Potential first MFH purchase

[Omi C.]

Hi everyone,

I'm considering making an offer on my first property. I'd love to get the advice and wisdom of the BP community on this deal. What have I missed??

The property is a 4-plex in a nice family/community oriented suburb. Each unit is a 3/2 with a garage. Schools are above average. Crime is non-existent (1 theft in the last 30 days, summer was the same). Building was built in 1990. The property is fully rented at present.

Here are the numbers:

Purchase Price: $230,000

Down payment, 25%: $57,500

Loan amount: $172,500.00

Loan payment (conventional, 5%, 30 yr): $926.02

Monthly rent: $3100.00

Monthly costs (see below): $1,456.50

Monthly NOI: $1,643.50

Monthly Cash flow: $717.48

Yearly CCR: 14.97%

The monthly costs include:

5% vacancy

10% Maintenance

10% Capex

9% Property Management

~1.5% Property taxes

~0.6% Insurance

I normally would put vacancy at 10%, however the tenants in the area seem to stick around for a while and it seems unrealistic to assume that every unit will turn over every year. 5% to me means that I am planning on 2 units turning over every year, and that it won't take longer than a month to fill those units again.

I am also expecting the 20% of Maintenance+Capex to cover turnover costs. It seems reasonable for a newer building like this, but I'm not sure?

These numbers are my best shot at "worst case within reason", and 15% CCR seems like a pretty good worst case.

What do you gals and guys think?

Omi

[Mike H.]

Given how new the building is, I think you're right on with the numbers. 

And the fact that they're all 3/2's is even better. You should have higher occupancy there than a typical 4 plex that I see here (2bdrms/1bath). 

The only other question is what is the place going to appraise out for? Are you paying absolute retail for it or are you getting any type of equity capture in the deal.

At the end of the day, I don't think it really matters if you're paying retail if the rental numbers work for you. My only concern is that 60k seems like a lot of money to sink into an investment. If there is some equity there, it'd be nice if you could somehow get some of that initial deposit in a year or two.

Outside of that concern, the simple facts are the numbers look great. What I'm really amazed at is how low the taxes are out there. 1.5%???? Jeepers and here I thought california had crazy high taxes.  I've got houses here in Illinois that I'm paying 4% taxes on. Yea, as in a 100k house would mean I'm paying 4k in property taxes.  Thats not the norm but I have a couple. Most tend to be running around 3% right now so thats not much better for the norm.

For that age and that style unit (3/2s), I definitely think thats a solid deal. I hate having to put so much money down. But if thats what it takes, thats what it takes......

Better than any other investment you're going to make. Your Cash on Cash (15%) is great. But don't forget, you're going to have principal paydown on that loan for more of a return. You're going to have appreciation 2% a year even is going to be another 4,600 a month, etc. 

And, over time, your rents will go up and your payments will stay the same. So your rental profits will increase as well. Meaning your cash on cash will go up over time even more.