Dallas 4-plex - Good deal?

Question

Hello BP community!

My fiancé and I just got our first offer accepted for a four-plex in Dallas and are looking for some advice on our analysis before our option period ends.

The property is comprised of four 2b/1ba units in the South Dallas-Fair Park neighborhood and is right across the street from a large industrial plant. The building has a parking lot with no cover and a brand new 30-year roof. It's currently fully leased at $600/unit.

Asking Price: $200,000

Gross Rents (4 units): $2400 per month

Expenses: Taxes: $350/moInsurance: ~$200 (haven't gotten a quote yet)Vacancy (5%): $120 Repairs (7%): $168Capex (6%): $144PM (10%): $240

Total: - $1,222

Mortgage: - $787 (conventional with 20% down and fixed 4.25%)

NOI: $2400 - 1222 = $1178

Cash Flow: $1178 - 787 = $391 per month (10% CoC ROI)

We feel like this is a pretty good deal based on our numbers, but want to see if we are missing anything? We would also like to hear from anyone that has experience with this type of investment in this area of Dallas.

Thanks all!

Kyle Scholnick · Answer

Overall, not a terrible deal, but I wouldn't expect to make much of anything. This is a bit of a shady area so will likely be crime, drug deals, break ins, much more maintenance than you are quoting. I would bump up maintenance and cap ex to AT LEAST 10% each, more if want margin of safety. Also that vacancy rate is unrealistic, especially in this area. Better make vacancy rate 8.3% at minimum or 10%.

Again, I've seen much worse, but don't be disappointed as this deal won't make much. No appreciation will happen. Overall, even with leverage when all is said and done, based on my calculations you will make around 4-6% total. Good to get your feet wet, but also the type of property that can turn you off to real estate.

John Chapman · Answer

Do you have sales comps for the fourplex?  (Bob Bowlng is correct that  fourplexes are valued on sales comps as opposed to income approach.)   I have a fourplex in Grand Prairie and hate the stupid thing though it cash flows okay.  However, it has not gone up much in value in the seven years I've owned it.  Kind of illustrative of the principle that you're better off buying quality properties that have the potential to appreciate.  That's where real wealth is built.  (Would have probably made more money buying a decent SFR.)

I can't really comment on the value, but here are the things I would look for from a management perspective.

How many square feet are the units?  Is this is in a small multifamily ghetto or intermingled with SFRs?  (If you're from here, you'll know what I mean.)  How many parking spaces are there?  You need at least two per unit if they are two bedroom units.   'Really don't like that it's across the street from industrial.

Are you sure you don't have any utilities?  I have never seen where you are not at least responsible for trash and lawn.  Most fourplexes usually have landlord paying water too. Insurance is probably too high.  Repairs are way too low.

Account Closed · Answer

CapEx is not an operating expense so the NOI is understated.  There are no cap rates on fourplexes so the 7% is a meaningless number and the 1.2%/mo. in gross rents also has no meaning by itself so I don't see how you can proclaim the deal "decent" or"not screaming".    Can you elaborate?

Marc C. · Answer

I don't know your market, but, on the face of it, I think the numbers look acceptable for a small property.

1.2%/mo. in gross rents. NOI=$1178 x 12. Price is $200K. 7% cap rate. No screaming deal, but a "decent" first project to learn from. What's your total ROI over a 5-year hold, assuming rent rises 3%/year and expenses 2%. Would like to see that at 20% or more (it's all hypothetical though). If the ROI is lower, can you put less down on the loan to increase it? (Make sure you are including your closing costs on purchase and sale to compute.)

5% vacancy is probably unrealistically low unless there are long-term tenants (which often means the rents are below-market). How does it look at 10%? You can compute the actual economic vacancy once you see the seller's actual numbers.

Just my two cents; others' experiences may differ.

Marc

Herbert Toney · Answer

THE SOUTH DALLAS AREA IS A BAD PLACE TO INVEST IN REAL ESTATE CRIME IS BAD AND DRUG DEALER ARE ALL OVER THE PLACE I WOULD ADVICE YOU NOT TO BY ANY PROPERTY IN SOUTH DALLAS AREA OR WEST DALLAS AREA I LIVE IN GRANDPRAIRIE TX ABOUT 40 MINS FROM SOUTH DALLAS I HAVE PROPERTY IN CEDAR HILL AND GRAND PRAIRIE THERE A LOT OF GOOD AREA IN DFW AREA BUT STAY AWAY FROM THESE TWO AREA

Immanuel Sibero · Answer

@Calvin Clark

I would carefully check out the area... Parts of south Dallas-Fair Park can be challenge...

This is not the same property as the one below, is it?

https://www.biggerpockets.com/forums/432/topics/79...

All the best... Immanuel

Ken P. · Answer

New "30 year" roof is good, but what condition are the other systems in the building?  Are there individual central HVAC systems for each unit, or just wall A/C, and what is the condition?  Same for the windows.  What is the condition of the individual units; i.e., will much work be required when the current tenants move out to be able to attract the type of good tenant you want moving forward?  Our first multi family purchase was of a property where most of those systems and the units themselves were in poor condition, such that we're having to ultimately put in about $9,000 per unit to bring them up to the point where they command higher rent and we can attract the type of tenant we want to lease to.  In our case improved operations provides the self-funding to make these investments possible, to the detriment of cash flow during the first 4-5 years, but we planned for that going in.  Make sure you have a complete understanding of the conditions of these units and how much capex will really be required.

How does the rent compare to other similar properties in the area, or other alternatives such as nearby apartment complexes?  Are rents at market or under market?  Is there an option of moving the property up within the class, e.g., from a C to a C+, or all the way to a B?

What are the comps like?  To someone from most spots in CA this may seem like a great deal, but how does it compare to other 4 plex sales, or to per-unit prices for duplexes or triplexes?

Jeff Kehl · Answer

@Calvin Clark any utilities paid by the owner? Common lighting, trash, water, heat, how is that all handled? Who is managing the property currently? Have you spoken to them? What's the crime rate and school ratings there?

Dallas 4-plex - Good deal?

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