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Updated about 9 years ago, 10/27/2015
Deal or no Deal (Multifamily)
I was recently notified of a 4 Plex from my agent and the asking price is 105K. It is a 1/1 with full occupancy. 3/4 units are month to month as they are out of contract where another new tenant just signed on for a 12 month lease. Owner pays for Gas, Electric and Water.
Monthly Income: $1,630
Expenses: ?
Utilities: ?
Mortgage: around $430 for a 15 year or 219 for 30 year
Property Tax: $226
Repairs Exterior/Interior: Not sure but needs it
Insurance: ? Part of LLC so Owner doesn't know
Owner is willing to deal as they are moving out of the state and want to slow down and pass off the property to someone else after 25 years. Just by assessing what has been provided, I do not believe this will bring a positive amount of cash flow. I applied the 2% rule to obtain a valid rent amount. Most rent in this area of 1/1 is going as low as 330-500. 1 tenant is currently paying 525 the rest are in the 300's. 50% rule shows Cash Flow to be at ~$150, however that is just a guess as I cannot speak for those that are in question above.
I believe it is time to move onto the next property to evaluate. Thoughts? Thanks everyone!
All the best,
-Rick
Hi @Rick Turman
I appreciate the idea behind the 'rules of thumb' that can be used to assess a deal, however I believe that you need to dig into the details for each and every investment before you decide if it is worth investigating further.
If he is trying to sell you the properties he should be willing to do the research to get you the numbers you need. Ask for his schedule c to see what he's reported to the government and call the utility companies yourself to see if they will give you an average cost monthly then multiply that by 12 for your annual costs.
Remind him that this is a business decision and you need x,y and z to analyze the opportunity.
Lastly, if he is willing to negotiate it may not be worth walking away from at this time...
Hope this helps!
A : )
@Rick Turman You have to take vacancies into account, especially if tenants are month to month. I'd ask for a rent roll as well to make sure tenants have been paying rent consistently.
In regards the utilities, I'm not how cold it gets in Ohio, but utilities can definitely put a dent to your cash flow. Property taxes might change based on the purchase price of the property as well.
You also want to make sure big ticket items (Roof, HVAC, etc) are in good condition. If they are expected to be replaced soon, you have to increase your CAPX. Putting a new roof and replacing mechanicals can be very costly.
Landlord paid utilities can cause way more wasting of utilities by tenants, so the 50% rule of thumb should maybe be more like 60 to 65% ...
The 2% rule of thumb would imply that the max acquisition price should be 50x monthly total rent; for this one that's somewhere around $80K.
Where do I learn more about these "rules of thumb" all of you are talking about?
Originally posted by @Jim C.:
Where do I learn more about these "rules of thumb" all of you are talking about?
Search the terms here on BP.
2% rule
50% rule
etc
We've debated each of these things a hundred different times. You'll find all sorts of opinions on just about everything :)
@Rick Turman I actually think this warrants a closer look IF the neighborhood is not a C/D class and IF the tenant makeup is not C/D class. If your tenants are blue collar, hard working, etc. then this could be a great cashflowing investment.
What worries my is your $300 rent range per unit. You have to ask yourself "what type of tenant can only afford $300?" What is the difference between that tenant and the $500 tenant? Generally, you need to factor in higher economic loss the lower your rents go as you will be attracting lower quality tenants.
This looks a lot like my first deal - roughly $92k purchas price, 3 units, B class blue collar neighborhood, rents for $1605 per month. It has been an excellent investment so far, so do your due dilligence properly prior to passing on this deal.
I agree with everything @Ashley St. Gelais said except for the Schedule C comment as rentals are reported on Schedule E. Ashely, if you are reporting your rentals on Schedule C, time to get a new accountant :)
@Ashley St. Gelais, You can find these Here: https://www.biggerpockets.com/real-estate-investing as it is a free PDF provided by BP.
You also need to account for PM fees, even if you plan on managing it yourself.
I don't see Trash expense. Is that a city service covered by your taxes?
Vacancy will be high. I'd put down at least 8.3% (1 vacancy/year/apartment)
Your Cap Ex on a place like this should be at least $200/month. One of the main reasons for selling a house after owning it for 25 years is the fact that it probably needs a furnace, roof, siding and water heater(s). Until the big stuff is taken care of, I'd probably look to save $300/month
If I had to do this deal, I'd want it vacant except for the tenant under contract. And then I'd make sure there is an automatic payment system set up from them. I don't know how much cash you have, but put $3000 into each apartment along with some sweat and get those rents up to $525/month/door.
Switch all the utilities to the tenants' names. If you are going to be paying for gas heat, get a weatherization company in there and button up the home.
With 25k down and another 25k cash in improvements you should aim for a place making you $2100/month gross.
@Rick Turman thanks for the help
@Brandon Hall, Thanks for your input! How can I find out the Neighborhood is C/D class? I checked the County Auditor and found the Grade to be C+ and Condition to be A. Is this what you are referring to? And what does this mean? I absolutely agree with you as to why I cannot get 525 for rent on each of these units. Perhaps even more once each are renovated.
Is there a way to get those units on a separate meter for everything for utilities?
@Aaron Montague, I did not ask about trash. I agree with those high ticket amounts needing to be fixed. If 80K should be acquisition cost currently, I may be able to squeeze by with a 70-75K offer and Mortgage to include for all of these expenditures. Almost a Flip/Rehab/Rental while tenants are in place. I do not see there being an issue in cost of rent if the tenants are getting upgrades.
The area is near down town in our city which Marathon Corporate Headquarters is here in the city. Everyone works at Marathon an it is a very Blue Collar city.
I just me stick with this one for a little while longer after I get all my details. I will look into Schedule E, trash, and account for vacancies. What will sweeten the deal is if the owner is willing to come down to about 70 or start negotiations from there to accommodate for rehab costs.
Thanks everyone for your responses, and looking forward to discussing this more!
-Rick
@Rick Turman did you ever find out more precisely how much utilities run? In my area, I've seen 4-plexes where the owner paid utilities and it cost him around $6,500/year. Definitely eats up a good chunk of cash flow. Splitting the utilities or submetering if possible would definitely be something worth looking into.
Originally posted by @Rick Turman:
@Ashley St. Gelais, ...
IMO you have it backward. The tenant market determines market rent for a specific type of unit in a specific neighborhood. Once you know the rent, you then have an idea of how much it might be worth.
And when I used the term "acquisition costs" in my earlier post, my intent was that acquisition costs include all costs to get the property into rentable condition plus any looming repairs and replacements (e.g. 20 year old furnace is going to need replacement very soon). So you would discount the purchase amount being offered by all of those, as you have already noted in your post I have quoted here.
@Steve Babiak, Thanks for the clarification! I know a lot more now than I did this morning thanks to the advice from all. I will wait to hear back on the numbers and if I do not, I will do my due diligence in contacting the right people.
As for any other advice, have we not discussed anything else that you would bring up with the owner? I would like to cover everything as I am new to the Rentals. Thanks again for the help, and have a great remainder of the day ahead!
