advice on a deal -- first 4 plex

Real Estate Deal Analysis & Advice
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advice on a deal -- first 4 plex

Jonathan C.
Investor · Falls Church, VA · Member since 2013 · 24 posts · 5 votes

Hey folks

I started RE investing about a year ago after studying it for a while. I live in the Washington DC area and now own two condos, both positive cash flowing, one at +$340 (cash/cash @ 11%) and the other at +$330 (cash/cash @ 8%).

A friend in NC alerted me of a deal on a fourplex (not on market) but here are the specs:

Price: $240k

Currently fully rented at $2100/month (four each at $525 -- other identical fourplexes rent for $550, so I should be able to squeeze an extra $100 within a year).

Monthly Costs:

Electricity: $20 (just for some common area lighting -- each unit has its own separate meter for electricity and gas)

Prop taxes: $90

Water: $125

Garbage: $50

Septic: $30 (Costs about $1000 and need to do it once/3 years)

Landscape: $50 (my estimate)

Manager: $100

Insurance: $100

So total monthly costs are $565

Assuming I can finance 75% on a 30 fixed note @ 5%, P+I should be $966. Total monthly costs are thus $1531.

This positive cashflows at $569/month, with cash/cash at 10.5.

Cap rate on the building is thus about 7.7%. (~18.5k/240k)

Thoughts on this deal? Very attractive in that it's already all rented out...i could conceivably not hire a management company for a few months. It's not immediately close to my home, but I can go there and back in a day (it's about a four hour drive each way). Slightly apprehensive as it would be the first freestanding building I'd own (short of my own home).

Thanks for any help!

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Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
12y

@Kenny Anderson

First of all - thank you for your service!

CAP Rate is a measurement of the rate of return which juxtaposes the total investment to NOI. For example, if I were willing to deploy capital so long as I receive a 10% cash on cash, then for investment opportunity which generates $5,000/year I would be willing to pay $50,0000. 5k is 10% of 50k.

The reason we don't use Cash on Cash is because we need to measure apples to apples relative to financing. You could buy a building with 75% leverage (25% down), while somebody else would pay cash for the entire purchase. Both need to have a common way to evaluate the deal, which is the Capitalization Valuation.

We use the NOI (Net Operating Income = Gross Income - Expenses not including Cost of Money) as the basis for this calculation:

Value = NOI / CAP

So, if the Annual NOI is $15,000 and we need to receive a 10% return relative to Capitalization Rate, then the most we can pay is:

Value = $15,000 / 10% = $150,000

If we pay more, then our return is less that 10 CAP, and visa versa. This only scratches the surface but I hope it helps!

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  • Daniel Miller
    St. Petersburg, FL · Member since 2012 · 173 posts · 44 votes
    13y

    The numbers look a little slim for me. There are no maintenance costs built in. I usually budget for $650/unit annually. Also, I know that up north heating costs are normally paid by the landlord. Is that true in this case or are they passed onto the tenants.

    Rentals are hot right now. Maybe this is the best in the area. I have been offered some properties around these numbers. There is a fourplex in my area that will rent for $600/unit and its listed at $244,900.

    Its a solid building. Not too up to speed on the D.C. rental market, but this particular property looks a little slim to me.

    0Reply
  • Jean BolgerPro Member
    Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
    13y

    Is the insurance based on what the current owner is paying, and have you verified it would be the same? (Just cause 1200/yr for a fourplex sounds great, and wouldn't be doable around here) Same question on the landscaping- unless it's a tiny lot, or won't require weekly mowing.

    I'd agree with Daniel, it's a little slim. Your condos sound great though!

    0Reply
  • Seth B.
    Portland, OR · Member since 2013 · 48 posts · 14 votes
    13y

    if you are willing to own a property 4 hours from where you live and have a management company run it. Why not look even further away in another city where the numbers are even better.

    0Reply
  • Steve Smith
    Beverly Hills, FL · Member since 2013 · 388 posts · 62 votes
    13y

    @Jean Bolger just a reminder to include maintenance and vacancy rate in your figures

    0Reply
  • Steve Smith
    Beverly Hills, FL · Member since 2013 · 388 posts · 62 votes
    13y

    sorry that was directed at @Jonathan C.

    0Reply
  • Jonathan C.
    OP
    Investor · Falls Church, VA · Member since 2013 · 24 posts · 5 votes
    13y

    Thanks Steve, Daniel, Jean and Seth. Will budget in $55/unit for maintenance, and ask another owner of an identical building what his vacancy rate is.

    It's a borderline deal for me. I can get another condo in the complex where I'm crushing it on condo #1, but cash/cash will be closer to 8% this time as price will be higher this time and interest rate will be at least a point higher.

