Triplex Deal; Need Finance Advice

Real Estate Deal Analysis & Advice
11yFollow

Triplex Deal; Need Finance Advice

Aaron B.
Houston, TX · Member since 2015 · 12 posts · 0 votes

2300 Sq ft Triplex

List Price: $600 k

Unit 1: 2 BR $1850/month

Unit 2: 2 BR $1600/month

Unit 3: 1 BR $1100/month

Total Rent: $4550/month

Gross Income: $54,600/yr

GRM: 11

Assuming taxes and maintenance are 1.5% of list, each, then 

Expenses: $16,000/yr

NOI: $38,600/yr

Property Info:

Units appear to have been recently renovated, so there doesn't look like there is much forced appreciation potential besides some landscaping opportunity or just rent increases. The property is well situated to accommodate yuppies working all over Houston or alternatively, college students attending higher education institutions nearby.

Market Thoughts/Demand Outlook:

The Houston market may have a bobble with recent oil price volatility, but other forces will make certain markets in Houston a great investment. Rentals may be a more and more attractive option here as housing prices have appreciated considerably over the past 18 months. 

My Plan:

I plan to own 1.5 million in assets within the next 5 years. I want to replace work income with rental cash flow and I plan to refinance on appreciation gains in order to expand my holdings at a faster yet responsible pace. I currently have no personal capital to bring to the table. 

Unknowns:

The submarket typical GRM.

The rent market's pricing profile

My Question:

Since this is residential property,  I could technically put 10% down with a conventional loan.  I find I can make cash flow with a 10 to 20% down payment;  however,  I've read that margin should be on the order of 15%. To give a 15% margin, I calculated that I would need to put $220k down (>30%). I think this difficult margin hurdle exists because of the high list price. Am I misunderstanding this concept of margin? Or am I over emphasizing it? Regardless,  a private loan on that large of a down payment seems like a rough way to get started. It may even be a prohibitively risky deal.

I'm excited to hear your thoughts.

0Reply
32 views

Most Popular Reply

Nathan Emmert
Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
11y

I'll be honest, I have no idea what you're talking about.  I read this early in the morning so probably breezed through some numbers I shouldn't have...

But you say taxes and maintenance are 1.5% of list price... each... 1.5 + 1.5 = 3%... right?  3% of $600,000 = $18,000 but your expenses are only $16,000 a year?

What about property insurance?

In a triplex, the owner generally pays water/sewer/trash, where is that expense?

Who is taking care of the landscaping?

Where is the property management cost?

You aren't expecting any vacancies?

Are you CAPEX expenses figured into your maintenance budget or separate? What about the cost to get your vacancies rent ready and other repairs?

Texas isn't a low tax state... I would expect half your GOI to go towards expenses in the long term.  If they are recently renovated you'll likely be lower than that for the first 5 years or so as stuff ages.

Given all that, this property generates less than 1% rent versus the purchase price. With a 25% down payment you'll be lucky to break even. In my market I can "buy" that much rental income for less than $300k straight off the MLS. I'm not saying it's not a good deal for your area (I don't know your market) but it's a terrible deal from a cash flow or CoC perspective.

1Reply
See this reply in the discussion

16 Replies

Jump to latestLatest
  • Chris Stromdahl
    Rental Property Investor · Seattle, WA · Member since 2014 · 222 posts · 38 votes
    11y

    @Aaron B. 

    As far as 10% vs 15% X% return, it all depends on the market and really what you are comfortable with. I posted a Success Story on my first B/H recently, some people were supportive, some people said it was a deal that they would not have done. But, I did the research, made a decision and am comfortable with it and that is what matters at the end of the day.

    As far as this deal goes, I punched your numbers into my property analyzer spreadsheet and it looks to me like you would be generating $175/door per month and that is before any taxes are taken into consideration for the long term. That is not a real strong return for having to invest $60K. That is 10% Cash/Cash and 7% Cap Rate. They say you can get 8% return in the stock market. Also, those returns are based on 0% for property management. One thing that I learned early on is to by a property with the expectation to hire a property manager some day. Otherwise you are buying a job. 

    Furthermore, my analysis only includes $600 for property insurance, PMI and repairs and maintenance. I can only assume that those numbers are below what you will actually have to pay.

    Maybe I am missing something, but that is my two cents.

