Quadplex Question for a newb

[Joey Newton]

Could some one double check my math?

Good morning everyone. 

Totally selfish question but, I am in negotiations with a landlord who wants to sell 2 quadplexes in St. Louis. I am very green when it comes to multifamilies, and I was hoping that some one could look in to there hearts, and go over the numbers on this deal just to make sure I am not making a bad purchase. Again, they are selling 2 buildings each with 4 units, each unit is a 2 bed 1 bath. The tenants have a laundry/ dryer hookup, and a small storage area in the basement. He is trying to get $195,000 per building, and the average rent for all 8 units in $685. The operating cost on each building is almost identical, so I will just use 1 building as an example. 

Taxes/ year: $3,002,  Insurance: $1,573,  Trash/ year: $654,   Electric/ year (exterior lights): $420,   Water/ year: $1,200 sewer/ year: $1,500,   Spray for bugs/ prevention: $311/ year,    Lawn cutting/ year: $640,   Misc (furnace filters/ 9v batteries): $250

I have gotten mixed reviews back from my colleagues when they go over these numbers with me. Some say it is a great deal, some think not. If some one who has some time in the saddle regarding multifamiles could look at this for me I would be forever grateful.

- Joey

[Neal Bawa]

I have over 1,600 multi-family units that I own and manage, so I feel that I can contribute to this discussion. Here are my two cents.

Looks like you've already gotten really good advice on the capex. The 1% rule was also mentioned. So let me skip those and go to a different viewpoint. While the 1% rule is a great General guideline, what really applies in an area such as St Louis, which is predominantly a Class C or worse area for cash flowing rentals it's something known as churn. Churn is the frequency with which you lose tenants, either because they want to leave, or because you're forcing them to leave through an eviction process churn is the real killer of profit and is not covered as often by BiggerPockets or other forms as it should be, in an area such as st. Louis or Detroit or South Chicago or Kansas City Kansas. You should be looking at the quality of the area to determine what the churn in that area is going to be. I have taught many multifamily classes on this, and one of the simplest ways to determine churn is to go to City- data.com, and plug in the zip code that your property is in. Now scroll down to see what the median household income level is in this ZIP code. If the income level in the zip code is very low, you will have a large amount of churn. The general rule of thumb that I provide is that you want the median household income level to be above 38 K in the Midwest and above 40K in the rest of the u.s. numbers below this, cause tremendous churn, which will spike your repairs and maintenance cost and kill your profits. This is why, you commonly see buildings not only crushing the 1% rule in St Louis, but even crushing the 1.5% rule. if it was this easy to make money in St Louis, everyone in the world would be buying in St Louis. But the locals know about the churn issue, and so the 1% rule should not apply to most of the c neighborhoods in areas like st. Louis. Another metric to look at in city data is poverty level in that particular zip code. You want the poverty level to be at 10% or below to prevent eviction and delinquency related churn. In certain cases numbers between 10% and 20% could be acceptable. But poverty levels higher than 20% cause excessive churn and delinquency and eviction related costs. So keep those in mind.