1st offer-4 family check

[Brad S.]

I'm looking to make my first offer and need some help checking my numbers. It's a brick 4-family (2-1bed, 2-2bed) in a lower income, but decent/low crime neighborhood on a street with other 4-families. The property is vacant so there is no actual expenses available.

Numbers:

• Asking price: $50,000
• Repairs/Upgrades: $20,000 (needs driveway, HVAC repair, water heaters and possibly kitchen/bath upgrades)
• Monthly gross rents: $2,130
• Expenses: $1,476 (69% - seems high but breakout below)
• Income after expenses: $654
• Mortgage payment (25% down): $282
• Monthly cashflow: $372

Monthly expense detail

• Taxes: $383
• Insurance: $62.50 (estimate)
• Property management: $213 (looking to self manage though)
• Vacancy: $191.70 (9% assumed)
• Utilities: $150 (SWAG estimate owner pays water/sewer)
• Maintenance: $213 (10% assumed)
• Cap Reserves: $213 (10% assumed)
• Grounds keeping: $50 (SWAG estimate-mowing & snow removal)

Besides input on whether this makes sense, I have a couple of specific questions:

1) I can never hit the 50% rule when I run the numbers. Do you include vacancy rate when calculating? I'm I being to conservative on my maintenance and cap reserves (10% each)?

2) How much should I factor for grounds keeping (Ohio) and water/sewer?

[Brad S.]

One other question. It shows $4,500 escrow for water heater and HVAC repair. How does this work? Is this something I get back at closing or after proof of repair?

[Terry Hershberger]

I am not sure you can do 4 baths and kitchens for $20K???

[Joel Owens]

I break It down another way.

First verify the rents and how long they have been at that income level. 3,6,9 months, 2 years??

Then look at the tenant rolls for any waiver of security deposit or first months free rent or half off to get them in there and if they were screened properly.

Do a market research for the area to make sure your rents rest in the middle range for the area so tenants will not want to leave. What year was this built??

4 units at 2,130 is 532.50 a month per door. If immediate CAPEX needed is 20,000 then they are really asking 70,000 all in. 70,000 all in is 17,500 a door for 523.50 in rent which is really good.

60% costs as you stated is normal for landlords that pay utilities.

2,130 X 12 = 25,560 a year X .40 (60% costs) = 10,224 NOI

At a 10 cap the value would be 102,224 sales price.

[Shane Johnson]

@Joel Owens

OP said property is vacant.

I would drive over to the area, and knock on every door of the 4 plexes around there to meet the tenants, and ask them how much they pay. Dont mention your trying to buy that 4plex, but just mention you own one in the area, and looking to increase the rents or something.

[Joel Owens]

Yeah I missed that detail. Answering so many post it happens........... : )

I wouldn't believe any seller estimated repairs on a vacant unit. If it's stripped it will not be 5,000 a unit.

More like with exterior roof, windows, parking lot about 12k to 13k a unit total for 2 beds.

[Brad S.]

@Terry Hershberger Good point. What is a good budget for low end bath and kitchen?

@Shane Johnson Thanks for the suggestion. I have looked at Rentometer and elsewhere for comps and they show median rents ~$475 for 1 beds and $595 for 2 beds. Your method would yield actual rents however.

@Joel Owens Thanks for the quick review. It's not totally stripped, but not a gem either.

Am I estimating too much for cap ex and maintenance reserves? I want to make sure I'm covered, but I also don't want to over estimate to the point I'm loosing out on deals.

[Shane Johnson]

No problem, I would also check craigslist, that seems to be a very active source of rental comps that I like. The only way to tell what something rents for is to either look up the property and contact the landlord, or watch craigslist diligently and pay attention to when the listing disappears and at what price it was last listed at. The method I mentioned would not only yield real results, but it would give you insight to renters who are paying too little or too much, as well as renters who have been there for multiple years. Not saying you should still tenants away from another four Plex owner in the area, but you might be able to mention to those same renters about the availability of your four Plex with upgrades compared to their unit at such and such price. It would give you a leg up on cherry picking the best tenants in the area already, And/or be a lead generation method as they might know somebody looking to rent.

[Aaron Montague]

@Brad S. I'd guess you're looking at $5000/apartment for Kitchen AND Bathroom remodel.

With the items you are looking at, I'd double your cost estimates. 40k should be safe. 10k for Kitchens, 10k for Baths, 5k for a driveway, 5k for HVAC, 4k for 4 Water Heaters installed, 6k for stuff you haven't thought of yet.

I think your numbers are a bit too high for Cap Ex and Maintenance. The major reason I say this is the renovations you are conducting at the outset. I'd put away $225/month for both for a deal like this.