Quad in Georgia

[Darryl Blalock]

Hi Guys,  I'm new to this and could really use some expert advice.

We found an owner-occupied quad listed at $275K. Nice clean building in a nice clean area.  The other 3 units have long-term renters, and a new tenant is moving in to the previous owner unit.  All are month-to-month tenants. All electric units, tenants pay own utilities. Trash is included in property taxes. All appliances are less than 8 years old, but the roof will need replacing in 7-8 years.  Last year's rents were $21,300. I'm planning on using a property management service.

Got preapproved for a 4.125%, 30 yr conventional with 25% down.  I don't have that kind of liquid cash, so I'll have to take out an equity loan on my primary residence. Not excited.

I ran the BP calculator, plugging in numbers as best I know, and my Cap Rate is about 6.75%. My CoC ROI is a little over 9%.

My lender seems to think that the unit is a little undervalued (elderly widow seller- wants to get out and travel), and that I may be able to cash-out refi in 6-12 months, recouping my initial investment. Is this reasonable?

We did submit an offer at $250K with a couple of escape hatches written in- waiting on word.

OK - what am I overlooking?  Is this feeling I have just first-time jitters, or is there something that's gonna bite me? I really want to do the first one right.

I sincerely appreciate any and ALL advice!

DB

[Joel Owens]

If you take rents at 21,300 and divide by half ( 50% opex ) you get 10,650 NOI

Take that 10,650 and divide by 250,000 purchase price = You get a 4.26 cap rate.

Take 21,300 divided by 250,000 you get a .0852 rent to purchase price ratio which is under 1 percent.

Pretty lean numbers even for a good area. The owner will probably say they self manage and that there is no management in the numbers and expenses have been lower so opex is 30 to 35% etc.

I don't buy that. If you factor 8 year old items and replacing the roof eventually you could easily get to that 50% expense number average over time. Just because a lender gives loan does not make it a good deal.

Now the rents could be grossly under market value.Older investors tend to not push yield as they do not want to "rock the boat" withe their investment. So if rents are hundreds of dollars below market and property taxes are high then there are other areas to work on improving yield.

If the area is good pay special attention to the other quads around you. You typically can't control the other investors versus owning a larger investment. Also make sure the tenants pay water directly and you do not cover it in the rent. Tenants use 30% more water when they do not pay the bill directly and tend to not report leaks. Request the sellers transcripts for the schedule E directly from the IRS. Sometimes sellers fudge income numbers to buyers but will rarely not be accurate with their filing to the IRS.

Good areas trade at premium pricing so only you can make the decision if it makes sense long term to place your capital into that property.

I wouldn't count on a refi at those numbers in the near future. Lenders usually only go to 75 to 80% max of the properties value.