Buying Our First Fourplex. Help!

[Justin Swierczek]

Hello BiggerPockets Nation, 

We are seriously considering buying a fourplex via a private deal and need advice on how to model this and what to offer. The current property is being managed by the owners who take their time turning over the units. The husband is a DIY type guy who does all the work himself and as a result, leaves units vacant for substantial periods of time. As an example, they had a 30% vacancy rate in 2015 as there were two vacant units that the husband left for multiple months. We would also self manage this but would hire the work out to turn over the units instead of DIY to minimize vacancy. 

I have three years of their financials as we talked about them selling a couple of years ago but they decided not to. 

There has been a tenant in one of the larger units for over 15 years. He's an older gentleman who is disabled and on a fixed income. As a result, the rent charged for that unit is substantially under market. Overall, it looks like the property is under market rent but they have the experience at this, not me. 

The property is within a block of the high school in town and is right off of the main road. There will be no shortage of tenants for the property. One unit is currently vacant as they are waiting for the new owners to fill it. As luck would have it there was a bad storm just recently that flooded that one unit with an inch of water. They have since replaced the carpet and dried the unit out. It's been about 10 days since the storm.

They want $185k but that is below my target return of 12% cash on cash return or an 8% cap rate. When I run those numbers the offer comes to $170k instead. This is assuming a 10% vacancy rate and 10% for repairs and maintenance. 

Four questions:

What is a fair offer to them?
What would be a good assumption for the vacancy rate?
How do I access the potential water damage in that 4th unit? 
What would be good items for due diligence that we should do?

I don't want to offend them at a $15k lower offer but there isn't anything that comes close to that valuation in the city they are selling in as real estate prices there are and have been depressed.

Linked below is my model for the property. I would love your feedback. 

https://docs.google.com/spreadsheets/d/1tWaGof8ozPFjT7OKfa-5w3JIOaIZNHOZkldlp4EMeMA/edit?usp=sharing

Thanks,


 
 

[Joe P.]

Hi @Justin Swierczek, maybe I'm a bit conservative, but you can skew all the numbers you want to make this work. If you're buying for cash flow, which I think you are, work your way backwards. What's the cash flow you need per month/per door to make this work for you?

Now build in the current sale price, PITI, vacancy, CAPEX, maintenance, utilities, city costs, any ancillary costs, and add in your "rehab" cost. If after all that, you need at near/at/above your cash flow desire, then great.

COCR is easily adjustable depending on what you end up putting in. You could seller finance to get great PITI numbers and have virtually zero money invested, for example. COCR isn't everything.

At the end of the day, the point is to make money. Take the worst case scenario for numbers, and see if you make money.

Also, water damage is a real PITA -- I'd try and find out what happened there. Was it just excessive rain? Foundation damage? Is that unit below ground and that's why it got an inch of water?

It looks like you did a nice job of trying to think through expenses. But what about CAPEX? Don't see that anywhere. 10% for vacancy...OK. 10% for maintenance...OK, could be above or below. What happens when you need a new fridge? New stove? New roof? That's a separate line item you should be looking at, right?

Finally, there's a rehab cost here too, since it sounds like this thing needs work and you have the water damage. What does that do to your precious COCR, or more importantly, your cash flow?