4 plex eval...Put it under contract or not?

Question

Hey Bigger Pockets,

I've been evaluating a 4 plex these last few weeks and I can't decide what to do.  (this would be my first RE purchase).  The basic numbers are this:

Negotiated purchase price:  336,000

FHA monthly payment:  2150

Rents per unit:  $650  (market rents are $720 I'd say)

The current tenants have all been in there for quite a while so they're good stable, quiet, trained(!) long term tenants.  I could raise rents on them but then expose myself to vacancies and such.  My real quandary is this, I don't know what the average monthly expenses are and I won't have access to that info unless I get it under contract.  But if I do that, I put my earnest money at risk, and also risk frustrating everyone involved in the process if I were to simply back out.  Thoughts?  Advice?

My agent thinks a swinging deal (of course) but my gut is telling me to walk away, but in my area there really aren't any good 1% deals or anything close that comes up.  This has been one of the better ones.

Dan Dwyer · Answer

Hi Josh a couple of things  you said yourself your gut is saying pass and since it is your first deal your not sure if it is just butterflies or not, always listen to your gut and as you do more transactions you will learn if it's just the excitement of the deal or a true warning.

Then you said you didn't want to stress others involved in the potential deal. Really?  You aren't responsible for their feelings. Set your parameters of what will work for you and your plan if the deal doesn't work then it's Next!

If you are working with a real estate agent or writing your own offers they should be structured  to give you a due diligence period with no risk to the earnest money deposit, in our area the standard is 17 days.

Don't talk yourself into a deal because you feel the need to do something

Good luck and trust your gut

Josh Butler · Answer

Yeah the payment does include the taxes and insurance...but property taxes as I understand only go up each year.  A few years down the road my minimal margin becomes a nonexistent margin...There isn't much wiggle room.  I'll talk to my agent though about getting that kind of agreement from the listing agent for future deals we look at.  I didn't know that that was an option.  Thanks for your help everybody!

Jared K. · Answer

You shouldn't have to put it under contract to get the expenses. If an agent is selling it then you should just sign an agreement not to share the info but use it for your own use to evaluate the deal. I wouldnt put a dime down but I would say hey I need the expenses or I cant say if its worth buying or not, or I walk and buy a deal from someone else. If you do have to put a deposit up and it gets that far then make sure you put a contingency clause in your contract so you get your deposit back if you dont like the #'s.

I would look elsewhere b/c those #'s are not a deal in my book before expenses of any kind. You never mentioned taxes and insurance but it would blow this deal further toward a NO WAY if not included in the payment. I live in a similar type area where people spend too much to get that kind of return also but I wont. I would buy outside your area if you have to where there are decent deals, close to you if it makes you feel better, and have a rental management company handle them for you. It wouldn't take much of a deal minus rental mgt fees to beat this deal and those #'s.

Sorry to be candid, best of luck!!

Elizabeth Colegrove · Answer

I work on a Southwest Airlines model so a lot smaller margin. Your deal scares me for a few reasons

*under value but your scared to increase, if they were truly undervalue increasing them shouldn't be. Problem

*its a duplex so a lot more expenses for your cash flow

*$650 is a low monthly rent so what kind of tenants do you have in your apartments

What is your "plan" or goal? Are you trying to a buy a 4-plex in a certain area to live in or a future rental.  My husband is active duty and a large part of our model is self management of personal properties even cross country.

A big part of our success has been having a great realtor that I can trust. Our model is single family's because they appreciate in price and rent. We have had a lot of friends rent out rooms covering all their costs allowing them to put away their "living" costs for other expenses.

My passion is real estate as another basket to the point I started a blog/website. While your first deal is always scary, your gut should not be screaming at you to run away ;) that's nt beigg scared that's you head telling your heart something

Jared K. · Answer

@Dan Dwyer I think you gave him great advice. If you worry about feelings in this business you wont get too far but on the other hand I can see where he is coming from too. Being new will give you insecurity b/c your not the rich guy that owns a ton of properties and people treat you like your a nobody.

Josh dont let anyone or anything stand in your way. Thats the agents job is to work for both parties so make em do their job if you have to, and some you will!!!! Its your money so make em work for it!! Your just as important as anyone else out here even if you have never bought a deal and are inexperienced. Dont get suckered be some of these agents either that say its an awesome deal if its not, happens a lot!! Follow your knowledge of how to evaluate a deal that you learn on Biggerpockets and make offers that are shameful embarrassing lowball offers b/c its your $$ and your business!! You will get an accepted offer eventually and it will be a GOOD investment!! Stick to your guns, not what everyone else is paying!! Follow your gut!!!!

Best of luck!!!

Matt Morgan · Answer

You should be able to find the majority of the expenses without having to put it under contract. Taxes are typically available through the MLS, insurance can be found by calling an agent and getting a quote, maintenance/capex will typically be 15-20% of rents, and utilities can be found by touching base with local property managers and asking what they're seeing on their units.

Also, you can back out of a contract during the initial inspection period for any reason you deem appropriate and still be refunded your earnest money. That being said, you can skip all the above steps, apply the 50% rule (which is fairly accurate) and find that this deal is going to fall short of just about every return metric.

The only reason to buy this building would be because of future appreciation, which is purely speculative and probably not a wise idea.

Good luck!

David McEwan · Answer

Using the 50% rule makes me say a big NO to this deal doc! Price to high and rents are too low! Don't worry south Florida multis are like this too!

Arlan Potter · Answer

way too high.  No cushion at all. rent 7/10% per month rent/price. not even close for my business.

Josh Butler · Answer

@Zack H. Thanks for your response.  That mortgage payment is after a 3.5% downpayment...is it reasonable to expect deals with a better rent/payment ratio even if I'm only putting 3.5% down?  Salt Lake is a tough area...I could always put down more and lower it, but I'm trying to keep my reserves so I can buy other properties after buying my first one.

Zack H. · Answer

Purchase price is too high.  Rents are too low.  Expenses will depend on the age of the structure structure and taxes.

4 plex eval...Put it under contract or not?

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