Birmingham Fourplex

[Rand Linton]

Hi All. I have the opportunity to purchase a 4 plex (2 duplexes) located next to each other for 99,500. The property is located in Birmingham, Alabama, in the East Lake area. The units are 2br/1.5 bath and appear to be approximately 1100 square feet per unit. Tenant pays electricity and water/sewer. Here are the numbers for 2013:

Total Income (2013 actual): $24,940

Expenses (2013 actual; this is where it gets tricky); I have listed in groups as seller has listed:

1) Repairs & Maintenance: $14,202

*The $14,202 includes $9,000 for installation of 2 new HVAC units in 2013. Remove those 2 items and R&M is $5202.

However, I question why seller would sell the year after incurring such an expense?

2) Ground & Site: $3296

*Includes $3152 for landscaping. Broker states that Seller includes landscaping expenses for several other properties in the expense statement for subject property; Seller estimates that landscaping for the subject property alone would be only $1000. So, by reducing the Ground & Site by $2152, total Ground & Site expenses are $1144.

3) Administrative: $13,654

*Includes $11,231 for property insurance. Again, the Broker states that Seller includes property insurance expenses for several properties in the expense statement for the subject property. Seller estimates property insurance should be $1200. Removing the excess property insurance leaves total Administrative expenses of $3623.

4) Utilities (common area electricity) - none provided but using January and February of 2014 numbers, which average $42.50 per month, I'm sticking in $510 for this expense.

Total Expenses (as is): $31,662

NOI = (6,722)

Total Expenses (with above noted adjustments): $10,479

NOI = $14,461

Currently, the property is 100% occupied with each unit renting for $525. That produces total rental income of $25,200 per year (4 x $525 = $2100 x 12 = $25,200). I discounted that number by 10% for vacancy and collection loss to produce a net number of $22,680

$22,680 - $10,479 (adjusted 2013 expenses) = $12,201 NOI

Putting $25,000 down on the full asking price leaves a mortgage of $74,500; financed over 20 years at 6% = $6405 annual debt service.

Cash on Cash Return = 23.18%

Assume $25,000 down payment plus $20,000 for closing costs and repairs:

Cash on Cash Return = 12.88 %

2014 Annualized:

Expenses for Jan & Feb of 2014 totalled $10,000. This includes another $3696 for Property Insurance and an expense of $3255 as a make ready after a 10 year tenant moved out of one of the units. Removing the make ready expense and reducing the Property Insurance expense to $100 per month leaves total expenses $1625 on average ($10,000 - $3696 + $200 - $3255 = $3249), and annualized expenses of $19,500.

Utilizing the 2013 income numbers, NOI = $3180 (22,680 - 19500). Obviously, the deal is not doable at full purchase price.

At purchase price of $75,000 with 25% ($18,750) down, remainder of $56,250 financed over 20 years at 6% = $4836 annual debt service.

At purchase price of $50,000 with 25% ($12,500) down, remainder of $37,500 financed over 20 years at 6% = $3223 annual debt service.

How does this deal look to the forum members? As mentioned above, I question why the Seller would sell so soon after incurring the expense of 2 HVAC units. Based on 2014 annualized numbers, it does not cash flow.

For you Birmingham investors on here, is East Lake a war zone?

What else am I missing?

Thanks for your help.

Rand