Is asking price to high? (fourplex in Miami)

[Jordan Hamilton]

I am trying to get into my first deal which happens to be a fourplex in Miami Florida (neighborhood of Allapattah). My strategy is to use FHA financing to allow me to put down 3.5% to basically get me in the game, live in one unit for 12 months, and get out of there to rent out the fourth unit. I am looking on the MLS for most of my deals that works with my price range. I have a total of 25k for a downpayment.

Currently FHA allows a max price of 550k for any residential property with 1-4 units (I am sure you already know this). The property I just made an offer on has an asking price of $550,000. All the units are currently rented out at $1,100 per month (month to month leases). All expenses are reported at $13,000 (25%) by owner. Vacancies were reported at 0%. My mortgage payment is 30 years at 5% ($34,190 annually - principle plus interest). With those numbers I would cashflow $2,969 per year with current rents from year 1.

According to most strategies out there for investors, it is best to bump up expenses to 50% and vacancies to 10% so if anything happens like an economic downturn or something breaks I wont lose my shirt.

So for my analysis I bumped up the expenses (to 50%) and vacancies (to 10%). With that said at that price of 550k I would negatively cash flow annually $-10,670 ($47,520 gross rent - $24,000 expenses - $34,190 mortgage). Its also worth mentioning that rents are nearly at the top of market at $1,100 for comps in the area. So I bumped the asking price down to the cap rate of that area 7.8% and got a price of $301,538 and made an offer at $300,000.

That puts my new price of $300,000, expenses ate 50% ($24,000), vacancies ($5,280), and mortgage ($18,649). I would cash flow $4,871 annually or $405 per month. Thats not a huge number but its something I could definitely work with assuming something doesn't go wrong like bad roof or plumbing (which owners says is in good condition). Its also worth mentioning the owner bought this property last year from previous owner for $490,000. After my analysis I can see why they might be wanting to sell so soon.

So my question is, did I analyze this correctly? What are your thoughts on my asking price and the way I got my numbers? Am I on the right track here?

Thank you!

Jordan

[Jason Brown]

@Jordan Hamilton Allapattah is my exact farm area for my investing and I believe I've probably looked at every MLS listing in between Flagler and NW 62 St. In my opinion the price of 550K is consistent with what MLS listings for 4 plexes are going for but it is not a good deal for investment.

In Allapattah at 1100 you are implying that the units are basically 1/1's because 2/1 and up are at least 1300. At 550K they are asking for 138K per 1/1 door which is high for my criteria. Even though Miami is hot right now you should still be looking to at least achieve the 1% rule as it is still very possible. 

This is probably a walk away situation where the previous owner bought too high and is trying to offload their problem on you. Don't go for it. Your numbers are spot on. A 4plex cashflowing 3400 a month in Allapattah should definitely not be looked at for more than 300K. Unfortunately not everyone is an investor and the pressure from little havana and wynwood from normal buyers is bumping up prices all over the city. 

One further thing to take into consideration. Also remember to look at your cashflow not only from a dollar perspective but a dollar/per tenant perspective. Yes you are cashflowing 400 a month but you are managing 3 leases so you're cashflowing 135 per tenant. Also is management (are you paying yourself) part of the 50% expense assumptions? Yes you will live there now but one day you will move and is there enough play there to pass off the handling to a professional?

Good luck out there man! I LOVE MIAMI!!!