    So I'm really weighing this fourplex four hours away against a condo 15 minutes away (a $240k property against a $140k property).

    BTW you can't get into fourplexes in the DC area unless you're talking about at least $500k, unless you want to go into some bad areas and I'm not ready for that.

    Ultimately I want to get into multi families, and that will require going at least a couple of hours from DC.

    0Reply
  • Michael Seeker
    Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes
    13y

    @Jonathan C. - you've completely left out maintenance costs which is a major factor (my guess is you left these out of your CoC calculations for your condos as well). In my area, I factor about $100-$200 per unit per month for multifamily depending on the shape of the property. If the property is in good shape, you might be looking at about $400/mo on average. If it's not in great shape, you might be closer to the $800 range. This doesn't really sound like a deal to me. I won't even look at anything in my area unless the monthly rent is at least 1% of list price. For the property you're mentioning, I'd want at least $2400/mo plus the ability to increase that to even give it a second thought.

    0Reply
  • Paul B.
    Investor · Gurley, AL · Member since 2013 · 47 posts · 9 votes
    12y

    Hi @Jonathan C. ; I agree with @Michael Seeker on rent at least 1% of list price. Question I would ask is what is the upside once you buy, through increased rents, lowered expenses, etc. Market in that area going up/down? In addition, that 4 hour away market may or may not hold the rent numbers or what you perceive as potential rent increases over time. Also, how old is the 4plex and is there deferred maintenance? Just from personal experience, x4 starts to add up on everything. Cheers

    0Reply
  • Jonathan C.
    OP
    Investor · Falls Church, VA · Member since 2013 · 24 posts · 5 votes
    12y

    Thanks @Paul B. -- what specifically did you mean by "Just from personal experience, x4 starts to add up on everything."

    Regarding the market where the 4plex is located, i'm generally bullish on it for a number of reasons.

    As for the building, it is 25 years old and has a new roof.

    0Reply
  • Harry M.
    Real Estate Investor · Dallas, TX · Member since 2010 · 449 posts · 173 votes
    12y

    Hey Jonathan,

    I'd pass. As the other guys mentioned, it looks really slim. Some areas where I think your figures may be low (or omitted)

    - Maintenance cost (as already discussed)

    - Vacancy cost

    - 100/month for a manager sounds really low. 10% is typical for a SFH, and there's not enough volume with a 4-unit to get much, if any, of a discount.

    - Leasing cost. In addition to their 10%, management companies will typically charge between 1/2 and 1 month's rent for filling vacancies.

    - Insurance. As Jean mentioned, 1200/yr sounds low, although I don't know your market. In DFW, I'm paying 1466 for my duplex (148K property). My SFHs are coming in around 0.8% or 0.9% of purchase price for insurance cost per year.

    Sorry to be a bit of a downer...but the way I see it is that it would be quite a few years before you really made much money from it. Don't get stuck driving four hours just to make it work! My rentals are an hour away and I self manage. Even that is a bit of a beating, though in my case still within the "worth it threshold". 4 hours each way would be brutal!

    Best of luck!

    -Harry

    0Reply
  • Paul B.
    Investor · Gurley, AL · Member since 2013 · 47 posts · 9 votes
    12y

    Hi @Jonathan C. ; what I meant by x4 is that with an older 4plex, all the systems tend to be aging along with it (HVAC, plumbing, etc), among other things like siding and windows. I have a 4plex about 30 years old and replacing these items adds up, especially when they have about the same cycle life. If you have the cash reserves to handle it, may be not an issue. Just make sure to account for it in the analysis I guess is what I'm driving at. --Paul

    0Reply
  • Michael H.
    Dallas, TX · Member since 2013 · 90 posts · 8 votes
    12y

    Jonathan C. - can you share me details on your properties in DC? I'm curious how you can cash flow in the DC market without a significant down payment. You can pm me if you'd like. A 4 plex should be way more than 500k. What area in DC were you looking at?

    I agree with everyone here that this deal does not look too good. Cheers!

    0Reply
  • Kenny Anderson
    SFR Investor · Delran, NJ · Member since 2013 · 24 posts · 2 votes
    12y

    @Jonathan C. I'm curious about your condos...sounds nice. Are they located on the MD or VA side? I would love to get into the DC market, but like you alluded...it's a very expensive market. My wife obtained a 4plex in the Columbia Heights a few years back and it's providing steady cash flow. I have a my only rental located in Waldorf MD. Not a huge amount of cash flow, but I don't think I'll ever have an issue finding a tenant. I live in NJ (2 1/2hrs away) now because of my job, but seeing the transformation happening in DC keeps me attracted to the area.

