Please help! My first "real" deal and I'm at a crossraods

[Joel Kadlec]

I am currently under contract on two 4plexes that are side by side, so 8 total units. After the inspection I found out that all the AC units and furnaces will need to be replaced pretty soon due to their ancient age. Im estimating 8 ACs and 8 furnaces and install could run about 30k. There are also a lot of small things here and there.

The seller has agreed to fix a lot of things, but is doing himself so there will be no proper or licensed documentation which makes me nervous. Not sure if this is typical or not.

My plan is to hold for about 5 years and then sell and upgrade.

Anyway here are the numbers:

Purchase price: $170,000 (85k for each quad) ARV I estimate $240k

Loan is commercial 15% down 20yr

Monthly Income: $4,000

Monthly expenses: $3,087 (I estimate 5% vacany 8% repairs 8% capex, etc.)

Cashflow: $912

Cash needed: $59,000/this includes the 30k for HVAC as stated above. or I might be able to get a line of credit tacked onto the loan after apparsail comes through which would make my cash needed about $30,000 but would change my number a little as well obliviously.

ROI 18.4%

Good thing is that roof is only 2 years old and the exterior is in great condition.

Any advice would be greatly appreciated! My inspection revision deadline is on the 21st and I am trying to get as much input as possible from any source I know. Thank you all very much in advance!

Appreciatively,

Joel

[Chris Simmons]

Based on what you are describing and my knowledge of the area, I am concerned on several fronts.  Fortunately, you are going through a good commercial bank that should vet your numbers but don't trust them totally.  Banks will still give you enough rope to hang yourself.  

This is a big deal with low quality tenants for your first deal.  Be ready for higher than average issues with vacancy and such.  

While I like the area, (I just bought a duplex at 25th and sheridan) the price you are paying concerns me.  I'm trying to picture where you would get units like that at that price and I'm not liking where I think it's located.  Hopefully I'm wrong and you really landed a good deal. 

The seller fixing lots of stuff is expected, especially at this price point.  Hopefully he does it right, but again, at this price point and considering he's selling, what's his motivation?  

Fortunately, this is still considered single family under landlord tenant act and financing guidelines, so you could conceivably get a 30 year fixed rate mortgage for both sides, (2 mortgages total).  The landlord tenant act is important in determining what you have to do as landlord....more strict and higher levels of service required for true commercial vs quadplex or less.  

Are utilities metered seperately?  What do you have to pay?  What are your numbers regarding trash collection, outside lighting etc....assuming you will provide either for these properties.  

How confident are you with exit strategy?  As rates rise, cap rates and property values will tend to fall but of course there are lots of other factors that can impact and override those.   Unlike a boring single family home, you will pretty much be stuck selling to another landlord so you need to be cautiously optimistic about future values etc. 

Proceed with caution. I will be happy to help and meet you sometime if interested.  

Good luck.