How much rehab work is too much?

[Dean Suzuki]

Hi,

I'm looking at a 4plex in Phoenix built in 1962. Each unit is a 2bd/1ba and 720sqft. According to rental comps, I can get $500-$600 per unit. The purchase price is $125K. With 30% down 30yr mortgage at 5.1%, I compute monthly mortgage payment at $476. Using the 50% rule (thanks everyone for showing how this works), I compute $500/unit * 4 units = $2000 * 50% = $1000.

So, based upon that, $1000 - $476 (mortgage) = $524. So, it appears like a good deal.

However, it looks like it will need about $40K to $50K in rehab work. The major rehab items are that the units have old evap coolers that are on their last legs so I will need to replace them with new AC/heat pumps and which will require new electrical panels. So, I'll need to purchase 4 AC units and 4 electrical panel upgrades. Plus, there are many deferred maintenance items that need to be fixed.

I'm wondering at what point does the rehab costs make the deal a bad deal. My realtor mentioned that after fixing the units up and by comps, they should go for $180K and possibly $200K by next year (at the rate that the Phoenix market is going). I'm a buy and hold so I was planning to hold onto them.

>> I'm looking for any advice on how people would evaluate this deal.

Also, would you recommend doing only the necessary fixes up front and trying to push off any expenses for fixes till later (e.g. taking out carpeting and putting vinyl planks/tile)? Or would it be better to try to fix it up as much as possible initially to potentially get a better tenant and lower the longer term maintenance costs?

Thanks for your help.