Looking at a 4 unit multi-family. Opinions of the numbers?

Question

I am looking for some opinions on this property. Here is a numbers picture just to get the conversation rolling. I am sure I can negotiate a bit lower price, but I don't see this hanging around much longer. This is at the entrance of a road that they are currently building a 40 house subdivision on and they already have a couple houses up. This is a ready to roll property fully leased. 10 years old. It should be low maintenance. Single story brick front, vinyl on the other three. Decent location. Close to my home and my other rentals. Also it is just a minute out of my way on my day job commute (which I desperately want to leave some day).

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John Stevenson · Answer

So far so good on this one. Some of the numbers above were a little off after I found more accurate actual costs (sewage fees, road maintenance fees, etc). It did not change much. The main thing that changed is I am getting it cheaper! However, any way I look at this it still makes enough money unless something went horribly wrong beyond anyone's anticipation.  My realtor thinks the rents could be raised if there is turnover. I am not sure about this though, I am not counting on that. Right now it is fully leased, so it is turn key for the moment. I will fix a couple minor things.

The good news is we have an accepted contract after a few back and forths. $309k + Seller pays $3k towards closing! Of course we still have to do inspections. There are a couple small things I see, but nothing out of the ordinary for anything you might buy that is pretty new.

This property has large nice units. It has Two 3 bedroom 2 bath (1475 sq/ft each) & Two 2 bedroom 1 bath (943 sq/ft each). It has high ceilings with coffered in the living rooms. The one larger unit I was able to view had all hard flooring (tile and laminate). The smaller one had tile and carpet. The property is only about 10 years old. I believe this was going to be 1 of many units on this property (and likely the display), but when it was built the economy must have killed the project. The original builder eventually sold the property (with the apartments) to the current developer a couple years ago. They switched gears to building houses on the rest. They seem to have no interest in running rentals or they may want the cash to keep going with the development possibly? They have 2 houses built so far and just went on sale. So, I am catching this right at the point the developer would have the most outlay of cash (my opinion).

I was skeptical on the property and the price at first, but the back story of how it came to be and why they are selling it all seems to work out. This building is at the entrance of the new subdivision with only 2 houses built so far.  I was able to enter two of the units (both floor plans). Both sets of tenants seemed very happy there. They said it was quiet and the nicest apartments they could find in the area. These are somewhat rural, but close to several towns, and also very commutable to a large city with easy access to the interstate.  I also inquired about their electric rates and they were very happy with those. The  smaller unit was under $70 a month (total electric units).

This will put me at 10 units with 2 loans. Getting there! Balancing the day job and commuting will get a little tougher, but maybe some day I can become independent.

Is it safe to post pics yet since we are under contract? :) I am always worried I am giving away too much info, but it should be pretty safe now that we are under contract? Hopefully I am not giving out too much info.

John Stevenson · Answer

Thanks. Everything is looking pretty good to me. The taxes will go up over time, but they don't seem to move faster than rents go up around here. Everything kind of moves together so you always make about the same amount while building equity.

This 4 unit is about in line with its actual value/sales price as far as taxes go, so they should not move unexpectedly. However, you never know what the county will try to do make you argue with them :)

I will try to get it cheaper than 325k if I make an offer! :) I may fail, but I will try.

By the way, I am a little leary of discussing this stuff on here because I know everyone on here is looking for investments. Is this a bad idea? How else can you get help looking at specific properties without giving away your lead? I don't know anyone in real life that even does this stuff. I have been on my own and figured everything out myself so far...

John Stevenson · Answer

Good news yesterday afternoon. I got the first quote on insurance from my current provider on my other units. It came in a little over $1700 for a 100% replacement at 12% higher than I am paying and a $1k deductible. It is also their higher level one that has some other perks if something were to actually happen. This is well under the $3000 originally figured above!

However, with the good news, also came some other news. I won't call it good or bad. The bank wants 25% down for a conventional locked in loan.  It should be somewhere south of 5.5%. I am not sure yet. This is a bit more down than I hoped, but I can come up with it and it will at least increase cash flow! So, I consider it a wash. The amount extra needed I should recoup quickly, but for the next 30 years (or until I can pay it off) I will enjoy the little extra cash flow and a little more safety net on monthly costs if something happens :)

John Stevenson · Answer

I actually ran the numbers even up to 10% vacancy and increased the maintenance and it still makes money even if it gets that bad. I am not a seasoned pro at calculating this to death. I did request my realtor send me the numbers/spreadsheet they use. They ran the numbers and they looked good to them, but I want to double check what they use for the area against what I have tried.