    Another question maybe someone on this thread can answer. I'm trying to interpret Jonathan's breakdown. What does (cash/cash) mean? I see it's an equation for a %...but I'm not tracking on what's being divided...

    0Reply
  • Account Closed
    Investor · Orem, UT (Orem) · Member since 2013 · 36 posts · 7 votes
    12y

    @Kenny Anderson , the way I understand cash on cash is: the return on the money you actually invested (in a percentage form). So, it you put down $20,000 and are receiving $2500/year net return from that 20k you invested, that is a 12.5% cash on cash return (2500/20000). Hope that makes sense!

    - Rusty

    0Reply
  • Kenny Anderson
    SFR Investor · Delran, NJ · Member since 2013 · 24 posts · 2 votes
    12y

    @Rusty Pollard , OK..got it! So he is referring to return on investment.. Thank you sir.

    0Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    12y

    @Jonathan C.

    Much too much Jon. $500/month of gross should set you back no more than $40,000 per unit - no more. You NOI is missing vacancy and maintenance, so let's just assume that Operating Costs are more like $800-$900/month, which leaves you with NOI about $1,300/month tops. Capitalized at 10 CAP this valuates at $156,000 - and I wouldn't do anything less than 11 CAP.

    Hope this helps - good luck!

    1Reply
  • Kenny Anderson
    SFR Investor · Delran, NJ · Member since 2013 · 24 posts · 2 votes
    12y

    @Ben Leybovich. Can you please explain/break down that last calculation?

    Capitalized at 10 CAP this valuates at $156,000 - and I wouldn't do anything less than 11 CAP.

    0Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    12y

    @Kenny Anderson

    First of all - thank you for your service!

    CAP Rate is a measurement of the rate of return which juxtaposes the total investment to NOI. For example, if I were willing to deploy capital so long as I receive a 10% cash on cash, then for investment opportunity which generates $5,000/year I would be willing to pay $50,0000. 5k is 10% of 50k.

    The reason we don't use Cash on Cash is because we need to measure apples to apples relative to financing. You could buy a building with 75% leverage (25% down), while somebody else would pay cash for the entire purchase. Both need to have a common way to evaluate the deal, which is the Capitalization Valuation.

    We use the NOI (Net Operating Income = Gross Income - Expenses not including Cost of Money) as the basis for this calculation:

    Value = NOI / CAP

    So, if the Annual NOI is $15,000 and we need to receive a 10% return relative to Capitalization Rate, then the most we can pay is:

    Value = $15,000 / 10% = $150,000

    If we pay more, then our return is less that 10 CAP, and visa versa. This only scratches the surface but I hope it helps!

    3Reply
  • Kenny Anderson
    SFR Investor · Delran, NJ · Member since 2013 · 24 posts · 2 votes
    12y

    @Ben Leybovich

    I enjoy serving. Thank you for supporting!

    So to summarize, use NOI to determine value since it's a common factor regardless of how the purchase was structured. Basically, if I use 10% as a constant and calculate the expected NOI, I can then determine what I should pay for the property, i.e. value?

    0Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    12y

    @Kenny Anderson

    Yep

    0Reply
  • Kenny Anderson
    SFR Investor · Delran, NJ · Member since 2013 · 24 posts · 2 votes
    12y

    @Ben Leybovich

    Thanks a lot Ben.

    1Reply
  • Michael Krassos
    Real Estate Investor · Dumont, NJ · Member since 2013 · 61 posts · 2 votes
    12y

    Hello Ben, et all, one thing I've been struggling with is determine what a good Cap Rate is to use in my markets. Who would know this or how should it be determined? FYI I am looking at 2-4 unit properties in Northern NJ.

    0Reply
  • Brett Shepherd
    Investor · Donnelly, ID · Member since 2013 · 8 posts · 4 votes
    12y

    Thanks for the info Ben. Michael, here is some info on CAP Rates from someone no doubt smarter than me:

    http://www.biggerpockets.com/renewsblog/2013/03/30/battle-of-the-cap-rates/

    0Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    12y

    @Michael Krassos

    Several things you can do to find out CAP Rates in your area.

    1. The hard way is to work it backwards. If you know the sale price of a building, and you know the NOI of that building at the time of sale, then you can work the numbers backwards to work out the CAP. Do this for 100 buildings and you'll start seeing patterns.

    CAP = NOI / Value (in this case the sales price)

    2. An easier way is to ask an appraiser or more importantly a commercial banker.

    Incidentally, I have an eBook on Kindle dealing with this stuff. Look it up if you are interested (3.99) Hope this helps :)

    0Reply
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