Thoughts on this 4 unit deal?

[Danielle Cage]

Hi,

I’m looking at a 4 unit deal in the Chicago area. I’d appreciate thoughts on whether you think it’s worthwhile.

This is my first buy and hold. I’d like to scale at a moderate pace. 

I have a decent job, so I’m not dependent upon cash flow.

Once I purchase a multi unit, I'm going to pivot and purchase an SFR, hopefully picking up 5+ units this year.

The property has a lot of deferred maintenance but not a lot needs to be done immediately and can be spread out over 1-2 years.

Purchase - 415k

Rent - 4800/ mo

Cash out of pocket - 15k

Maintenance, cap ex, vacancy- 540/ mo

Cash flow after all expenses- 850/ mo

Concerns:

- Buying at 6% interest and not waiting for rates to go down

- If we do hit a recession and rates/ values drop, would my rents go down to

I appreciate any and all feedback!

[Dan H.]

Quote from @Danielle Cage:

Hi Dan,

Yep I used an arbitrary # that all the calculators offer. What do you recommend for figuring capex and maintenance?

It is the new 5% conventional down. I negotiated max seller credit.

I appreciate the feedback about the Great Recession and rents! Makes total sense.

 I recommend you create a spreadsheet with the current cost of replacement, expected lifetime (use middle of the expected range), and then calculate the monthly charge.  Sum up the monthly charges and you will have total expected monthly cap ex cost projection.  

Example for my market: 

- water heater $1600 (lower end of licensed plumber cost), 12.5 years (150 months) $10.67/month

- roof (asphalt shingle) 2 br, 2ba typical size ~$10k licensed, 20 year life span $41.67/month

kitchen, exterior paint, flooring, plumbing, electrical, fencing, tree trimming (I have a property where the tree trimming is one of the larger maintenance/cap ex items at over $1k/year), bathrooms.  

I suspect you will be surprised by how much it adds up to. I am up to $350/unit per month on 2 BR Condo where HOA is responsible for exterior or small attached studio (so $350/unit is the smallest number I use and includes maintenance and cap ex). My house is highest at $1k/month and has the over $1k/year for tree and bush trimming in addition to $300/month gardening that does not include the tree trimming and having a pool and large yard (just over 1 acre) with lots of hardscape (asphalt).

Attached units are a little cheaper than detached units (as well as save on insurance). Condos have exteriors in HOA fee so are much cheaper in the maintenance/cap ex (because the costs are in HOA fees). Pools are maintenance/cap ex killers and only make sense if you can get significantly more rent or, on personal residence, use it a lot.

I forget if the new loan is Fannie or Freddie, but your lender should know. It has up to 95% LTV OO and no sustainability requirements. My son is looking at this option.

Good luck