Need Help Analyzing Investment Property Deal

[Jonathan Bolano]

Hey Everyone,

I need help analyzing what I think is a good deal. Now, I have not looked inside the apartment yet but if pictures prove worthy, then it should not need any work. If there is work needed, it'll be minimal (Under $5k). This is my first time purchasing a 4 Unit multi-family and I want to make sure I have everything thought out. I purhased and flipped my first home (live in flip) and am in my second home today. I do all my own repairs but would be contracting for big jobs.

Here are the details:

Sales Price: $299.9 (working comps)

Total Income: $3.3k (rent) + $325 (other) = $3.7k

Total Expense: $2350 (mortgage) + $400 (Water) + $409.8 (Vac) + $372.5 (Repairs) = $3.5k

Cash Flow: $192.75

Annual Cash Flow: $2.3k

Down Payment: $0 because I'd try to solely do this with HML upfront and then refinance in 6 months with bank. However, I feel it will appraise with bank for exact Sales price. Meaning I'll have bank mortgage for $203k and left with $87k due to 70% rule. Not sure how I'll manage this and this is where I need help (planning and such).

Closing: I'm assuming $10k?

Rehab: Worst case it needs some work $10k but I think I'll keep tenants if they click with me so I'm hoping this drops to $0. I'll see what it looks like at 2pm today. 

ROI: 6% (because of previously mentioned numbers)

NOI: $2542.75

Cap Rate: .9%

DCR: .09 (not sure if if this is a percentage number and should actually be 9%?)

$/Unit: $72.5k

$/SqFt: $103

The list says that the owner annual income is $41,760 and expenses is $9,784.

Thoughts? Did I find something worthwhile? Should I be rethinking this? Any advice would be extremely helpful and appreciated. 

[Ken P.]

I assume by mortgage you're including PITI (Principal, Interest, Taxes, and Insurance)? P+I are straightforward, but for taxes are you assuming the amount due based on the sales price, rather than current taxes which may be based on a lower assessed value? Similarly, is the insurance number based on an actual quote? With the low cash flow you don't have any room for error in your assumptions.

How does the $3300/mo rent stack up to comparable units in the area? Ideally the rents would be under market with the units as-is, or under what you could get after relatively minor updates to the units, giving you an opportunity to increase NOI.

Of course the expenses in the listing are only $9,784 per year - in listings they are always going to be low, to inflate the NOI. You can generally ignore that number. Much better to assume expenses are going to run about 50% of gross income. See real estate ROI calculators around the BiggerPockets site or other websites to make sure you're not missing any expenses category, and be generous in your estimates of expenses; i.e., error on the high side when estimating. Even if the building is newer and everything is in great shape, if you plan to hold it for any length of time you'll need to set aside CapEx reserves for expenses such as furnace and/or A/C replacement, roof replacement, driveway and other concrete replacement, etc.