    Thanks, Chris

    0Reply
  • Shaun Weekes
    Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
    11y

    @Aaron B. 

    A three unit property is going to require a 25% down payment if you're going to use conventional financing.

    If you live in one unit you can do this FHA with 3.5% down.

    Also make sure that your loan amount is within the loan limits for your county. 

    I hope this helps Sir.

    0Reply
  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    11y

    I'll be honest, I have no idea what you're talking about.  I read this early in the morning so probably breezed through some numbers I shouldn't have...

    But you say taxes and maintenance are 1.5% of list price... each... 1.5 + 1.5 = 3%... right?  3% of $600,000 = $18,000 but your expenses are only $16,000 a year?

    What about property insurance?

    In a triplex, the owner generally pays water/sewer/trash, where is that expense?

    Who is taking care of the landscaping?

    Where is the property management cost?

    You aren't expecting any vacancies?

    Are you CAPEX expenses figured into your maintenance budget or separate? What about the cost to get your vacancies rent ready and other repairs?

    Texas isn't a low tax state... I would expect half your GOI to go towards expenses in the long term.  If they are recently renovated you'll likely be lower than that for the first 5 years or so as stuff ages.

    Given all that, this property generates less than 1% rent versus the purchase price. With a 25% down payment you'll be lucky to break even. In my market I can "buy" that much rental income for less than $300k straight off the MLS. I'm not saying it's not a good deal for your area (I don't know your market) but it's a terrible deal from a cash flow or CoC perspective.

    1Reply
  • Aaron B.
    OP
    Houston, TX · Member since 2015 · 12 posts · 0 votes
    11y

    @Chris Stromdahl 

    Thank for taking the time to give me your two cents.

    If you're OK with my asking,  what do you consider a strong $/door/month number? 

    I think you're right that the numbers this deal not great. If you were looking at this deal would you just move on and look/wait for the next deal or would you consider what price would make the numbers work and bring an offer to the table?

    0Reply
  • Aaron B.
    OP
    Houston, TX · Member since 2015 · 12 posts · 0 votes
    11y
    Originally posted by @Shaun Weekes:

    @Aaron B. 

    A three unit property is going to require a 25% down payment if you're going to use conventional financing.

    If you live in one unit you can do this FHA with 3.5% down.

    Also make sure that your loan amount is within the loan limits for your county. 

    I hope this helps Sir.

    Thank you for your advice! 

     I must have old information.  Is the 25% down payment a requirement based on the number of units? Where can i find info about loan limits by county? 

    0Reply
  • Aaron B.
    OP
    Houston, TX · Member since 2015 · 12 posts · 0 votes
    11y
    Originally posted by @Nathan Emmert:

    I'll be honest, I have no idea what you're talking about.  I read this early in the morning so probably breezed through some numbers I shouldn't have...

    But you say taxes and maintenance are 1.5% of list price... each... 1.5 + 1.5 = 3%... right?  3% of $600,000 = $18,000 but your expenses are only $16,000 a year?

    What about property insurance?

    In a triplex, the owner generally pays water/sewer/trash, where is that expense?

    Who is taking care of the landscaping?

    Where is the property management cost?

    You aren't expecting any vacancies?

    Are you CAPEX expenses figured into your maintenance budget or separate? What about the cost to get your vacancies rent ready and other repairs?

    Texas isn't a low tax state... I would expect half your GOI to go towards expenses in the long term.  If they are recently renovated you'll likely be lower than that for the first 5 years or so as stuff ages.

    Given all that, this property generates less than 1% rent versus the purchase price. With a 25% down payment you'll be lucky to break even. In my market I can "buy" that much rental income for less than $300k straight off the MLS. I'm not saying it's not a good deal for your area (I don't know your market) but it's a terrible deal from a cash flow or CoC perspective.

     Nathan, my numbers aren't well presented,  you're right. Sorry about that. I definitely have plenty to learn.

    Your point about the rent's being less than 1% of purchase price caught my attention. I assume you are figuring that metric on a monthly basis. What sort of % are you typically interested in when purchasing a multi-family rental? 

    0Reply
  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    11y

    I target 1.5% of purchase price for monthly rent as a minimum... given 25% down at today's interest rates of 4.5% and 50% assumed expenses, it gives me a CoC of something like 18%... I prefer to be closer to 2% rents but being a more passive investor, I don't shop for deals as hard as others.

