4plex Analysis-too good to be true?

Question

Here are the numbers:

1-3Bd

2-2bd

1-1bd

2k sq ft, full basement

fully rented  @2100/month gross

going for 74,900 short sale, an inheritance that the owner doesn't want to deal with

seems like a great deal so far, but here's the kicker- 3/4 of the units are rented by the former owners(uncle) family members.

I'm thinking worst case, I have to do 3 evictions, but given the numbers, still worth the risk?

David Beard · Answer

Not picking on you, Chris F., but the problem with these kinds of posts is that just a few numbers are given with no context whatsoever.  There are plenty of places in Michigan, or Cincinnati where I invest primarily, or most cities in the midwest, where the neighborhood/submarket would be so poor that it would be a terrible deal even at an apparently good gross rent yield.

Here are just a few things that are critical to determining if it's a "good deal" for you:

What is the grade of the neigborhood (sub-market and broader area)?

What is the grade of the property (including age, condition, deferred maintenance needed, how outdated are units)

Who pays water?  Heat?  Hot water?

What is the tax assessment and tax bill?

This is a cross-country investment. How will it be effectively managed in what is bound to be a low-income area with these types of rents.

Tom A. · Answer

@Chris  F. , taxes in Michigan are not based on a property's own sales price.  If they were it would be very easy to game the system.  Michigan uses comparable sales primarily, until you get to larger multi-family properties.

I don't know how familiar you are with the property tax appeal process in Michigan but you can appeal your assessment each year with the local municipality, and if not satisfied, take it to the state tax tribunal.  That may take a year or two to get resolved but it's not too expensive and you will get refunded any overpayments back to the date of the original appeal.

Do you mind sharing what city the property is in?  There are a few "suburban" areas that have a bit of a Detroit feel, but if it is indeed in a nice white collar area the price is almost too good to be true.  While the rents sound very good given the purchase price, there's a lot more to any investment than those two numbers.

Adrian Tilley · Answer

@Chris  F. Wait, let me guess, DETROIT??  = D

Calling @Joshua Dorkin ...

Chris F. · Answer

I don't mind sharing. It's in Waterford.  But the large cash flow offsets the taxes so It's not a deal breaker either way.

Chris F. · Answer

@Adrian Tilley

No Detroit fortunately does not encompass the state of Michigan :) I wouldn't invest in the city of Detroit.

Chris F. · Answer

@David Beard  this is not in Detroit. It's in the suburbs in a nice white collar area.. And I will say that the property last sold in 2002 for 200K. taxes are on the high side at almost 3K, but tax basis is most likely based on 2002 sales price so I can probably get that reduced.

the rest I'm still trying to find out but so far based on what I'm seeing, it looks good.

Chris F. · Answer

Thanks for the replies all,

@Kurt K.  I'm not looking to evict anyone, however there are 2 scenarios I'm concerned with:

1. the "uncle" was really letting them pay whatever whenever when he had the house, and I will expect the rent on the 1st like every regular non familial landlord

2. that the sellers "stacked the deck" with family members to drive up the price and get it rented, and once sold those family members will immediately bail giving me a 25% occ rate and a migraine:)

@Adrian Tilley As far as the rest, the rents are not far off, maybe a bit on the low side, which is good for me. Also this property is in Michigan.

I do not have leases yet, but that is definitely on my list of requirements.

Adrian Tilley · Answer

@Chris  F. From what you have provided, it looks pretty good.  Another vote for looking at market rents and not current rents - could be better or worse.  Out of curiosity, where did you find the property?

Michael Seeker · Answer

Do you have copies of the leases?  Any offer should be contingent on your review of the leases within 48 hours of receipt.  Do you know what market rents are for the 4 units?  I generally don't pay too much attention to what the current rent is and focus more on what market rent is.  If the units are under-rented then great...if they are over-rented then you're in bad shape.

Wayne Brooks · Answer

Remember that the asking price is not the price that the shorted lender will accept.  It's just the price they listed it for, and it may or may not be realistic FMV.

4plex Analysis-too good to be true?

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