How does this 4plex look?

Question

I am looking at a 4plex for sale, here are the numbers I have, can someone look at them, crunch them and let me know what else I need to find out about this property?

1920 SQ Ft
	Built in 1940, cinder block construction
	All units one bed one bath
	$400 per unit
	tenant pays all utilities
	Taxes of $1000 per year
	Asking price 130k
	Close to a college in a good neighborhood

What else do I need to find out?

Michael Seeker · Answer

I wouldn't necessarily say the property is way overpriced.  The property may be way overpriced for that rule, but not necessarily way overpriced for the area.

By that rule, you'd be looking for rents at or above 2% of your  purchase price.  In my area, I look for rents between 1.2 and 1.5% of the purchase price because I don't want to invest in the parts of town that command the 2% rates.

As with all of the rules...they are a general guideline and are meant to be just that.  They are not the law of the land.  You can find plenty of successful investors that don't follow the rules outlined on here and plenty of failed investors that do/did.

If that property were for sale in my area, I'd take a hard look at it just based off of the numbers you provided.  I'd also want to see all of the units separately metered and preferably separate HVAC systems for each.

Bily Elliott · Answer

Michael Seeker  I am going to do a drive by tonight and check it out, I also plan to call the realtor later today to find out why the owner is selling.  According to county records it has been owned by the same trust since 1997.

@Troy Fisher Your debt service number of $521 is correct, when I punched in a loan of 130K with a 20% down payment it gave me the $630 per month number I used, I am not quite sure why though, but I have found a different calculator that seems to be working.  All four units are 1/1, I am not sure how nice they are inside, but the outside of the building looks to be in good shape.  They might be able to be raised some, but I think even $450 would be a little above market rent from what I have seen.

So using the 50% rule with the proper debt service numbers, each unit still only cash flows $70 per month.  Even bumping the rent up to $450 each that still keeps the cash flow at under $100 per unit, $94.75 to be exact.  I do realize these rules are just guidelines and they are not set in stone, what else do I need to find out from the realtor to see if this is worth pursuing?

Troy Fisher · Answer

You're right.  The first cup of coffee hadn't quite settled when I began writing the post this morning.  I'll take back the wild part.  And that's the fun part of BP is arm chairing all these deals!  I enjoy it.

I've interviewed 20+ property management companies and only had one that had satisfactory answers to my questions and in their ability to handle my properties that wasn't based on a flat fee based on rents of $525. (my average)  If you are getting $725 for your units they are more accurate and a higher class tenant.  Of course this might be one of those 'market' dependent factors that are discussed all the time too.  Sure, sure if there is no tenant there is no fee.  But don't forget to add in: leasing charges, labor upcharges, phone call upcharges or any of the other things that PM companies try to get you with if you don't read the agreements.

Thomas Williamson · Answer

I can only speak from personal experience on this.  I bought my first four plex in July.  Similar story, but without the college.  Mine is great location, close to everything, and it was built in 1983, and not the 1940's, and my units are all two beds and two baths.  My purchase was 157,000.

My rents are 750.00 per month, tenants pay all their own utilities.  Based on my experience, I wouldn't purchase the deal you've presented.  I had a ton more re-hab than origianlly budgeted, and remember mine was in decent shape and built in the 1980's.  I did a complete inspection on the property, but once you get in and start working on those things, you'll find a million other things that need to be fixed.

If the rents were higher, then I think you could justify the purchase, but with rents that low, I'd keep looking.  One other thing (and of course this is market specific, but could be the same there too) I thought mine would rent out easily, turns out not a ton of people looking for just a two bedroom.  But in your case that would be good for college kids.  Good luck.

Michael Seeker · Answer

Here's a perfect example of why the 50% rule is flawed.  You're talking about charging 2 different rents on the exact same unit(s)...nothing else has changed.  If you raise the rent from $400 to $450, do you really think your expenses are going to go up by $25/month?

Just something I wanted to point out...not a huge factor in this decision though.

Aaron Montague · Answer

These numbers are not "wild assumptions," they are based on the numbers Bily provided above.  They are assumptions however.  Part of the process is figuring out how to look at each of these numbers as a larger chunk of the whole.  This is his deal, so I get to armchair QB the numbers from my desk :)

Mortgage Rate - Bank Rate tells me lots of good looking numbers as well.  I have not been able to close on a conventional loan at 5% in a while.  My last 2 quotes (TD bank, Merchants Bank) were for 5.5% and 5.625% over 30 years.

