Analyze My Deal - crunch numbers to make it work?

Question

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 · Answer

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

Rick L. · Answer

Thanks Joe, great info!

Joseph Weisenbloom · Answer

I would be hesitant to touch this deal and here is why. The expenses of 60% are not overly conservative and it may well be more than that. With the floor layout like the one you have and the level of neighborhood you are dealing with you will be attracting some low level tenants. Not to mention the resale value for a house that has been jerryrigged like that is lower. Expect these rooms to be full with larger families than anticipated which means wear and tear. Not to mention water for all these people will be exorbinant. With that being said I am not a fan of lower class neighborhoods so I may be biased. This dosent mean this cant be a deal you will just have to get a lower price. Considering a cap rate of 10% I would offer 100k. 11040/.1 = 110000 - 10000. As far as whether this is a good deal compared to your market you will have to speak with local investors and get their 2 cents. Go to a local REIA or look someone up on this site. Or look up other deals that have been done in your area under the "deal analysis forum" From what you are telling me 11% CoC does not seem like a good deal. Hope this helps.

Rick L. · Answer

@Joseph Weisenbloom @Bill Jacobsen

Rick L. · Answer

bump

Rick L. · Answer

I need to better familiarize myself with CoC return yields and CAP rates for my area to analyze this deal. Does anyone have any suggestions how to become more familiar with these two in my market?

Bill Jacobsen · Answer

I calculate a 7.6% cap rate using a 60% expense ratio and 8.6% using your numbers. The question is whether those rates are high enough for C- properties in your area. Also, are you sure their are no repair costs up front? Best of luck. Bill

Joseph Weisenbloom · Answer

2300 * .4 = 920 NOI 920 NOI - 575 P&I = $345 4140/36250 DP = 11.4% CoC Is 11.4% CoC good for a C- neighborhood in your market? Are there any other repairs needed?