1st Rental Purchase, Buying Fourplex

[Chris Nerio]

Hey everyone, I'm looking to possibly put an offer on this deal for a fourplex in St. Louis. 

Purchase Price: $225K

DP: $45k (20%)

Annual Gross Income: $27,060

Total Operating Income: $27,648 (less vacancy at 4%)

Total Operating Expenses: (including 5% for Maintenance, 10% for property management, taxes, insurance)

NOI: $17,053

Annual Cash Flow: $2498.60

Monthly CF: $208 (less mortgage (principle, interest,  @ 5.25%, 20 year ammort.)

My estimate for my investment is about $50,000 all in. (closing cost, dp, minor repair)

So that puts my cash on cash at about 4.99% correct?

And cap rate is 34%?

Am I doing the math correct? My concern is that it seems like a lot of cash out of pocket for minimal monthly cashflow? Am I missing something?

Any thoughts on the deal?

Thanks everyone!

[Max Householder]

There is a formula on the city website for how they calculate water sewer and trash. Last year for our 4-unit it was:

Water & Trash: $360 quarterly
Sewer: $150/month

For insurance, figure 0.5-1% of the purchase price.

For taxes figure 1.25-1.50% of the purchase price, but this will vary depending on the neighborhood/zip code. The city is hard up for money so they really extort the hell out of anyone with an asset. I've heard crazy tax numbers from people in Benton Park West and other higher end areas. Our taxes have jumped as much as 10-11% in a year. in 63109 and that's not a particularly hot area. Take whatever last year's # was and tack on 10-15% and figure it'll go up at least 2-5%/year and probably more.

Landscaping our PM charges $30/trip which is twice/month in the spring/summer.

Definitely get a pest INSPECTION up front, we have had horrible issues with bed bugs and roaches at our 2nd property which we did not expect at all going in. Our lease charges pest control back to tenants which is nice for the bottom line, but tenants are generally not thrilled as you can imagine. Our PM now charges a quarterly fee to do furnace filters, pest control, and a number of other annual maintenance items. Figure like $100/unit per quarter.

Big picture, we have 3 years of numbers on our first 4-unit property and combined it's been:

(% of gross rents)

Vacancy 1% (very fortunate with inherited tenants, our 2nd building, across the street, was 16% year 1)
Management 11%
Taxes 9%
Insurance 4%
Fixed expenses (water, sewer, trash) 12%
Variable expenses 21%

58% total. This includes a couple of unit makereadies, some water/mold damage to one unit, replace both sewer laterals, and a good bit of maintenance on our boilers, so IMO 50-55% expenses is probably more typical.

These older buildings are not cheap to operate, especially when maintenance has been deferred/neglected by a prior owner. Ask me how I know :)