A multifamily rental deal analysis

[Eran Roseman]

Hey All!

I am new to this community. It looks like a great community and I am proud to be a member.

I would like to hear your opinion on a deal I am checking out.

It is a 3 units house. There are two 2 bedrooms units and one 3 bedroom unit.

There are long term tenants in the house. They are on month-to-month basis.

The house was built in 1890. It is in more then reasonable condition, taking it's age into consideration. Interior is is decent condition low quality finish. New windows, vinyl siding and roof were installed in 2002. New gas lines and furnace in 2008. New water heating in 2008.

It is located in a low income neighborhood, but not "ghetto".

The owner request 75,000$.

No repair currently required.

Current rent for all 3 units is 1,500$, which is exactly 2%.

Expenses:

Gas: 175$

Water: 150$

Electricity: 0$ (paid by tenants)

Tax: 215$

Insurance: 100$ (estimate)

Property management: 125$ (estimate)

TOTAL: 765$

The total is 50% of the rent, but does not includes vacancy and big repairs.

Adding 10% vacancy and 10% big repairs budget, the TOTAL is 1,065$

Mortgage with no money down: 380$ (estimate)

Net Cashflow: 55$

Up to here, nothing too exiting.

The current property management says that it is important for the owner to keep the rent low. He believe in being fair and affordable. He also likes to keep the vacancy rate down. This strategy works and the vacancy rate is practically zero.

According to rentometer the 20th percentile for 2 bedroom apartment in this area is 550$ and 700$ for 3 bedroom. The units in this house are rather small and basic, so 20th percentile seems fair.

Assuming that I can raise the rent by 20% and that I negotiate a better deal and close at 70,000$, the number looks like this:

Cost: 70,000$

Rent: 1,800$ (2.6% of cost)

Total expenses: 1,148$ (64% of rent)

Mortgage: 354$

Net Cashflow: 299$

Now this numbers look much better.

My questions are:

1. Did I missed anything?
2. Is it safe to make such an assumption about the rent?
3. I thought that the 50% rule supposed to be conservative. The expenses here are significantly higher. What can I deduct from that?
4. Would you go for such a deal?

I will be more the happy to get any feedback.

[Kevin Nalley]

I'm with Aaron, I have passed on properties that require me to pay anything but water, and I don't even like paying that. Even with water, I've seen some wild fluctuations in bi-monthly bills.

Considering you're from Iowa and there are 3 units in this building, $175 for gas seems very low, especially in winter.

I have 22 doors right now (two duplexes, two 4-plexes, one tri-plex, and the rest are houses) and all of them are built in the late 1800's and early 1900's. 10% for maintenance is not enough, I would factor in a minimum of 20%, it seems like there's always something to fix with these old buildings and nothing in them is square or standard. With a mere 22 doors, I have a full time maintenance guy that stays very busy.

The biggest problem with slightly above Ghetto properties is tenant screening... I can't stress enough to learn everything you can about screening and do it thoroughly.