    1Reply
  • Aaron B.
    OP
    Houston, TX · Member since 2015 · 12 posts · 0 votes
    11y

    I like those criteria Nathan. I suppose I'll have to continue to learn my market and create some investment guidelines myself as well.  Thank you again for your time!

    0Reply
  • Shaun Weekes
    Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
    11y
    Originally posted by @Aaron B.:
    Originally posted by @Shaun Weekes:

    @Aaron B. 

    A three unit property is going to require a 25% down payment if you're going to use conventional financing.

    If you live in one unit you can do this FHA with 3.5% down.

    Also make sure that your loan amount is within the loan limits for your county. 

    I hope this helps Sir.

    Thank you for your advice! 

     I must have old information.  Is the 25% down payment a requirement based on the number of units? Where can i find info about loan limits by county? 

    Hello Aaron,

    You can find the county limits on the Fannie Mae and FHA websites. Or just google county loan limits for mortgages and I'm sure you'll find something. If you don't let me know and I'll do a search for you.

    0Reply
  • Matt G.
    Rental Property Investor · Dallas · Member since 2012 · 107 posts · 69 votes
    11y

    You can also find the actual property tax typing the address in on hcad.org  The 2014 property tax was $11,577.97 and that's assessing the property at $450k

    http://www.hctax.net/Property/TaxStatement?Account...

    0Reply
  • Chris Stromdahl
    Rental Property Investor · Seattle, WA · Member since 2014 · 222 posts · 38 votes
    11y

    @Aaron B. 

    Without doing any calcs, using the 1% rule as a baseline, the most you would even want to consider offering is $450K. That is a pretty deep discount, especially in a hot market like Dallas where you are using conventional financing and there are people with cash who could fund this deal and make it work in their favor. $600K is an awful lot of money for a new investor. Personally, I would move on.

    When I first started looking I was h@#l bent on buying a MF property. What I found that was, given the amount of capital we had to work with, a SF residence made more sense financially and was a scope of work we could handle. I have to crawl before I walk. I would suggest looking at some SF homes in the greater Dallas area that are priced competitively and present you with an opportunity to putting some minor sweat equity into. Get that done, learn how to rent/be a landlord and build from there.

    $/door: $300+ is a good baseline. But this is market dependent.

    0Reply
  • Aaron B.
    OP
    Houston, TX · Member since 2015 · 12 posts · 0 votes
    11y

    That is sound advice Chris.  Thank you for your candor. 

    Again,  I appreciate everyone's perspective! 

    0Reply
  • Sean Ploskina
    Investor · Virginia Beach, VA · Member since 2012 · 244 posts · 69 votes
    11y

    Where were you getting 10% down for a commercial loan?  Seems really low, but awesome if you got it

    0Reply
  • Nick Weidner
    Investor · Houston, TX · Member since 2012 · 19 posts · 1 vote
    11y
    What area is your property located in Houston? I am little surprised at the rents the Triplex is pulling. I bought a Duplex in SE Houston back in September, I had to put 25% down. There was no way around this (other than a private lender) - trusted me I tried! My credit rating is over 800 and I have no debt other than my house I live in. Around summer time I ran into the same issue when I tried to pick up a 10 plex, I ended up not getting it due to the Banks wanting 25%. From my experiences, banks want 20% for SFR and 25% from Multi's --- this is if you are buying as rentals and not living in the units.
    0Reply
  • Aaron B.
    OP
    Houston, TX · Member since 2015 · 12 posts · 0 votes
    11y

    Sean, I think I was going off of old information. I thought the banks did things differently for 2-4 Unit buildings because they're residential not commercial.  Maybe the distinction only matters if you live in the unit? 

    Nick,  the unit is in montrose.  I agree, the rents seem rather high.  Location and high property and rental pricing inside 610 may be the reason for the high rent?

    Matt G., I enjoy that you found the property I was talking about without my mentioning the neighborhood or address.

    0Reply
  • Juan Silva
    Real Estate Investor · Kirkland, WA · Member since 2014 · 33 posts · 5 votes
    11y

    @Aaron B.  I think you've gotten a lot of great advice indicating this may not be the best deal for your given situation. That said, and if you'd still like to sanity check Montrose rent rolls, you can do so by typing the address and # of beds into www.rentometer.com and it'll return avg/median rents in the vicinity. Hope this helps.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free