3 Unit MF - Analysis, Offer and Financing Structure

[Christopher Cruz]

Hi Guys -

The past two years I've been gobbling up information on all things real estate - specifically buy and hold MF (1-4) in the low-middle income space.

I have finally come across a property that I believe will be a great first investment property and I would like to share my analysis and thoughts to get some feedback and guidance in how to make an offer as well as best way to structure my financing (30 yr fixed, 15 yr fixed, etc.). I have an appointment to visit the property on Saturday, and if all things go well I will be hoping to make an offer within the next week.

Property: Listed at $200,000
3 Unit MF, fully occupied.
Tenant 1: Section 8, $1,305/month. Just resigned 1 year lease.
Tenant 2: $1,000/month. Month-Month lease
Tenant 3: $800/month. Month-month lease

Each unit is individually metered and tenant pays utilities except for the following:
Electricity for section 8 tenant only (2,100/yr)
Water + Sewage for entire house (1900/yr)

Property Taxes: 7,808
Insurance: 1,500 per year

Summary: (annual basis)
Rental Income: $37,260
Operating Expenses: $13,308 (35.7%)
NOI: $23,952
Mortgage 30 yr @ 5%: $10,307
Net Income: $13,645 $4548/Unit

The following expenses were receieved from the owner. I realize that operating expenses at 35.7% are unrealistic. Even after adding 10% for repairs, maintenace, and reserves puts this property at 45.7% - I would still be very happy with this outcome.

To dumb down the wishful thinking (and numbers) I reassessed with operating expenses at 50%:

NOI: $18,630
Mortgage 30 yr @ 5%: $10,307
Net Income: $8,323 $2774/Unit ($231/Unit per month)

Even with operating expenses at 50%, this property seems to be a cashflowing cow.

The month to month tenants have been there since 2010 and 2011, they were recently switched to monthly leases when the owner decided to sell the property to allow more flexibility to the potential buyer. The section 8 tenant was resigned for another year due to nature of the tenant.

Roof and chimney was redone in 2009, new gutters installed.
Plumbing was replaced in 2009 (main stack and drain)
forced hot air furnaces for 1st and 2nd floors - 2004
Electrice baseboard for 3rd floor
all hot water heaters replaced within the last 6 years

Everyone is up to date on rent, and he is willing to provide me with signed statements for verification. However, he will not provide bank statements to verify.

When I asked for schedule E, he did not want to share his tax records. I think he misunderstood what I was asking for. The broker said he is going to speak with his client to try and obtain these.

I have a copy of all 3 lease agreements and they look good and clean. Everything the owner has told me was on point.

The owner is selling in order to liquidate to flip houses. He sold another 3 unit less than a mile away 2 months ago.

The owner bought the house in foreclosure in 2008 at $176,000
The house was tax assessed $185,000
The asking price on the house is $200,000.

I would appreciate all and any feedback, criticism on analysis, important things I left out, major questions to ask when visiting the property on saturday. Basically would like to have everything covered, and because this is my first I'm sure i've overlooked/missed a good amount of things.

I would also like some guidance on how to go about offering for this property. In the analysis I provided above I assumed I offered asking price at $200,000 with 20% down. The cashflow gets even better when purchasing the property for $175,000 which I originally modeled it at.

Is it out of line to offer $175,000 when they acquired the property for $176,000 in 2008 and it is assessed at $185,000? The house has been on the market for 15 days - so I feel like I have a good chance of purchasing this property, I don't want to miss the opportunity with a lowball offer. I want to offer a fair price that works for both parties. With that being said, I would like to pay as little as possible =).

Lastly comes the financing. I'm beginning to shop around for mortgages today and what I have in mind is 30 year fixed mortgage to take advantage of today's rates. If you guys have any creative ways or better ideas on how to go about purchasing this property I would love to hear feedback. Keep in mind I have enough liquidity to put down 50%. Do I put as little down as possible to remain liquid for another purchase?

I know this post was long, I just wanted to be thorough. I'm sure I forgot some things out so just ask if I did. I appreciate everyone's time and feedback.

Thanks
-Chris