Is this Multi-Family a good deal?

Question

I was looking at a 3 income property in Milwaukee, WI that is listed for $175,000.  It is a duplex and a cottage on the same lot.   The total monthly rent is $2,300 and it is fully rented--2 long term tenants.  I am not planning on living here.  The property is in a very good and popular area of town, although I'm not necessarily interested in buying it in order to speculate on appreciation.  I am interested in positive cash flow.  I actually went through the property last week and it looks in relatively good shape. The property is 3 blocks from my residence as well which is a bonus.

It seems as though the GRM and Cap Rate look good for the property, although I don't know how useful the GRM and Cap Rate are for a 3 income property.  I also don't know specifically what a good GRM and Cap Rate are for my area, but it does seem to compare favorably to some others that I have run the numbers on.  I have not yet gotten the repair/maintenance records for the past few years yet either which would obviously help me calculate the cap rate more accurately.  I am fairly certain that vacancy would be low in this area, although I have enough reserves just in case.

I am planning on putting 25% down and also feel I could get the list price down a bit as it has been listed for 80 days without a price reduction.  The deal seems to pass the 50% rule.  Even if I paid full price at $175,000, my monthly principal and interest payment at 25% down would be $645.  50% of my monthly rent is $1,150.  Therefore, I'd have a hypothetical cash flow of $505 per month or $168 per unit.

Any thoughts would be much appreciated as I am just starting and have much to learn.  Thanks.

Aaron Montague · Answer

@Darren Budahn

Passing the 1% or 2% rule is a good start.  Now you want to find out the actual costs of owning that property.

I would find out exactly how much the following expense are going to cost you each month. "The tenant pays" is a good answer as well. Put those numbers up here and I'll tell you what I would pay for the place.

Taxes

Sewer and Water

Trash

Heat/Utilities

HOA

Cap Ex and Ops

Insurance

Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)

Vacancy- as a %. (8% represents 1 vacant month/unit/year)

Colin G Murphy · Answer

Hi Darren

I would echo Mark and Mohammed comments above. Your initial numbers look quite solid, certainly good enough to merit a couple of days of more intensive due diligence. Keep digging, and if you can´t find anything wrong, then don´t be afraid to take the plunge :-)

Good luck!

Todd Norris · Answer

@Darren Budahn

I shy away from using "projected" rent to calculate deals. I'd rather not make a decision based on the best-case scenario, because it is unlikely that you'll collect the projected rent. I'd ask for 3 years of Profit/Loss statements and calculate your ROI based upon real numbers...not projected. Also, make sure you factor in property management, if you plan to use it. That additional 10% gross rent expense can be a deal killer! Of course, not an issue if you plan to manage it yourself. Lastly, make sure taxes and insurance are factored in there somewhere.

Gather all the numbers (utilities, insurance, taxes, mortgage, etc.) and compare to the average annual income over the last 2 or 3 years. If the cash on cash % meets your standard, then I'd say it's a good deal for you. If it falls short, then maybe you need to keep looking.

Good luck!

Dawn Anastasi · Answer

Thanks so much for listening to the podcast!  I use "Baumgardt" -- you can Google the name and find it quite easily.  When I find a home that interests me, I check it out myself first.  Only after I make the offer do I hire the home inspector.

I've listened to the inspector and done observations on enough properties at this time that I know what to look for, but use the professional as he has over 35 years experience and will catch things I am not aware of or confirm my thinking which is also helpful for the future.

I've also used plenty of contractors that I know in general what rehab items cost, but there may be new things I am unsure of that could pop up in the future.

Darren Budahn · Answer

Thanks for all the great suggestions and insight from everyone!

To answer a few of the last few questions that were posted:

1. Yes, my financing would be for a 30 year fixed at right around 4.25%.  I do have cash to do renovations if needed.  However, I have walked through the property and it doesn't need any major work that I can tell.  It is currently fully rented with 2 fairly long term tenants.

2.  I do need to check out if the building would be non-conforming or not.  My lender is requiring this.  Just like Steve mentioned, in the event that the structure is totally demolished, the bank wants to make sure it is possible to rebuild the structure.

3. I don't have an exit strategy at this point.  While I probably should, I'm not close enough to making an offer at this point to have considered that.  Also, I'd probably looking at a long term buy and hold as I don't plan on leaving my current neighborhood, but it's definitely something to consider.  The duplex layout is 2 bed, 1 bath in both units which is very common for this area and I'm not too worried about being able to rent it out due its prime location.  The 1 bedroom cottage would be more difficult to rent (IMO).

Thanks again.

Steve Babiak · Answer

Properties like that near me are non-conforming in terms of zoning.  In some areas, in the event of a total disaster that wipes out the structure(s), the re-build would have to be conforming; so the rebuild might have restrictions to consider.  You might want to explore the zoning and if you would face restrictions in a disaster ...

Todd Curtis · Answer

What struck me most about your deal was the setup of a cottage and a duplex. If the potential exist to rezone it into two separate lots, it opens up possibilities for the future.

Another question I had was on the financing. I'm assuming that the P&I was for a 30-year fixed, which would put it at around 4.25%. Any potential issues down the road that could change that rate?

Other than the down payment, do you have the cash for any potential repairs or renovations, and if not, would the terms of a loan for the repair be much less favorable than that on the first mortgage?

Darren Budahn · Answer

Thanks for the reply Dawn.  I would definitely get the home inspection before closing and would certainly like a reference if you don't mind.  The home inspector I used 2 years ago for my home was very good and thorough, but he has recently retired.

I also just wanted to mention that I listened to your podcast (from last year I believe) on bigger pockets a few days back and it was excellent. I'm glad you recovered quite well from that first deal where you got burned by a family member.  I'm in the stage of trying to learn as much as possible and I figured I had to listen to your podcast when I saw you were Milwaukee area investor.

I was quite impressed with your investment strategy.  It seems like you are getting a great ROI on all your properties.  In fact, after watching your podcast, I scoured the local homes listed on MLS for between $20k and $30k.  I never knew you could get such strong rents for SFR's for homes at that price point.  It looks like you are easily beating the 2% rule.  It made me think that I may want to explore this option as well at some point.  Being a complete newbie, I wanted to be conservative as I start out in REI by looking mainly at strong positive cash flow versus speculating on appreciation.

One quick question if you don't mind: When you locate a home that peaks your interest, do you have the home inspected by a contractor or home inspector before you make an offer to give you an idea of what the rehab may be?  Obviously hiring a home inspector and not making an offer would get quite expensive if done often.  I know you can get the home inspected after an accepted offer and back out at that point if you want, but I was just curious how you approach this. Possibly you have a contractor that gives free quotes before you make an offer?   Thanks Dawn.

Dawn Anastasi · Answer

@Darren Budahn

Make sure you get a professional home inspector to check the place out to ensure you're not missing anything.  Let me know if you need a reference.

Is this Multi-Family a good deal?

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