First Quad, Plenty of Info, Negative Cash Flow First Year?

[Jeffrey Sullivan]

*Summary at the bottom

Alright, guys, so I'm looking at my first quad.  I have a partner that is family and we currently own six mobile homes and rent them out.  The mobile homes all rented and bringing in ~$2,000 a month profit.  We would like to get into actual real estate for the purpose of building that sweet, sweet equity for future purchases.  Anyways, we found one for sale in our small town, and the general details are below:

• Asking price: $275,000
• Expected first year improvements: $7000
• Year built: 1985
• Unit detail: 4 apartments, 790sf each, 2 bed/1 bath, individual heat pump and exterior storage closet (unfinished), electric stove and refrigerator included, washer/dryer room w/ hookups
• Total finished area: 3140sf on .22 acres w/ paved parking lot and sidewalks, 2-story building

Rent

Each unit is currently rented with tenants ranging from 20 years of tenancy to 3 years.  The rents are as follows: $410, 410, 490, 490 - totaling $1800 / mo, grossing $21,600.  These rents are very low as the current owner was gifted the property and has a very low monthly payment.  He nearly has the property paid off.  Our plan will be to raise the rents to either $600 or $625, which we're confident we will be able to get after renovating each apartment.  So across the course of the first year we will bring in $2400 / mo, grossing $28,800.

Expenses

Now for the expenses.  Tenant pays electric, and we pay water/sewer/trash.  From our inspection the building only needs some basic cosmetic fixes, which is a good thing I believe.  The siding outside can be touched up in spots (popped out of place), and the insides need painting and flooring (carpet/linoleum now).  We will factor that into our improvement costs up front, and are going with $7,000 the first year for renovations.  One concern is that each unit has its own heat pump, and only one has been replaced.  As old as the other three are, we think we're on borrowed time.  That means they could last several more years or each fail this first year.  Replacements would run about $3,000 each brand new and installed.  Worth mentioning is that we are more than capable of doing ALL the work minus maybe carpeting and HVAC.  So, expenses:

• Taxes: $1500
• Insurance: $1700
• Utilities: $3000
• Maintenance: $2000 (maybe low, maybe high, need to see paperwork first)
• Vacancy: 6%
  

Financing

My partner will actually be able to put down %20, but we're wondering if we should try %10.

NOI/ROI, several options

• (Year 1)($12,091 NOI) @ $276,000 w/ $7,000 in improvements, %20 down, and at the current $21,600 gross rents. (Total annual cash flow = -$1,334, Cash ROI -1.89%, Total ROI (equity, etc) 3.16%)
• (Year 2)($18,859 NOI) @ $276,000, %20 down, and at the renovated $28,800 gross rents. (Total annual cash flow = $5,343, Cash ROI 7.71%, Total ROI 12.76%)

OPTION 2 - AT $226,000

• (Year 1)($12,091 NOI) @ $226,000 w/ $7,000 in improvements, %20 down, and at the current $21,600 gross rents. (Total annual cash flow = $1,098, Cash ROI 1.86%, Total ROI (equity, etc) 6.18%)
• (Year 2)($18,859 NOI) @ $226,000, %20 down, and at the renovated $28,800 gross rents. (Total annual cash flow = $7,886 Cash ROI 13.34%, Total ROI 18.28%)

Summary

It all comes down to the financing of the property and at what price we can buy it at assuming we can make a deal. The buyer has stated to the agent we're working with that he is willing and expecting to negotiate. He is an older man that was gifted the property and I believe looking to make his life a bit easier by ridding himself of it. We are figuring ~$32,000 for improvements and expected maintenance (including new heat pumps) the first couple of years, and will use that to bargain. We have the mindset that we don't need the property, which is huge leverage for us, and would really feel good about this if we can knock down that $275,000 asking price to something closer to $220,000. That seems to me as a first time buyer as a low ball, but the return is not very great for any prospective buyer at the current asking price, in my opinion. We also have an LLC already if that means anything. We will get some tax breaks for sure.

Any advice on how to haggle or about a realistic offer would be MUCH appreciated.  Any advice about anything else is equally appreciated.  I'll monitor this thread and try to answer any questions as fast as I can.

Is this a potentially good deal?