Underwriting 16 units (four 4plex's)

[Cody Dover]

I'm underwriting a deal right now, trying to determine a generic rule of thumb people use for expenses. 

The deal includes: 

- Four 4-plex's totaling 16 units

- 100% occupied (although I like running my numbers at 89%)

- $600/door = $9,600 Gross Monthly rents || Yearly $115,200 Gross rental income

- Hard cost include: 

- $10k Taxes/insurance yearly

- $11k Property Management yearly 

Total Income [MINUS] hard cost = $94,200. 

I've been told to multiply your total Gross rental income by 50% to account for expenses so

($115,200 x .50) = $57,600 as a NOI. Then calculate your loan payments in from your NOI.

I just have a hard time believing expenses are going to turn out to be that high. Would I then subtract my hard cost of Taxes/Insurance from the $57,600 or is that factored into the 50% we cut back? 

This deal will be a value add deal where we can add about $2.5k per unit in upgrades and raise rents $50-100. The rent as it is, is hard to beat in this area. 

Located in a city with a University Population of 30,000+ enrolled. Excellent job growth and voted top 5 places to live 2 years in a row. 

I have factored in my loan amount to be $52,300 yearly (with renovation cost added in)

The payout to private money will amount to $11,400 a year. 

Please let me know your thoughts after seeing some of the skinny numbers on the property. Would love to hear your insight and if I could possibly get better terms than a 25 year 5.75% on a $733k loan balance.

[Ed Matson]

Cody,  Be very careful when looking at seller's maintenance and repair numbers.  Sometimes they defer maintenance to save $ knowing they will sell.  This understates their costs and you will be paying disproportionately more in the first year or two of operations.