Closing in a week how does this deal look? Quadplex.

[Robert Hernandez]

Hello BP!

I am closing in my First deal week and as such I am very nervous whether or not its a good deal. The unit is old ~40 years old with old HVAC 3/4 are about 13 year old and one is about 8 years old. Roof about 5 years old.

3/4 Units are occupied. But, there is one tenant who lease is due and I do not plan to renew the lease due to past history of not paying on time (the old owner helped and lowered payments). Therefore, there will be one unit that I have to put a tenant in when I own it.

Purchase price: 

Purchase Price: $212,000

Loan: 3.5% FHA Loan Morgage rate 3.3%

Mortgage/PMI/TAX/Insurance: $1350/yr

Expense: (10%/8%/8%/10%): Vacancy, Capex, Repair, Property manager: $1080

Utilities: Electric and Water is tenant paid

Rents: $650, $650, $700, $700   -= $2800

Cash Flow: $370/month 

Cash Flow (10% expense):  $280

Cash at Closing: 8.5K (6K paid by seller)

The home is in a C class neighborhood, not the best there are some section 8. But, relatively quiet, not the worst place. Being that this is my first deal I am very nervous. My cash flow is pretty low since I was conservative with the numbers. But If i'm less conservative of course I can get close to $500/month if I do like (Repair 6%, Vacancy 8%, Capex 8%, PM 10%)

I would be living in one of the units, but i'll count my payment towards the income. 

I'm worried that I am "Overpaying" by paying market price for something that requires alot of potential CAPEX expenditures. Nearby Comps sold for around 205, 207, 220.

The appraisal came at my purchase price. I'm concerned about a downturn and this property isn't worth much. The seller is buying a homewarranty so that gives a little confort. But, I can't help but feel like this is a bad deal. I'm worried about vacancy too. The community has like 7 Zillow ads for rent around my area. The community is a quadplex market with a like 20 in the subdivision. A lot of which have been on the market from 1-2 months. 

Any Thoughts?

[Anthony Wick]

@Robert Hernandez First, I need to point out that your rents total actually equals $2,700, not $2,800. But maybe that is a typo since I redid all the other numbers using your percentages and still came up with cash flow of $378 per month. Which will, of course, actually be "lower" because you are occupying a unit. But you did your numbers as if all units were rented out, which is the way to go. You also did your numbers as if you had a PM, but since you will be living there I am assuming you will manage it yourself, so you do save another 10% there. But, you have not included any utilities in your calculations. That could dampen your profits quite a bit. And I will assume your PITI calculations and the PMI for the FHA loan are all real numbers and not estimates.

All in all, I like this deal for a few reasons (assuming your numbers are correct). First, you're starting with a 4 plex House Hack. Second, you used an FHA loan for a low down payment. Third, you utilized the loan itself to roll in some closing costs by having the seller pay for those (in essence you are paying them, but over the life of the loan). Fourth, the seller is buying you a Home Owners Warranty so you can avoid a huge capex cost in the first 12 months. I ALWAYS ask for this from the seller on smaller multi family units. Fifth, you are being quite conservative on your numbers. You're assuming less rents than you'll probably get, and you're assuming higher reserve costs than you probably need. And those HVAC systems and age of the 4 plex really isn't that old.

If you're able to fill that vacancy quickly, raise the rents slightly, and eliminate management fees for a couple years, this should turn out well for you (disclaimer: I don't actually know your area at all so this is just based on the numbers you have provided here). Of note; don't expect to refinance this baby for at least 3-4 years, because at a 3.5% down payment, it takes a while to get enough equity for a bank to do a refinance.