Am I overthinking this deal?

Question

Hi everyone,

I would like to get an opinion on a deal I have under contract, I have been a bit hesitant due to the interest rate that I am getting on this deal. I may be overthinking too much, feel like I'm stuck on analysis paralysis, so any input I can get will be helpful.

This is the property info:

Located East side of Hollywood, FL

Fourplex consisting of (2) Studios and (2) One Bedrooms

Property is in good shape but outdated, needs: (4) new bathrooms, fresh paint, maybe windows

Current rents are $4,150 total

Market rents are $5,600 total (Conservative)

I would be inheriting tenants, so I would have to go through the process of vacating the units, renovating, renting.

Purchase price $655,000

Loan terms: DSCR with 20% Downpayment at 8% interest rate

I estimate insurance to be around $4,500-$6,000 / year

Taxes around $10,000-$11,000 / year

Based on this numbers, the property will not cash flow on day one. After raising rents at conservative numbers it will cash flow about $500-$600 total per month.

I am not even calculating for vacancies, management, etc. Not to worried about it because I will be self-managing and I know I can get them rented pretty quick on that market.

I think the numbers are not super attractive, nor terrible, and what keeps me engaged is the future appreciation and rent increase over the years.

My plan with the property is to hold it as a rental but would like to recover as much as possible from the capital invested while keeping it cash flow positive.

I have experience investing in condos but I feel those are pretty straight forward and easy to do, this would be my first time getting into this type of deals.

Any thoughts on this?

Erik W. · Answer

Sounds like a lot of risk with no much reward. Why not just invest in S&P 500 Index and make 8-10% annually with zero hassle?
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I want my real estate deals to be KILLER. Not just "meh" or "kinda okay." There are tons of risks and hassles; whereas if you "bet" on the S&P 500 you're basically showing that you are confident in the American economy as a whole. While there is possibly the chance of losing money, the S&P has returned a year over year annualized rate of return of about 10.7% since 1972... that's a 50 year track record. And if the S&P 500 goes to crap, a four plex isn't going to help you. There will be rioting in the streets daily and you'll need gold, guns, and food stocks.
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This to say: I don't think the US economy is going in the toilet anytime soon. I prefer real estate to the stock market, but when the margins are as thin as what you're describing that takes the luster out of it, and I'd just take the easy route and get checks in the mail and/or reinvest via DRIPs.
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ALWAYS factor in Property Management. If you get sick or are otherwise out of pocket, you must account for those expenses. Otherwise, you've just bought yourself a volunteer job. Other investors will value the property based on having professional management in place.

Nicholas L. · Answer

@Jose Goncalvez

need all the expenses - no way to analyze without them and you haven't provided them.

capex?  repairs?  shared utilities?  vacancy?  landscaping?  miami business license fee(s)? (not sure if that's a thing but you have to count everything...)

my guess is you will be negative cash flowing for several years

doesn't sink it necessarily but i don't see it being cash flow positive at a long time with an interest rate of 8+%

just the way the market is right now.  probably would have been fantastic with a rate in the 4s

Caroline Gerardo · Answer

Do you have a real quote from an insurance company for coverage?

Cost to evict tenants $140000 if they fight you. I would not buy with existing tenants who likely do not pay.

You cannot and should not do any upgrades with existing tenants paying below market.

How much cash reserves do you have to carry this limping along?

Put 35% down and does it cash flow?

Justin Hammerle · Answer

@Jose Goncalvez - I know FL is tough right now but it appears to be breaking both the 1% and 50% rule even with the increased rent, I would pass and spend time looking at other properties.

Luis Maqueira · Answer

need all the expenses - no way to analyze without them and you haven't provided them.

capex?  repairs?  shared utilities?  vacancy?  landscaping?  miami business license fee(s)? (not sure if that's a thing but you have to count everything...)

my guess is you will be negative cash flowing for several years

doesn't sink it necessarily but i don't see it being cash flow positive at a long time with an interest rate of 8+%

just the way the market is right now.  probably would have been fantastic with a rate in the 4s

Hi Jose if you don't have experience with this numbers  please please review them.

we bought 8 multifamily the last year Hollywood and most Miami Dade and cash flow ...

yes with 8%,  Insurance 9000 (4000$ fourplex ask around no way)  taxes expect them to go up you are purchasing, expenses (yes you need to add them) and Management.

You can't cashflow do the numbers backward and to make enough to do a DSCR loan... No owner can sell at that price ... and give you the property...

The game today is owner finance, Value ADD so you buy equity to be built, and buy and hold.

Luis M  MMP

Michael Stoyanov · Answer

Hi Jose,

I hate to break your mojo, but I agree with the rest - it seems that you are buying a job for a minimum wage.

Walk away from this one.

I am currently buying brand new duplexes outside of Fort Myers for around $500K each and renting them long term for $2,400/mo each side (57,600 Gross Operating Income) - no need to do any work. Just closed on 4 of them in the past month.

This might be a better option for you.

Message me if you have more questions, but I hope you reconsider the Hollywood deal regardless.

Ray Hage · Answer

I agree with the others, way too many variables to worry and I LOVE Hollywood. I am there all the time and would love something east of 95 but the prices don't justify the rents for this property. If it were closer to 500-525k in its current condition, it might be ok, but at 655k, it's pretty rough. Way too much risk involved unless it has other potential like you can build another structure (duplex, etc) for the addition income or something like that. You could try to beat the seller down a lot on price or have the seller finance it at a low rate? At 8%, no way.

Chris Seveney · Answer

Where is the upside in this deal? The projections are all based on best case scenario which seems ambitious. Even if the stars align this seems like a lot of work for no money, the units are not making money you are paying yourself to manage the units basically.  Unless there is substantial appreciation upside, not sure where the deal is here.

Jose Goncalvez · Answer

Thanks Erik!

I'm already invested in index funds and a few individual stocks. It is definitely a better way when it comes to truly passive investing.

Just trying to diversify.

I agree the numbers are super tight. I may need to restructure this deal in some other way or just let it go.

Am I overthinking this deal?

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