Help with Analyzing 4plex- am I doing this correctly?

Question

Hey BP Family,

I saw a 4plex on the market and figured I'd run it through the BP Tool, but not sure if I'm doing this correctly as it came out to be a negative COC and would not cashflow until year 5. This may be too much to bite off for an initial property, if decided to pursue, but hey why not do the analysis and seek help from the community! My analysis was based off 20% down and gross rent of $2000 per unit.

Property Purchase Price: $1,149,600

Property Details: 8 bed, 4 full bath + 4 1/2 baths (8bed and total 8.5 baths)

Reading the description all it is owner unit occupied and the other 3 units are full. Selling it as is. It also states the rents are under market but does not state what that is. It's located in decent area in the city and near a solid college. Tenants pay all the utilities. I assume the owner is under the 1% "rule" if rent is under market for the area. So, here come the basic questions:

Am I analyzing this deal wrong? (on the surface it seems like a no go)

When using the Rental Property Calc on BP should I input 2bd 1.5 bath units or the full 8bd 8.5 baths?

If rent is not listed and I try to use rentometer- is there another way I can estimate what gross rental income per unit?

I included some pics from the report. Thanks in advance for the feedback

Darryl

Adam Lacey · Answer

@Darryl Griffin-Simmons also Craigslist or apartments.com are going to give you better info than rentometer. Just pretend you're a potential tenant. What platforms would you use to search, how does this property compare to options in the area? Look at size, beds, baths, finishes, amenities...etc.

Darryl Griffin-Simmons · Answer

@Peter Nikic this property is near Atlanta. I will rerun the numbers and see. Thanks!

Peter Nikic · Answer

Where's the property? At just under $300k per unit, $2000 per month seems low but tenants are paying their own expenses. Your variable expenses are way too high for 4 units, reduce them by at least 50% and this will have a positive cash flow. Plus don't forget you're paying over $1000 per month in principal. I'd also put more money down on mortgage and try to get a lower rate.

I think this should be a viable deal, good luck.

Darryl Griffin-Simmons · Answer

@Bill Brandt thanks for the suggestion. I’ve never heard of them but will check them out. I appreciate you sharing the information.

Bjorn Ahlblad · Answer

I will comment on a couple of things that have not been answered. If the property is within an easy hour drive and you have all the know how you can self manage. Otherwise no. That property is 300k per door!! It will not cash flow today and maybe never.

Bill B. · Answer

At those prices check out new builds. Companies like fourplex investment group (FIG) that build neighborhoods of new rental fourplexes.

Aleksandra Serebrenik · Answer

Will the current owner be moving out of the unit they're currently occupying? If so, you can run the numbers with the market rent that you'd get upon re-renting. Personally, I do a year-by-year five-year calculation on properties that I consider. That gives me a better idea of what improvements in profitability I can expect in the medium term.

I also agree with @Evan Polaski that you should keep the capex at least at 10%, and maybe higher, depending on the condition and year of construction. It's always better to err on the side of caution as far as building your reserves goes.

Concerning property management, I don't recommend just cutting that out from your expenses. Your time is worth something. Plus, you won't necessarily want to be self-managing forever. A way to possibly cut it down it to find out how much actual property managers charge in your market. You may be able to get away with 7-8%, though with just four units, seems unlikely, and that it would be 10%+. I've even heard of property managers not taking on just a single small multifamily because it's just not worth it, or having a minimum per-unit price. I'd suggest doing a year-by-year calculation, and only allowing a lower property management expense for a limited amount of time (ex: first 3 years). Maybe you'll see that in your calculation, with increasing rents, you'll be able to budget the full 10% property management after a few years.

Evan Polaski · Answer

@Darryl Griffin-Simmons, do you see strong likelihood of appreciation?  If so, negative cash flow, while not ideal, may be worth the value growth.  Look at all those LA investors who haven't cash flowed in a long time, but have had properties double and triple in value.  It is a risky play, and one most don't recommend, but there are people out there becoming quite wealthy if you manage that risk correctly and/or get lucky.

Secondly, with all calculators, you can make this cash flow.  Defer all the maintenance, run it like a slum, and you can cash flow for a while, but you are trading long term value.  I disagree that your capex is "too conservative".  If this is a long term hold and/or there are upgrades needed that you are budgeting for through cashflow, you are probably under reserved.

You are also potentially missing leasing commissions, if you hire someone (including most managers) to lease the property for you.  You will have some fixed costs (who is paying landscaping, whether or not the property is occupied), who is covering the "house meter" for common area lights and electric, or unit utilities when vacant (unless you want to show a unit with no lights on).  Some of these are marginal costs, and not shifting the needle, but should be thought of.

But the biggest one is back to maintenance and capex.  I lump these together, because older items require more frequent repairs.  So your decision starts to blur those lines, i.e. do you replace the a/c (capex) or fix it again (maintenance). And the thing with capex in general, you can get away with lower reserves, and continue to repair things, but eventual everything goes out.  HVAC, roofs, appliances, kitchens, plumbing, flooring, etc.  If you aren't keeping units up to modern design standards every 10ish years, your rents will continue to lag "market" rents.

Ali Boone · Answer

My favorite way of checking rents is to call local property managers and ask their opinions since they are the boots on the ground folks renting properties out all the time. You can offer to throw them a couple bucks to run some comps if need be.

At that price, it's unlikely you're analyzing it wrong. I've not really heard of a $1M+ 4plex that would cash flow. The reality is *most* properties on the market aren't likely to cash flow. Have to find certain markets, certain areas of certain markets, and certain price ranges and property types.

Darryl Griffin-Simmons · Answer

@Adam Lacey I think I put CapEx in at 10% to be conservative. The property is within a manageable driving distance and could self manage if necessary to reduce costs. I appreciate the feedback.

Help with Analyzing 4plex- am I doing this correctly?

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