Advice on a 6-Unit Multi-family deal I am evaluating

[Harsh Singh]

Hello BP community,

I am looking at  deal in my local market that's priced at $425K. This property will need about $75K in rehab and the market rents would increase between 5% and 8% once the rehab is done.

I am trying to figure out what expense ratio to apply to this opportunity. Does the 50% rule include only operating expense, or does it also include debt coverage and taxes as well? Also, what's a realistic operating expense ratio for a 6-unit multi-family deal? I feel like a 6-unit compelx is not as difficult to manage as a 10 or 20 unit complex.

Can someone please provide some insights?

[Andrew Johnson]

Harsh Singh Short answer is that the 50% rule should cover everything but debt service and profit. That said, you can swing to 60% pretty easily so you’ll want to take a peak at a T12. And if there’s $75K worth of rehab the owners annual expenses are likely artificially low, which is likely what created the $75K need in the first place. So you’ll have to walk that balancing act.

I don’t think 6 units is harder or easier to manage than 20 units. With 20 units something is “always going wrong” so I’d propose that it’s actually easier to manage. You don’t have a “bad month” because there is always good and always bad. Or, put another way, all things equal it’s easier to manage a 20 unit complex than 3 buildings that are 6 units each.