Can anyone help a novice analyze a 5-unit in Cashmere, WA?

Question

I've been analyzing real estate as an amateur for a while now and I've read Brandon Turner's book "Rental Property Investing." I also listen to numerous podcasts on REI, and I spend time on the BP site. I also joined The Seattle Investors Club but my first meeting isn't until January, and I need advice now.

I now am looking and analyzing more seriously, and want to move toward making my first purchase.  I've worked as a police officer for almost 30 years. My eventual retirement is fine, but I'd like to start creating some more passive income right now. I consider myself seriously interested in REI. I've owned 4 houses in my lifetime, and I managed a 16-unit apartment building in college.

Here's a 5-unit in Cashmere, WA that interests me. I'm looking for advice on rents and expenses, because I had to do a lot of guessing. You can look up the property yourself: 300 Chapel St. Cashmere, WA 98815. MLS #712065. I'm looking in Cashmere because properties are so expensive in Seattle. My dad lives in Cashmere, so I am familiar with the area and I visit there regularly.

• List price $515,000 (on the market for 6 days).
• Built in 1978 on .4 acres.
• 5 units. Each 1140 Sqft., 2 bed, 1 bath.
• Appliance, countertops and flooring is all  7 years old.
• It is listed with John L Scott but does not list the rents for the units. 
• I did my best with plugging in the numbers into the Bigger Pockets RE calculator.
• Purchase price of $515,000 with 20 % down ($103,000) = Mortgage of $412,000.
• I estimated that I might like to spend $30,000 initially for repairs. After repair value of $550,000. Again, total newbie estimates here.
• I can't seem to determine the going rate for commercial apartment loans. 5%?
• Monthly P&I = $2211.

Here's where I start really guessing at items and where I could use some help:

• Looking at what little rent information I can gather for Cashmere, I estimated that each unit would rent for $1200/mo. Obviously, I can probably call John L. Scott and ask, but I was curious that they did not list the rent as a selling point. Why not?
• 2 Loan points $8240.
• Vacancy $300/mo.
• Capex $300/mo. (Is this low?)
• Garbage $200/mo.
• Repairs $900/mo. (Should this be higher or lower?)
• Water and Sewer $400/mo.
• Insurance $100/mo.
• Property Tax (I can actually look this one up!): $432/mo.

The BP calculator shows my potential numbers as follows:

• Income/Expenses Ratio (2% rule) 1.09%. (I'm still not sure of this formula. What does this mean?)
• 50% rule (I understand this one better): Total Monthly Income $6000 (est.) x 50% for expenses = $3000. (Seems reasonable).  Monthly mortgage/P&I = $2211.  Total monthly cashflow = $788/mo. However at the top of the calculator, it shows monthly expenses of $4843/mo. and monthly cashflow of $1156. Is this more accurate that the 50% rule? As Brandon's book explains, it all depends on the property I guess.
• Proforma cap rate 7.35%. (Still not sure about this one either).
• I'm not going to list all of the future values. Needless to say, cashflow keeps on going up as does the eventual property value if sold. "The future's so bright, I gotta wear shades..."

This is the most relevant data I can give all of you on this property in Cashmere, WA. Are my numbers close? Or am I way off? Is this potentially a good deal? If it is a good deal, I could use some mentoring on this project. I don't know what the appropriate compensation would be. If it is a good (great?) deal, is there anyone interested in investing on the project?

Sorry for the length, but I want to give all relevant details and show that I'm serious (but have a lot to learn). A true mentor would be great. Thanks in advance for the replies.

Debra Batterson · Answer

Hi, David,  depending on the remodel costs of course, I have heard of investors turning 5-units to 4.  Just throwing that out there.  I'm a Washington State Broker and newbie investor.  I'm also taking the leap here soon.  If I can help, feel free to reach out:)

Pav Toor · Answer

David, if you look at the history of the property, it sold for $240K in Jan 2015.

Not that I am an expert in the Seattle market, but what made the property appreciate 100% in less than 2 years, was there some significant upgrades by the previous owners? Commercial lending rates are not the same as residential so I would do some more research before committing to this or any other investment.

