Help me Analyze this deal?

Question

4-plex  (2 bed 2 bath units)

Purchase Price:$360,000.00

Purchase Closing Costs:$7,200.00(2%)

Down payment: $0 (VA LOAN)

Loan Amount: $360,000.00

Loan Fees:$0.00

Amortized Over:30 years

Loan Interest Rate:2.300%

Monthly P&I:$1,385.28

INCOME

Total: $3,600

EXPENSESGarbage: $40.00

Vacancy: $360.

Maintenance: $180

Cap. Ex.: $180.00

Insurance: $126.00

Property Taxes: $575.00Mortgage Payment$1,385.28

Total: $2,886.28

Financial projections

1% rule: Slightly missed at .98%50% rule: $414.72 remaining

Mike Smith · Answer

A 7% cap rate seems like a good deal, especially in today's market.  However, I would really dig into the expenses to verify everything is accounted for.  Many times sellers will leave out items in the expenses to boost the cap rate.

Briefly looking at the monthly expenses I don't see anything for property management.  You need to account for 7-10% of gross rents for property management, even if you intend to manage it yourself.  Because if you ever sell the property, many buyers are not going to manage it themselves.  Or if they do manage it themselves, they should be compensated for their time.

Scott Cheek · Answer

@Jorge Morales I agree with accounting for property management in the event you decide to move and no longer want to self-manage.  Here are a few other considerations:

- Water/Sewer, Landscaping

- Annual rental permit/inspection fees - check with your local government.

- Are all utilities split for each apartment? Is there a common area with public lighting? This could mean an extra electric bill for you and/or cleaning.

- Fire monitoring.  One of the towns I invest in requires fire monitoring for properties with 3 or more units.  This was a $50/month expense I missed and conveniently left off the seller's proforma. Worth checking.

- What is the current condition of the property?  What repairs, if any, have the current owner put off that you will need to address right away?  Most of these should be identified in an inspection prior to purchase.  Account for these in your cash needed at purchase.

- Also verify that the 3 occupied units are in fact each rented for the amounts they say they are - ask for the leases!

For most investors, the 1% rule is a quick way to determine if a deal is worth looking into further, but not as a determining factor to buy or not.  I would also not get too hung up on cap rates and focus on your monthly NET cash flow per unit and CoC return. The Bigger Pockets calculator is a great tool for basic underwriting and to play around with the numbers to see how they impact these metrics.

The VA loan is a great example of how your cost of capital can make or break a deal, which should give you a competitive advantage to make a deal work that others cannot.

Good luck!

Matt Aquino · Answer

Hi @Jorge Morales

Looks like a pretty good opportunity/deal to me based on what you provided.  A few questions or additional information come to mind for me.

1. Whats the location? Is it a high cap rate or a lower cap rate market?

2. Since you have access to the VA loan and are considering the house hack, your return on cash is going to be really high (nearly infinite). Obviously many non-financial considerations need to be taken as well, but it seems like an excellent way to get started for a buy and hold.

3. Whats never in the numbers and I'm a huge advocate for is that this property would "get you in the game".  Your first deal doesn't need to be a homerun and by these numbers it seems like a good reasonable deal.

But your first deal buys you an education. You get much more than just the financial returns.  It will give you EXPERIENCE in the transaction, as a landlord, dealing with city issues, learning how to model/budget, etc. and how to operate!  Also it gives you a ton of CREDIBILITY ! Once you get that first deal under your belt, now you can talk with other investors and have stories/experiences to talk about and share.  This will catapult you into new circles, new conversations, and you'll RE education will grow at a crazy pace.  I'm a huge advocate of getting a decent first deal fast, rather than sitting around waiting for a "perfect" financial deal with massive juicy returns. In the current cycle we're in, those are awfully hard to find. Especially for newbies.

Lastly ... if you want to learn a ton more about underwriting.  Our group is having a virtual session with Ryan Diagle who is going to do a live walk through of a popular underwriting spreadsheet which is widely used in the multifamily space.  I think this would be perfect for someone like yourself to understand the numbers, what to consider, how to model it, etc. etc.

Its this upcoming Wednesday. Message me if you're interested in it.

Hope to see you there and hope the above helps! Good luck!!

Polo Vazquez · Answer

Hey Jorge! I'm from the area. If you got a fourplex that meets the 1% rule then more than likely you got a good deal! Congratulations. You don't see any of these anymore :S

My only concern is whether you are simply stimation rents to total $3600 or if they are already rented for that much. If they rent for a little lower than that you probably still got a good deal though since rents are probably going to go up this year!Hit me up with a private message if you wish! I'm always looking forward to meeting other RGV investors.

Jorge Morales · Answer

Hi @Matt Aquino

Thank greatly for your informed feedback brother.

1. The location is Alton, Texas. Which is part of the Rio Grande Valley. Mostly know as McAllen. From what I gathered so far a low cap rate in this are is 5-6 high is 7-8. from what I gathered so far.

Sent you a message as well.

Jeffrey Donis · Answer

@Jorge Morales I agree with @Matt Aquino. You should join a group to learn about underwriting! You can get coaching/someone to review your underwriting so you can submit LOIs on deals with confidence!

Let me know if you have any questions. I'd love to help in any way I can.

Help me Analyze this deal?

Most Popular Reply