Analyze My Deal - crunch numbers to make it work?

[Rick L.]

Property Description: non-MLS four family property was originally a 7 unit building (approximately 4400 sq ft total between both floors.) that was converted to a 4 unit building. The supposedly owner did a total gut to the building approximately 5 years ago. It has new windows, A.C., electric panels, roof, plumbing, and sewer laterals. Two units have 3 bed/1.5 baths; the other units are 3 beds/1bath. Property is located ijn a C-rated neighborhood.

Asking Price: $145,000

Conventional Loan Terms: 30yr @ 4.75% w/ 25% down payment $575

Gross Rent: 2300/month; 27600/yearly

Seller Disclosed Expenses (Unconfirmed):

Taxes: 1352 yearly

Insurance: 1600 yearly

H20 & Sewer: 528 yearly

Expenses:

Using the 50% rule, or 60% for expenses rule since owner would be responsible for utilities (sewer & water):

2300x 60% = 1380 for expense other than Principle & Interest (P&I)

Vacancy @10% = 230

PM @ 10% = 230

Repairs/Improvements@13% = 300

Insurance = 134 (seller disclosed) VS. 160 (estimated)

Taxes = 113 (seller disclosed) VS 125 (estimated)

Sewer & H20 = 132 (seller disclosed VS 210 (estimated)

$1380 - 1255 (My Estimated Expense Total) = $125

P&I Payment and Profit:

2300(Gross Monthly Rent) x 40% = $920

P&I = 575

$100/Door Rule x 4(Fourplex) = $400

$920 - $975 = ( -$55)/month

As you may notice, the seller's disclosed expenses vary greatly from my estimated expenses. Therefore property expenses may very well be 55% instead of the above calculated 60%.

With this change or 45% left for P&I and $100/door.

2300(Gross Monthly Rent) x 45%= $1035

P&I = 575

$100/Door Rule x 4(Fourplex) = $400

$1035 - 975= +$60/month

I have overestimated most of the expense numbers aggressively to skew the expenses in my favor. Most expenses will run less than my estimates. So, with the fudged numbers and percent allocated for expense the numbers work out and the property cashflows with the proposed loan terms.

I would welcomed a more seasoned veterans opinion on my numbers. I'm concerned that I'm being way to aggressive with my numbers and I have way more "meat on the bone" so to speak than what I've actually calculated.

[Aaron Montague]

I didn't see a Trash expense anywhere. Is that covered by your taxes?

I would probably spend the money to separate the sewer and water lines in this place. You'd need new meters and some new piping. I would guess it run you upwards of 6k. That investment against your 2500/year sewer bill estimate would pay for itself rather quickly. AND you might be able to roll a small construction loan into the mortgage.

I agree with @Joseph Weisenbloom on the price. 100k is a good starting point. It is a reasonable buy up through about 110k. At 110k, given your numbers, I see about $565/month cash flow and a 20% ROI.

25% down plus 6k for the sewer fix(rolled into the loan) plus 5k for closing for 34k out of pocket to close at 110k purchase price.

Here are your expenses as I see them:

Mortgage Rate 4.75%

Length of Mortgage in years 30

Monthly Mortgage payment $453.83

Taxes $125.00

Sewer and Water $208.33 (I accounted for borrowing 6k to remove this expense, but I figured it would take at least a year to switch the tenants over)

Trash $- (this was my big question)

Heat/Utilities $25.00 (Manager's electrical, outdoor light, etc)

Cap Ex and Ops $300.00

Insurance $158.33

Mgmt Fee $230.00

Vacancy $230.00

Total Expenses $1,730.50