first multi family, do these numbers work?

Question

Hello all!

I'm looking at purchasing my first multi-family deal.The numbers look good (I think) but I'm nervous on the location... it's literally in the middle of no where. A small town (population 250) and the nearest metro area is 45 minutes away.

The numbers:

They asked $300,000 and I got them down to $270,000.

Total monthly income: $4800 - 2 units are vacant (potential of $5700 fully rented)

Total monthly operating expenses: $2525 (numbers are averaged out from 2012 - present)

15 year mortgage at 4.8%: $1500

Total expenses: $4025

Cashflow: $775

This would be a no brainer if I could get it fully rented @ $5700... however in a small town I'm not sure how doable that is.

Thoughts?

Corey Demuth · Answer

Ah, okay - sorry it wasn't clear to me from your original post that it was so many units / I thought we were dealing with a straight residential loan.

Julian L. · Answer

@Michael Noto - You're not a jerk, this is why I asked. I had already countered before I posted this at $255k, which I'm now starting to doubt myself. It's in a rural town in North Dakota. I've purchased a handful of SFH in the metro area that is nearby in the past and would be using the same property management company, who I've had a good experience with. The reason it's attractive to me is because of the oil boom that has happened there in the past 3 years. The statistics of the town is 36% renters and 64% owners. I would be one of the only rental options in the town.

@Corey Demuth - This is not a traditional mortgage. Since it's a 12-plex, it would be a commercial loan. The rates are higher than residential mortgages. The 4.8% is a conservative number, it would most likely be more like 4.5%. I want a 15 year to pay off the mortgage as quickly. I am more of a slow and steady investor rather than a purchase as many properties as I can type.

Corey Demuth · Answer

I have to ask about this:

"15 year mortgage at 4.8%: $1500"

Huh? First, why not a 30-yr? And who the hell is trying to jam you with 4.8% on a 15-year loan??? You should be able to get into the low 3s for a 15-year.

Michael Noto · Answer

@Julian L.  If there are no people to fill the units, what does it matter if you can get it $15k cheaper?  What is that a difference of $100 per mo on a mortgage payment?

I am not trying to be a jerk at all, just trying to point out that if its unanimous on here that you should walk away maybe you should consider it?

Also, if you do not mind sharing where are you buying a 300k property in a 250 person town?

Lisa Ross · Answer

It really doesn't sound OK to me! You should think about it! Take your time and don't rush! I would strongly advise you to walk away!

Steven J. · Answer

I agree with the others that you should be very cautious on this one. If you really really REALLY want it give them a much lower offer that you know they'll say no to. You'll probably be one of the few to even give an offer and months down the road they might be willing to entertain your really low offer at that point.

In my opinion, I'd let that one go because of the population.

Tim Hall · Answer

Hey Julian, this does not sound like a knock it out of the park deal, so don't do it.  You can get in massive amounts of trouble. The property needs to be around 150-170 no more. Run away

Jesse T. · Answer

If you use 75% of maximum rents to cover commissions/property management and vacancies - your cash flow shrinks to $250/month.  That also assumes there are basically no major repairs/capital expenses.

Unless there is something closer than the metro area, the location seems like a big red flag.  Not only will it make vacancies harder to fill, but it will also likely have a negative effect on appreciation and the ability to raise rents in the future.

Ben Leybovich · Answer

Population of 250...?!?!  WOW - I don't think so.  The numbers in a place like this mean nothing.  Walk away