Management - I don't agree with your management fee structure.  Nothing about "great PMs" indicates they need to charge a minimum of $80/door/month.  More power to them if they can get that much.  I have 2 MFHs with a fixed % fee based on the total rents.  No floor amount anywhere.  If there is no tenant, no fee.  This deal dies quickly if you are paying 20% of the monthly rents to a manager.

Vacancy - We always signed our tenants up for 12 month leases backed by a co-signer.  Subletting was allowed in all cases.  We never had any issues getting rents in the summer.

General - Yes, it is a poor name for a category to be displayed in public.  I've changed it on my sheets.

Troy Fisher · Answer

Let's not make such wild assumptions and fill in some information:

130k Price

Rents @ $400/month each  -- Ok

Mortgage Rate 5.50%          -- Bank Rate just gave me a 4.54% add .5% for NOO and your in a more realistic ball park.

Length of Mortgage in years 30 -- Ok

Monthly Mortgage payment $553.59 -- And We already Agreed on this.

Taxes $83.33 -- Did we investigate the taxes and figure out if this is a real number or if it is going to change with the sale?  Here in California I discovered taxes are based on the LAST SALE amount.  So, is this $1000/yr real?

Sewer and Water $ -- Do you have an outside bib?  If so you are going to have a building water cost.  I'd be surprised to hear that the sewer and water are submetered.  The previous owner may be passing it along.  A good thing to look at during DD.

Trash $- ?? Well here's a glaring number.  We don't have a trash fee?  This could kill the tiny margins on the property.

Heat/Utilities $- Got an outside light?  Utility bill to you. Sure it may be as low as $10/mo but don't forget to include that number.

HOA $- DO NOT DO HOA DEALS!

General $150.00 (might be a bit low with college students banging on the place) What is this?  Maint. Reserves?  Monthly Repair Budget?  General is not a very good name for a budget item.  It doesn't tell a buyer how you spent the money, or a CPA whether it's a Capital Expense or Operating Expense.

Insurance $100.00 - What is this for?  Do we know if we need to have flood insurance?  Snow Insurance? Gnomes in the Yard Insurance? Does it include an umbrella coverage?  This seems rather low to me.

Mgmt Fee $160.00 (10%) -- The truth about Mgmt Fees and 4plexes.  If you are renting a property that is taking in less than $1000/mo most GREAT PM's will have a floor amt that must be paid.  Not just 10%.  This 10% drives me bonkers.  It's going to be more like $80/mo  so lets double that to $320

Vacancy $160.00 (10%) -- College town.  Your vacancy rate is going to go up, or your rents are calculated on 9months and spread out over 12.  If you are renting to students they are only going to be there 9 months of the year.  So that leaves you with 12 months/48 months of occupancy driving this number upto 25% or $360!

Total Expenses -- Unknown until we do our Due Diligence.

Aaron Montague · Answer

@Bily Elliott

You mention that the utilities are ALL paid by the tenants?  Are the Sewer and Water pipes separately metered?

My numbers run down this place at about $100/door per month.  This gives you an ROI of 11.5% with 25% down.  Interest rate of 5.5%.  Do you have a lender that is lending 4.25% on investment properties?  If so, I'd love to chat with them.

I get $393/month in cash flow with the following assumptions:
	(With 20% down and 4.25% rate and $450/month in rent I get $595/month and 20+% ROI)

130k Price

Rents @ $400/month each

Mortgage Rate 5.50%

Length of Mortgage in years 30

Monthly Mortgage payment $553.59

Taxes $83.33

Sewer and Water $-

Trash $-

Heat/Utilities $-

HOA $-

General $150.00 (might be a bit low with college students banging on the place)

Insurance $100.00

Mgmt Fee $160.00 (10%)

Vacancy $160.00 (10%)

Total Expenses $1,206.93

Troy Fisher · Answer

Well if the asking price is 130 and he's in at 20-25% NOO.  Then his mortgage is actually going to be 104000 (@20%) which is $521 in debt service..

400/mo is pretty low.. and I'd agree that you'd be looking closer at sub $100's to have reserves that aren't being drained by your debt service.  400 seems pretty low for a college town.  are they 1/1's? 2/1's? 2/2's?  What's market rent?

Bily Elliott · Answer

OK, after using the 50% rule this property is WAY overpriced correct?

$1600 gross rent / 2 = $800

130K mortgage, 30 year fixed @ 4.25% has a payment of $630 per month

$800 - $630 = $170/4 = $42.50 cash flow per unit per month right?

It looks like it should be 80K tops, and that only cash flows $100 per unit per month which is lower than I want to have.  An 80K mortgage has a monthly payment of $400

How does this 4plex look?

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