = -572.83/mo

Am I being too conservative in my numbers? There are things that could be done to reduce some of the expenses/increase income, like putting coin-op in and implementing RUBS. But I am also not considering the updating that would need to be done to the building which would be thousands.... I don't think I am going to move forward on this place unless I am just really screwing up some portion of this analysis. 

Any feedback is appreciated! Thank you!

Heather

[Matt Lefebvre]

@Heather R. Here's the very quick way that I use to analyze a deal without investing too much time budgeting expenses:

$650/mo x 4 units = $2600/mo = $31,200 (don't buy a property for a higher price based on future rent projections... always use the current numbers unless you're treating the deal as a flip).

$31,200 GAI x 50% operating expenses = $15,600 NOI (operating expenses usually run 50% with separate utilities, and I add on 5% if electric is included and 5% if heat is included)

$15,600 NOI / 8% Cap Rate = $195,000 purchase price (this is the number you should purchase the property for if you're looking to attain roughly an 8% ROI. An 8% return on your investment translates to approximately 12 years to pay yourself back for your initial investment in the property. I certainly wouldn't want it any less than that).

Now if the purchase price based on the quick formula I run is somewhat close to what the asking price is, I'd probably do a little bit more digging and run some more in-depth numbers.  But when I'm seeing a $195K purchase price versus a $390K asking price... that's a pretty big gap.

This is all based around cash flow and what you can do to maximize your dollars that you put in.  I never recommend people purchase based on projected future appreciation or projected rent growth.  If there is forced appreciation that can be made to increase the value of the property well over the purchase price and the cash flow can support it, then I might suggest a slightly higher price with the understanding that this needs to be treated less like a rental property and more like a flip.