Am I missing something with these numbers?

Question

I am a very new member and have found a quadraplex that I may be interested in.  This is a homepath +Renovation property

Tax Appraisal Value $165000

List Price $104,000

5% down required $4880

Unit next door (same design) apartments rent for $500 each

Mortgage Payment at 5.5% x 30 Years = 537.54

Property Taxes = 228.14 per month

Insurance $450.00 per month

5% for maintenance $100.00 per month

My calculations leave a monthly cash flow of $928.00

If I use the 50% rule (and I am calculating it correctly) I have a cash flow of $439.00

I am assuming that I can renovate this property for $10,000ish and it appears that there is currently tenants in at least 2 of the units (havent confirmed this yet).

guys this is kinda scary cause it appears to good to be true....

Ned Carey · Answer

My quick calculations say this is a 11% cap rate~.  Deals like that are out there. The financing makes this appear to be a home run with 100%+ return.

Lets do a reality check.

Are the repairs really $10,000? What level of cosmetic repairs are needed to get that $500 a month? Does the building have old systems that need updating?  Is there differed maintenance that you are not aware of? Is $500 month rent  for equal amenities ie: utilities covered or not? Separate meters or not?

If the property is 50% vacant, you may have substantial holding costs while prperty is re-tenanted and repairs are done. This period of repositioning the property until stabilized is a cost many new investors don't consider.

Given the property is 50% vacant and needs repairs can you get the financing proposed?

On the surface this appears to be a very good deal. If it were me I would get it under contract with a due diligence period or contingencies to check it out.

Good luck - Ned

Ibrahim Hughes · Answer

Alan I would google Ray Alcorn's article on performing due diligence on commercial properties (applies to residential as well) and investigate this deal (and all others) thoroughly.

Account Closed · Answer

Alan,

Actually, it's not too good to be true. It is true. Once you bought it for $104k, try to appeal and get your property tax bill reduced. That should save you about $800-$1,000/ year in property tax. However, your insurance will likely be much more than $450/year. It should be closer to $1,000-1,500/year.

Good luck.

Jeff Greenberg · Answer

@Alan Russell as the group has said, get it under contract with a 30 day dd.  You dig for more facts after you get it tied down.

Keep us informed how it is going.

Brandon Turner · Answer

Hey @Alan Russell welcome to the site! Have you read this post yet? You might enjoy it: How to Buy a Small MultiFamily Property: A Step by Step Case Study

Wendell De Guzman · Answer

Alan, if I were you I will tie up this property now before it gets snatched up by other investors. I agree with @Ned Carey : tie up the deal with inspection contingency (and financing contingency since you're buying with financing).

If you're too scared to tie up the deal, pass the deal to me ;-)

On a more serious note, there are always good deals out there. You need to be quick to get them when the opportunity presents itself.

Alan Russell · Answer

Thanks again to everyone that responded.  As I said I am very new to this however, some additional information I have gathered since last night is.....

Apts are total elect however, tenants are paying electrical bills (in next door units).  All four units are currently vacant however there are six identical buildings on this street and other than the 4 units in this bulding (it is bank owned) there is only one other unit that is not rented currently.  It is about 4 minutes from a military base which I think is a pretty good location for this type of rental.

Susan  - I agree with you about the vacancy rate and management fees and I have recalculated this one step further with 5% maintenance costs and I still get a cash flow of $499 Per month.  I am working with my realtor not to try to tie this property up till I can do an inspection and due dillegience

Susan Gillespie · Answer

Based on your numbers above, this is a strong deal.

Regarding expenses: In addition to utilities questions, I don't see closing costs or property management fees. Even if you manage this yourself, it takes time and effort to find renters and manage 4 units.

If I assume 10% vacancy and 10% management fees, (may be high, but better to be conservative), I get net monthly cash flow of $561 and internal rate of return at 39%.

Can you get and keep this rented? If so, this appears very strong.

Ned Carey · Answer

That may not be an expense but it could be reduced income. Do the $500 units next door include utilities. If they do and you do not, you will likely not get their $500 rent.

Alan Russell · Answer

Guys thanks for all the quick replies....some one asked about the $450 Insurance per month.

Also had a little type in there for insurance should have been  $150 / month (not $450 so that would actually make it $1800 per year...guess my fingers were moving faster than my brain.

However these units are separately metered so no unexpected expenses that way

Thanks for all the advice and help

Am I missing something with these numbers?

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