Is This 13 Unit Deal Worth Going For?

Question

I don’t want to be one of those people they’re always talking about that come on to biggerpockets, ask a few questions and then disappear. I’m in this real estate thing for the long haul and I’m not going anywhere.

Since my last post I actually found an investor here on biggerpockets and although we haven’t bought a house to flip with him, it’s not for lack of trying.

However, I have a family investor with whom we recently won a house to flip on xome.com and are just waiting on a change in the contract and we’re scheduled to close December 10th.

45 days ago me and the hubby went to breakfast and wrote down all of our goals. They are reasonably attainable and include flipping one house and purchasing one multifamily (as well as hire two more people for our remodeling company) in one year. With 320 days left it looks like we might be under contract on a flip, we hired one more person (although we’re still netting the same because we let someone else go) and I now have my eye on a multifamily… only it’s not a 1-4 unit. It’s two separate parcels but the buildings are attached.

The apartments need TLC so I would look at this as a value add property. We’d rehab the apartments as they come vacant.

The 4 unit is asking $199,900 and the 9 unit is asking $725,000 for a total of 13 units for $925,000.

4 Unit grosses $32,160 with the following expenses (let me know if I missed something, first column is yearly, second is monthly):

Taxes	$7,422.00	$618.50
Trash	$1,440.00	$120.00
Sewer	$2,134.07	$177.84
Insurance	$2,500.00	$208.33
Vacany 5%	x	$134.00
Management 10%	x	$268.00
Utilities/Lawn/Water	$1,868.49	$155.71
Maintenance 10%	x	$268.00
Total Costs	x	$1,950.38

$1950.58 x 12 months = $23,406.96 yearly expenses.... doesn't that seem high for a 4 unit?!

9 Unit grosses $75,485 (let me know if I missed something, first column is yearly, second is monthly):

Taxes	$10,728.00	$894.00
Trash	$3,960.00	$330.00
Water and Sewer	$4,716.63	$393.05
Insurance	$2,500.00	$208.33
Vacany 5%	x	$34.64
Management 10%	x	$623.57
Utilities/Lawn/Water	$860.56	$71.71
Maintenance 10%	x	$69.29
Total Costs	x	$2,624.59

$2,624.59 x 12 months = $31,495.08

Total gross income for the 13 units is $107,645. Total expenses is $54,905.04.

We estimate based on market rents we can increase this to $133,000 after turning over all units… and I still feel like I’m being light with that number.

Lastly, a 12 unit just down the street sold for $814,000 grossing $120,000 per year with way less taxes. Total taxes on the 13 units is $18,150 and the 12 unit taxes are only $6,026! I think I could appeal the taxes as well.

So I also did my research on the seller. I’m located in Pennsylvania, the seller's own a few properties here in PA, a lumber yard another 12 unit building and own a 2 million dollar house in Virginia. The 9 unit property has been in their family since 94 when they bought it for $340,000. Doesn’t look like any other mortgages were taken out on the property so there’s plenty of equity. The 4 unit was purchased in 1999 for $130,000.

We obviously don’t have that kind of money just laying around so we’re thinking of asking for seller financing. My main concern is, how do I make sure the mortgage is getting paid if I pay the seller? Couldn’t they just pocket all my money and let the bank foreclose on the house?

What should I even offer? I came up with a max offer of$160,000 for the 4 unit and $655,000 for the 9 unit for a total of $815,000. But I also have to remember that almost all the units need rehabbing!

As a side note also plan to manage these ourselves in the short term to get more experience. I was a property manager for a large corporate company for four years, managing hundreds of units and we currently own one multifamily. We also own a remodeling company so we'll be remodeling at cost. I am also a real estate agent and will get a 2.5% commission... although should I offer something to the listing agent to get the deal done?

Anthony Angotti · Answer

Do you have the cap rate on the 9 unit for the area? That would inform you on what to offer. Also, look into what the cap range is on renovated vs buildings that need work. For the 4 unit you'll want to know some comps (if there are any I know it's hard on that size) and if you can't find comps look at per unit prices in the area. Will give you some information. You can also use some sort of cap rate, but 4 unit is still residential and will be evaluated on comps. Agree that you should target somewhere around 8-10% Cash on Cash return, but you also need to see what's realistic to actually get the property (or pass on it entirely) You can use anytime estimate for the county you are looking in (I use it sometimes for PA to run some tax scenarios if taxes go up to purchase price). You can also call some items chattel on the 9 unit to get the purchase price down for tax purposes. Just check with your RE attorney/accountant to see what is allowable in your area.

Chad Eisenhart · Answer

You can only offer what makes sense to you financially.Personally, I would want to get a positive cash flow on my purchase.The 4 unit at $199,900 is not providing positive cash flow.If you factor in $150,000 mortgage at 20 yr for 6% your payment is $1074, leaving you with negative cash flow.On the 9 unit your math is wrong894.00330.00393.05208.3334.64 - Wrong623.5771.7169.29 - Wrong2624.59894.00330.00393.05208.33314.52 - Correct623.5771.71629.04 - Correct3464.2212 x 3464.22 = 41570.67Gross income $75485 - 41570 = 33915 (before mortage)Assume $725000 less 25% down = $543750 financed for 20 yrs at 6% = $3895 mortgate pmt monthly12 x 3895 = $46747 anually to debt serviceYou are not a charity.If I put 25% down I would want at least 8-10% cash on cash return on my money.Per "how do I make sure the mortgage is getting paid if I pay the seller?" You should just pay the mortgage company directly. You write the check or you have them ACH from your account.I do that with a seller now.She has access to the online account to ensure it gets paid. I have access also.

Patrick Liska · Answer

Figure your rehab into your costs, but take a look at the numbers,i don't know why you are paying the same in insurance for each building, see if you can get them under one policy. there is even more money to be made there, fight your taxes, but look at the garbage costs as well, it is costing you more per unit for the 9 unit than the 4 unit to remove trash, work out a better deal with the trash hauler. Any mortgage you will have with the seller should be recorded, they will also be on the 1st lien on the property, a title company will set everything up, or a lawyer, depending on who you want doing the closing. If this property is on the MLS than the listing agent would get a percentage of the closing.

Kiersten Vogt · Answer

Thanks @Chad Eisenhart. Thanks for all the information. I guess I'd have to get the property for even less because I also have rehab costs. And that makes sense to just pay the mortgage company directly duh.

Kiersten Vogt · Answer

@Bryce Litwin I couldn't believe it either... but I did just double check and the difference in taxes is definitely correct!

Kiersten Vogt · Answer

@Patrick Liska I took the number directly from the numbers provided by the seller and thought some of them were a little off. I would definitely try and negotiate some of those expenses like you said. Thanks for the information on the seller financing.

Chad Eisenhart · Answer

@Bryce Litwin Per "included both the real estate taxes and the school taxes"Agreed. The way to double check the tax accuracy is start with the listed accessed value of the property, you would expect that to be correct on the listing.Or search online for the county Assessment office, and find the listing on the Assessment website.Next search for millage rates or property tax rates in the county.In my area of PA there is:MUNICIPALSCHOOLCOUNTYRemember they come due at different times and when you pay affects the amount due.Plus factor in annual increases.This would also be helpful to know which school districts or municipalities have higher or lower rates. In my area of PA the lowest municipal rate is .21 the highest is 18.97, that is 90 times higher.

Bryce Litwin · Answer

Regarding the lower taxes on the 12 unit that sold, did you make sure that figure included both the real estate taxes and the school taxes? I have come across listings which did not include both...