First Multifamily- Am I being too conservative?

Question

Please be patient with me as I am new to posting. If I have forgotten needed info for your input let me know.  After all the reading/practice I can muster, I have begun my first search for a multifamily in Cincinnati Ohio.

Below is an example of a property I recently have looked into. The initial screening utilizing the 50% rule put this as a fairly solid prospect, and in getting a tour there were no red flags (brick, good condition, B or C neighborhood). However this was the first time I moved into the next step of working on a more detailed expense analysis, & after doing so the estimated expenses were far more than I expected, at almost 70-75%% of gross income.

The high expense ratio & the fact that this property looks far from a good investment surprised me a bit, and my concern is that besides perhaps the owner having to pay heat, the property's numbers are pretty typical.  The question being, am I misunderstanding something on my  approach to expenses or perhaps too conservative, potentially scaring me off from solid properties? Or is perhaps 70% expense ratio just a reality of the area I should expect?

Thank you!

Tyler

List   Price

$119,000

Down   Payment

$29,750

Repairs

$500

Closing Costs

$3,000

Total Cash Investment

$33,250

Initial   Screening

Gross Rent (4 Units)

$1,872

Expenses (50% rule)

$936

NOI

$936

Mortgage

$491

Cash Flow

$445

Cash ROI

16.1%

Expenses (Detailed)

Vacancy (10%)

$187

Property Taxes

$307

Insurance

$67

Gas/Electric

$150

Water   (per unit)

$90

Sewer   Service (per unit)

$90

Maintenance   & Repairs (5%)

$94

Property   Management (10%)

$169

Lawn   Care (7 months)

$39

Tenant   Placement Fee (per unit)

$78

Annual   Tuneup/Inspection

$19

Lease   Renewal Fee

$16

TOTAL   EXPENSES

$1,305

Expenses %

70%

NOI

$567

MORTGAGE

$491

CASH FLOW

$76

Goal: $300

CASH ROI

2.7%

Goal: $15%

Tyler French · Answer

@Todd Dexheimer - Thanks for the heads up. I hadn't considered the replacement reserve.

@Mike McCarthy - My apologies I may have made the reference to rent too vague. The property is at $1870 total gross rent (4 units @ $468).

@Jordan Moorhead - I'm glad you brought that up, as that is actually what I had considered as well. I agree I would like to learn & my father previously did that sort of work, so he has offered to help. With that, the return looks good. I just wasn't sure if I was "fudging" the numbers since my eventual goal after learning would be a more passive &  pay for property management.

Paul Gwilliam · Answer

Your water number isn't too high.  I'm in the Cincinnati market, too, and the average numbers I use are 45-50 per unit per month.  It seems high, but GCWW is expensive for everybody here.

You're not being too conservative.  I have a bias towards multi family property, and I haven't been able to find much of anything that tickles my fancy in the past couple months.  Keep looking.  The best thing that will happen to you is that you'll start to see trends in the numbers your seeing.   Things like the water example above.  Or your Gross expense ratio will start to get consistent.  When you see a lot of property and get used to analyzing it in a given market, you'll know what's "normal" and then when you see a pro forma that shows 30% expenses, and you'll know its a lie straightaway, or you'll see a low maintenance number, and that could tip you off to deferred maintenance.

The biggest thing I can say is hang in there.  Look at a ton of property and don't get trigger happy.  You don't want to end up owning a lemon just because you got anxious.

Craig H. · Answer

Tyler,

Your water/sewer numbers of $180/month in a four unit isn't crazy high.  My four unit building is $113/month and my 5 unit building is $188/month.  How many tenants live in the building?  To give you context I have 4 people in the four unit and 7 people in the 5 unit.  Low-flow toilets and shower heads do make a difference as I have those installed in the 5 unit building.  Also, your insurance number of $67/month.  If you're able to find insurance that low let me know.  That is pretty low.  If the building is boiler heat it will be tough to make your tenants pay for heat.  The only ways you could do it are ductless split systems or install electric baseboard heat, which can be costly because you may need to upgrade breakers so they can handle the electric heat.  Let me know if I can assist you in anyway.  I invest on the east side of Cincinnati.

Eric James · Answer

Conductimg this analysis is great. What is missing is: what other options do you have? For example, if you could relatively easily find another property with the same ROI that is metered individually to tenants? Everything is relative to what other options you have.

Tyler French · Answer

@Todd Dexheimer - The $550 is the total costs for water & sewer of quarter, about 180/month.

Thank you @Adam Dahlberg! I am trying to walk that fine line between eagerness vs over-analysis.

I am considering a $100,000 offer. It would only be a 6-7% ROI based on the expenses estimates above, but would be almost 15% without property management. The thought being I could make that ROI while we learn the property management maybe the first year, and work towards bumping up the rent, finding expense savings, or additional income (there is a 4 person garage that could be used as additional rented space.)

Adam Dahlberg · Answer

Hope it all works out for you! Good luck. I just have to question the $500 in repairs, but of course I have not seen the home or even pictures. In my market, you can't even get a faucet replaced for that amount. So it must be a cherry house. Wishing all the best!!

Adam

Todd Dexheimer · Answer

@Tyler French water is $550 and sewer is $550 for a total of $1,100/quarter? That is $366.67/month, which is really high (should be half). You may have leaky toilets and faucets or someone water the lawn a lot. You could update the fixtures and put in low-flow toilets to reduce that and bill back to the tenants.

Jordan Moorhead · Answer

@Tyler French why not buy something that's close to you and that you can manage so you can learn more about the process?

I would factor in property management and just manage it myself. I think it's good to get to know what landlording looks like.

Tyler French · Answer

@Jordan Moorhead - Thanks for the reply. You're right, this is my first investment. We thought that water & sewer was fairly high as well. We were given $550 per quarter for water/sewer both.

Where I struggle is in two considerations:

1. Deciding  if & what type of offer on this property would make:

In playing with the numbers, changing the offer amount does little to make the ROI worth it, unless I am offering an extreme lowball such as $80,000. The only two feasible options are to find a way to improve the expense assumptions by maybe having tenants pay heat, or plan on raising rent (it might be able to be raised by $50/unit). However the idea of making a deal that hinges on those future changes worries me. Or is that normal?

2. How this affects options in my overall search criteria:

Thus far I have seen most properties in my criteria go between maybe $90,000-$125000 with about the same rent. Meaning even if I pass on an offer for this property, with these type of expenses I feel i will always run into this same issue. The only time I would find an acceptable deal would be one need of heavy repair, much higher rent, or tenant pays heat.

I hope my rambling makes sense!

Initial Screening
Gross Rent (4 Units)	$1,872
Expenses (50% rule)	$936
NOI	$936
Mortgage	$491
Cash Flow	$445
Cash ROI	16.1%

Expenses (Detailed)
Vacancy (10%)	$187
Property Taxes	$307
Insurance	$67
Gas/Electric	$150
Water (per unit)	$90
Sewer Service (per unit)	$90
Maintenance & Repairs (5%)	$94
Property Management (10%)	$169
Lawn Care (7 months)	$39
Tenant Placement Fee (per unit)	$78
Annual Tuneup/Inspection	$19
Lease Renewal Fee	$16
TOTAL EXPENSES	$1,305
Expenses %	70%

NOI	$567
MORTGAGE	$491
CASH FLOW	$76	Goal: $300
CASH ROI	2.7%	Goal: $15%

First Multifamily- Am I being too conservative?

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