6 units - looks good to me?

Question

I'm back for more advice - - Found a 6 unit property (two triplexes) for $450,000 but I would probably offer $382,000 (85% of price). (It's a short sale.)

Currently fully occupied, monthly gross rent is $5700. Using the 50% rule, I'd have expenses of $2850 and a payment of $1718, so profit each month of $1132. ($188 per unit)

Am I figuring this right? Thanks!!

K W · Answer

Thanks for everyone's input; really helps me to understand. I did the property analyzer worksheet and came up with 9% cap rate as well.

Richard, we drove around the neighborhood yesterday. This is the first multi-family unit we've looked at that we felt comfortable with the neighborhood. It is mixed with small homes and other multi-family properties, but the majority of them seem cared for and well maintained. It is a lower income area, but doesn't appear to be crime ridden either.

There were very few For Rent signs, which we saw tons of in the other neighborhoods we had been looking at. Also the cars were decent and parked off the streets, while other neighborhoods had junk cars all over the place. This one looks good.

Jon Holdman · Answer

The 50% rule applies to the rent, not to the price.  50% of the rent will go to expenses.

To evaluate the deal, assume 100% financing.  If it will at least positive cash flow, assuming 100% financing and 50% of rent for expenses, its worth another look.  Many folks like to get $100 per door.  Personally, I don't want that much.  That's because my goal is to build long term wealth where other folks want income right now.  If your goal is income right now, you better use that same $100/door criteria.

Another way to evaluate a deal is cash on cash return.  In your case, you're getting $13,584 per year with an investment of $95,000 (plus closing costs). That's 14%, which isn't bad in my book.

Another way to evaluate this deal is the cap rate.  That's simply the NOI divided by the purchase price. I get 9.0%.  That's probably OK, too.

Bottom line is this is an OK deal.  Not a great deal, especially considering the distance involved.  But far better than a lot of deals that are posted here.

Richard Rabineau · Answer

Is this in a good neighborhood?

K W · Answer

I can get a 30 year loan at 6%. Was going to put $95,000 down for a loan of $287,000 with a payment of 1718. per month.

So are you saying the 50% rule applies to the sale price, not the actual loan payment? We want to buy and hold.

Richard Warren · Answer

How did you come up with your payment?  To analyze a deal you should do the calculation as if you are putting nothing down.  A large or small down payment doesn't change the quality of the deal, so assume $o down regardless of what you actually intend to put down.

Figuring a loan of $382,000 @ 7% for 30 years = $2,541.

That leaves a profit of $308, or about $50 per door.  Most people shoot for $100, so it's marginal at that price but not a disaster.

:cool: