Is this Potential QuadPlex in Philly a Good Deal?

Question

Hello BP!

I am looking to get into a deal but do not know if I am missing something or worse am moving too slowly on a potential bargain in Philadelphia. A friend is thinking of selling their Quadplex and I heard it could be as low as 325k.

I want to owner occupy a multifamily and thought this might work.

325k Quadplex in an awful school district but low crime lower North East section of Philadelphia

Income:

Unit A: 1 Bedroom $700 (Unoccupied) Currently Under Renovation

Unit B: 1 Bedroom $650 (Occupied)

Unit C: 1 Bedroom $650 (Occupied)

Unit D: 1 Bedroom Efficiency $500 (Occupied)

Detached Garage A: $150 (Unoccupied)

Detached Garage B: $150 (Unoccupied)

Total $2800

Expenses:

1.4% tax on 200k assessed value: $2800/yr -> $233

5% Vacancy -> $140

3% Repairs -> $84

7% Cap Ex -> $196 (Older Property built ~1930)

5% Prop Mng -> $140

Insurance -> $135

FHA Mortagage -> $1,368

MIP -> $230

Total: $2,526

Cash Flow: $274

CoC Return: 12%

I would love to hear any comments, warnings, or questions I should ask the owner.

I am unsure if I am looking at the whole picture? Is there a better way to estimate costs like repairs or Cap ex instead of a percent of rent that seems arbitrary to me?

Any and all insight is appreciated thank you BP you are an awesome community!

Joe P. · Answer

Your vacancy is way too low...consider turnover fees and having each unit vacant for at least a month -- that's 2,800 just in a month of vacancy ($233 per month).

Your repairs and CAPEX are incredibly low. I'd probably do 10% for management fees also.

Also agreed on the water bill...4 units is probably $150 a month, minimum.

I've seen worse deals but I think you should estimate what the worst case scenario would be -- and if you break even there, work your way back to some normalcy.

A lot of this also depends on how handy you are and how much work you'll do yourself. I'm an investor, I want someone else to manage the property and take care of tenants/issues. Well what's a new water heater? $750 installed? A new fridge or oven? $500? These things cost money...you could blow through your CAPEX and maintenance budgets easily when they're that low.

I also saw you didn't have an initial set-aside for issues -- I did the same thing and I've spent about 10,000 on my duplex in the last year just handling deferred maintenance that wasn't apparent. You should be prepared for the same...

Now with all of this in mind, re-run the numbers. A lot closer to zero now, isn't it?

Neal A. · Answer

In my opinion the numbers are a little too tight. If the deal has some type of value add then maybe it’s worth it.

I’d prefer to use a higher vacancy rate or else the property could cost you money at the end of the month. Your property management rate should be at least 6%.

Something of note - the rental license is going to cost you 55 dollars for each unit a year and then the trash collection is going to cost you 300 a year.

You also missed your water bill probably 100-200 a month depending on a variety of factors.

It doesn’t seem like a lot but your margins are already tight...

Steve Babiak · Answer

I have a duplex in Philadelphia, both units are one bedroom and both units have in unit laundry; so that is a good amount of water being used. The monthly water bill for that property is less than $60; based on many years, it has rarely exceeded $60 and never hit $70. So a four unit might hit $120 if we double that usage. And one of the toilets is an older toilet with more water per flush than what a toilet bought today would use.

Now if the OP is living in one unit, less rent will get collected; and one of those garages would probably be used to store stuff, meaning even less collected rent. With the plus being an owner occupied mortgage interest rate.

So the missing piece becomes: how much is the OP paying in rent now? If the property is break even but saves the OP some because that rent is no longer being paid, then this starts to make more sense.

Samir Goel · Answer

@Abel Rodriguez

Thanks for sharing this. I agree with the above comments around property management and vacancy. I don't know area well enough to comment on the utilities and other costs but sounds right.

However, to offer some opportunities for upside to look at. What are are other comparable units in the area renting for? Is there an opportunity to charge higher rent for the vacant unit? How about with the garage units? Is there a way to repurpose that for more monthly renovations.

Additionally to back up for a second. You mentioned you wanted to live in one of these units.  How does this compare to your current mortgage? If you are only collecting rent from three of the units is your monthly rent cost lower than what you are paying currently? Think about how this would compare to your current situation (IF you are renting). Also how involved would you want to be? Are you looking to making improvements to force appreciation or more of a light touch hold?

Think it's a bit tight as a pure investment but as a live-in it could be beneficial depending on your current rental/financial situation.

Steve F. · Answer

multi unit rental properties are charged $300 a year by the city for trash removal .

Amanda Sokol · Answer

Everyone gave you a lot of great tips. I’m not sure what part of Philly this is in but $650 seems a little low. Are they long term tenants? Last rent raise? When was the last time Are the other units renovated? How old are the core systems? Roof? I agree on not splitting the water bill. I Only did this once and would never do it again. Lots of finger pointing. I add $50-100 to the rent per month for water/sewer depending on the area.

Abel Rodriguez · Answer

I agree 650 is low but the area has fully renovated 1 bedroom units going for 800 so I do not know if I can raise them. If I were to raise them how much total rent would i need to collect at asking price to for it to make sense?

Roof is new within 1 year as I have been told but I have not inspected it. Those questions about when the last rent raise was I should certainly ask. I believe they were not updated but rather repaired over the years. I do not have specific but would imagine if they were relatively newly renovated it would have come up. I will gather this soon. Thanks.

Abel Rodriguez · Answer

@Steve Firth

@Steve Babiak

Thanks for the tip. I will add it to my assumptions. I guess this is just one of the few things I missed. Reason why its great to talk to experienced investors like you.

Steve Babiak · Answer

Yes, rental properties have to pay for trash removal.

Abel Rodriguez · Answer

I am sold on your comments I will not split the water bill. One thing that came up earlier in the thread but I am still uncertain about is the trash collection cost. I have lived in philly for a long time and have never seen this. Does anyone know if this is a real expense within the Philadelphia municipality?

Is this Potential QuadPlex in Philly a Good Deal?

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