I don't expect the taxes and insurance to move much, but I am going to go double check the county records to see what the appraised rate is. It is is rare, but maybe I can argue them down based on the purchase price :) They generally under appraise and over tax to seemingly erase all good arguments! I don't expect them to be appraised far off.

Those numbers above are not actually mine, but ones someone else created. I rarely go over 1 month on a vacancy around here and typically have relatively low turnover rates at my other properties. It does not take more than a few showing typically. I try to keep my properties nice enough that I would live in them. I think all but two are way over the 1 year lease (some of them above a decade). I have at least 3 lifers I think. I have had more than one unit where they lived there until they died. Usually a sign out front is the extent of the advertising. My stuff is all in a peaceful rural environment near smaller towns, but within an hour of a large city.

I am still messing with the numbers, but so far nothing is scaring me too much. Everything has some risk. This is the best deal I have found in my county since I have started looking. SFH are all priced out of doing anything and the fixer uppers available are really more suitable for demolition because they are hacked together improperly built junkers. I looked at two Saturday. Garbage. Decent houses can't command enough rent to justify the prices. You can pretty much forget finding anything that comes close to even the 1% rule in SFH's around here unless you want to get in the the big city in sketchy neighborhoods.

One thing I like so far is that all my rentals are within 15 mins of where I live and even closer to my land I plan to build on again some day. I don't know how anyone buys far away. I can never find anyone reliable or reasonably priced to work on anything around here. This is always my biggest challenge. I consider the renters and the rest pretty easy. It is the maintenance that is so painful to get done.

I will take a pause after this one to see how it goes for awhile and rebuild funds. If there are any problems, I will still have this purchased at a very low price for it's construction (under $64 Sq/ft). This is a nice place in a low density, but still slow growing area. I know this area well since I have lived here all my life. I don't feel comfortable buying far away or something I can not go fix something on my own if I need to.

As for insurance and snow, there is no way around these risks. I do snow removal when needed, so that is all you can do. I usually just pay a guy $50 bucks to clear the drive at my other rentals as needed. We really don't get many snows where it lands and lasts long. I did not do any plowing last year. However, I also have a side by side with an electric raise/lower Warn snow plow :) I can do my own if I need to. I did loosely figure for there to be some snow removal and the snow removal on the main subdivision road is part of the maintenance fee.

I do have my stuff in a proper LLC now and I do carry regular insurance. I may consider buying an umbrella after this just to add another layer of security. There is no such thing as risk free. So far so good though and I have been doing this for a pretty long time on my other 6 units.

"Do you get higher cap rates in college towns like Rolla, Columbia with 20% down?"

I doubt it, but I have not fully studied it. I do know people that live in both of those towns and the prices seem similar to my area. I consider these too far away for me though.

I would not consider this area a hot market at all for outside investors. It just happens to be where I live and invest (right or wrong). I think if your not living here, it is probably an even tougher market to get into. A lot of people that seem to be landlords in this area either built new, have owned them for decades upon decades, got them from their parents, or are slum lords. It is hard to start from scratch and do much in this county I think.

I guess my goal at some point is to possibly become independent of my day job and self manage/maintain my properties myself and just make all the money :) I have all the trade skills necessary to never hire anything out if I had more time. Who knows what the future will hold though. All I know is that sitting around doing nothing gets you just that......

Sam Shueh · Answer

Is 5% rental vacancy assumption valid in Union, Mo?  If people move around a lot each year in our area it takes close to a 1 month 40 viewers to lease but 1 week and 5 viewer to purchase.

You need to put in 2018 tax, insurance in your calculations.  Speak of insurance, what happens if someone slips in the winter and wants to sue you for not providing snow removal service?  Any umbrella policy insurance consideration for landlords.

Do you get higher cap rates in college towns like Rolla, Columbia with 20% down?

Marc Middleton · Answer

Just leave out the address and you should be fine. But yes, don't give out too much info publicly, save that for private messages :-)

Marc Middleton · Answer

Seems like a pretty good 7 cap. I'm sure your taxes will go up, but if you self manage it, then it will be a wash.

And its close to where you live making it much easier. (What's that worth?? 1-2% minimum! :) )

Get em down to $325k ;-)

Looking at a 4 unit multi-family. Opinions of the numbers?

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