4-plex. My First Deal. Is this a Good Deal? Thoughts on creative financing?

Question

This is my first attempt into REI and appreciate advice you can offer for acquiring this multi-family property with creative financing.

I have some initial details and expecting more information on the property withing the next couple of days. The following is all I have at the moment:

Sale by Owner: 72 years old with declining health, has owned the property for 19 years.

Property:  4-plex. Each unit: 1000 SF, 2 bed / 2 bath.

Full Occupancy (with a couple long term tenants.) Interiors have been renovated over the last 5-6 years. New water heaters. Exterior needs "curb appeal".  Las Vegas, Built in 1984. Near airport & University. Located on corner of two main streets with bus access. The area is a bit rough, but is being "cleaned up", a large park is being slated for development by the end year.

Asking Price:   $285K (broker suggests $300K)

Total Monthly Income: $2,500

Current Property Tax: $1,600

Current Insurance: $1,600 (owner says he's over paying - TBC)

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Please give me your two cents on whether this is a Good or Bad Deal?

- Based off quick 50% rule analysis (with 20% down), I'd only be cash flowing $130/mo.

- Purchase price would have to be 270K , with 20% down for a 200/mo cash flow.

How can I fit within the 50% rule... without contributing 20% down... this is where the creative financing comes in... suggestions please!

Also, what are some things that can be done to the property in terms of creating more cash flow?

Thanks in advance for your expertise! Mandy :)

Emma Chen · Answer

@Mandy Telleria , I came across this same deal before. As a 4plex, it's located in a nice neighborhood. It's confirmed that the park is in plan. I ran #s includes 6% vacancy, utilities and maintenance& repairs. The cap rate on seller's asking price is very low and even leveraged IRR is not ideal, assuming you will pursue the deal as buy & hold.

As an individual investor focusing on cash flow, I passed the deal. I can see the appreciation could happen if the park across the street is built in the near future. It might be a good deal for a RE investing company if they come in buy this 4-plex and other three contiguous 4-plexs and make them nicer together. Currently this deal is nicer than three contiguous 4-pexs. The 24-units complex nearby is charging $850-$1100 for rent according my market research.  Hope it helps.

Anthony Gayden · Answer

@Mandy Telleria Not a deal based on those numbers, unless of course you are expecting to make your money on appreciation.

I know people like to use the 2% rule on these forums, but for the markets where I invest, the 1.5% rule is more realistic. For your property that would be $2500 monthly rent divided by 1.5% for a purchase price of $166,666. That property does not even meet the 1% rule.

Troy Fisher · Answer

Oooh.  I'll cut you a deal on a 4-plex in N. Vegas.  Recently Renovated.  Rents are $550/mo 3 - 2/1's and a 1/1.  Thanks for the @Joe O !

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Near airport & University. Located on corner of two main streets  with bus access. The area is a bit rough, but is being "cleaned up", a  large park is being slated for development by the end year.

----------------------------------------------------------------------Boy, the only 4-plexes I remember in this 'area' that weren't HOA were out on the north side over By Desert Inn & Maryland.  And then you are talking about a rough neighborhood with a tough tenant class.  Indeed anywhere in Vegas you are going to have tenant class problems with the 4-plexes.

Mandy Telleria · Answer

@Joe O   I would love a fourplex in Summerlin or even in the SE/SW... and you're tellin' me it ain't going to happen. lol

I appreciate the insight as I am interested in Multi-families. @Phillip Dwyer and I have discussed multi's and he's mentioned that Vegas just doesn't have the supply/$.

I came across this one and I thought I'd run the #'s (as best as I know how, it was my first attempt) just to get an idea and see if it's workable. Even without working the numbers it didn't seem like a "deal" but I thought I'd present to the experts to start a dialogue.

@Phillip Dwyer   The rents have been confirmed in the area. There are 3 other buildings identical to the one for sale and they are collecting the same rents. There are smaller apts. across the street which go for $50 less. 2) The owner claims he has a very low vacancy rate. TBC. 3) No HOA.

This was a nice exercise for analysis on a property.  With that said, I'm not entertaining the purchase of this property (unless the owner knocks a big chunk off the asking price, not likely). Thanks for all your insights!

Phillip Dwyer · Answer

@Mandy Telleria Lot's of good advice here.  I'd stay away.  @Joe O summed it up well.  I'd also like to point out a few things even though the numbers suck as presented to you:

1.  Double check the rent numbers.  There's a good chance these are above market.

2.  What are they telling you about vacancy?  There's going to be a lot of turn over.

3.  Is there an HOA?

If you plan to play in this space, I'd be looking for a steeply discounted property.

Joe O · Answer

This doesn't even hit the 1% rule, so it's definitely not a deal, IMO.

Mandy, talk to @Phillip Dwyer about fourplexes here in Vegas.  The Vegas investors tend to stay away from them as they're all in fairly poor areas.  I'd love a fourplex in Summerlin, but it just doesn't happen, all of the areas they were built in (~30-40 years ago, generally) are subpar. So the tenants you get are the bottom of the barrel.

I sure wouldn't deal with the hassle of the tenants you'll have in that place for $100/mo./door (actually now that I think about it and recheck, you said only $130 total, not per door.. you should always shoot for at least $100/door).  In fact, you'll probably have trouble finding a good property manager for that type of investment, meaning you'll be doing a lot of that (not fun) work yourself.

You could snag these for just under 100k about 3 years ago, and a lot of us were passing back then (rents were maybe 2k/mo, so it just hit the 2% rule at the time).  Talk to @Troy Fisher  for someone who did buy 3 fourplexes back then (for around that price) and was happy with the appreciation (which you probably won't see now looking forward) but ask him about his tenants, property managers, etc... In fact, Troy may be happy to sell you a fourplex for cheaper than that price.  ;)

Overall it's not even worth a second look.   Start with the 1% rule and go from there.  :)

Mandy Telleria · Answer

Thanks for taking a quick look at the "deal" ... agreed, as per the number it's not a deal.

Clarification points:

• 285K is the seller's asking price. No negotiation has taken place. My hopes are that the seller is motivated enough to sell the property at a discount.
• There is expected appreciation for property in the area due to the new 24 acre park.
• The seller has been advised to sell for $300K (not advice from my broker). He has not listed the property with a broker - not sure why.

Michael Noto · Answer

285k for a 4-family with $2500 in rent is not a deal no matter how you slice it.

Also, you should seriously question your broker who says you should offer 300k.

Bill Jacobsen · Answer

Based on your numbers this property will make $15,000( $2,500 per month times 12 months times 50%) against a purchase price of $285,000.  That is about 5.3%.  You didn't say what your cost of money is but it is probably between 4% and 5%.  The spread is not large enough and can only change by raising the rents or lowering your cost of money.

Unless you can reasonably expect large appreciation I would pass.

Good Luck.

Bill