Good luck

Julie Marquez · Answer

@David Sweeney Welcome to Bigger Pockets and it's great to get started here and with the Seattle Investors Club. While you are analyzing this deal, which doesn't appear to be that bad, go through the numbers on dozens of more investment properties in the area. You might have to sign up for the pro account to get unlimited free calculation reports here, but this practice is invaluable. Look for things that just sold and over in Wenatchee and just analyze everything in the area. The numbers don't have to be exact yet.

And while you are studying and learning, talk with a couple of loan officers and see what type of products they offer and what it looks like to have a commercial loan versus residential. I just closed with Washington Federal, and was very happy with their products (they are a portfolio lender).

And depending on your time for this real estate, maybe look for an investor friendly agent in the area who can bring you deals and share with you more concrete numbers for your analysis. All the best to you!

David Sweeney · Answer

Thank you for all the excellent replies. I agree Patrick Britton and Pav Toor; why the new higher price?

Lauren Dilly, glad that you have been there and looked at it.

Again, thanks everyone. I'm going to keep looking for something more residential for my first purchase(s). A 4-plex is a great idea to keep it out of commercial.

Kay Keovongphet · Answer

@David Sweeney welcome to bigger pockets. I have friends in SPD and glad to see you're interest in RE. On several occasions my RE friends and I get together and talk about numbers, deals etc. If you are interested, I'd be happy to invite you to Meetup.

I also have an excel file I use to help analyze deals if you want it, I can share.

Rob Pond · Answer

@davidsweeney you seem to be looking at a lot of factors while making initial estimates.  At the end of the day, why are you buying this property?  Cash flow right? Before anything else you need more info from the agent.  P&L and rent roll is the way to start, don't worry about anything else for now.  Take the actual (not proforma) gross income and multiply it by 50%-55%.  If the tenants pay utilities estimate 50%.  That's your estimated NOI (Net Operating Income or cash flow).  Take that number divide it by your purchase price to get the CAP rate.  At this point if the property doesn't match your investment requirements then don't waste your time, move on to the next building. If the spread between the cap rate and your loan rate is acceptable to you, maybe further investigation is required at that time.

Jeff Kehl · Answer

@David Sweeney this is going to sound like weird advice but that property has one too many units. Because it is over 4 you will be looking at commercial financing likely with 20 year ammort. and a 5,7,10 year term with probably a 25% down-payment.. If you find the same property with 4 units you can get conforming 30 year fixed financing which will make it cashflow much better.

Also, if you would consider moving into one of the units for a year or you are a vet you can get it for a very low downpayment using a FHA or VA loan.

Derek Dame · Answer

It seems you are having issues "guessing" on expenses for the building. I would call up the listing agent and have them provide the prior year expenses and income. They should also be able to provide you with a current rent roll. That will give you the rents.

As @Eric Marofske said, you will need to secure commercial financing. You will need 25% down payment.

I always plan for 5% CAPEX and 5% maintenance. This all depends on the condition of the property. You might even need to go as high as 10% each. You will have to determine what a fair cap rate is in your area.

Patrick Britton · Answer

@David Sweeney  Couple of things I think might be important to consider:

1.  sellers are asking more than twice what they paid in 2015.  what have they done to it since?

2.  Cashmere is a remote location, so i would anticipate very, very little price appreciation if anything at all.  Betting that prices will go up is risky in even the more desired locations.

3.  pro-forma cap rates are pie in the sky.  Don't believe them, ever.  And triple check everything stated by the listing broker.  Most have a basic allergy to mathematics so you have to make sure they haven't "accidentally" made a mistake.  70% of brokers don't know the difference between cap-rate and cap-ex.

Have you physically been to the property yet?  Buying half a million dollar property sight-unseen is a little risky, even for the most hardened, experienced investors, IMHO.  Where does the estimate of repair costs come from?  $900/month?  Why are you paying 2% in loan points?

I would caution anyone against the potential conversion of 5 units to 4.  It's not as easy as knocking down a wall and better done in an area that is seeing actual and significant price appreciation.

However, assuming @Lauren Dilly is correct and rents are $4,225 for all units, I would not immediately dismiss the deal.  Just ask for lease agreements, 12 month rent roll, P&L statements, etc., and check and recheck everything.

Can anyone help a novice analyze a 5-unit in Cashmere, WA?

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