Please help me analyze this deal!

[Ryan Cheung]

Hello,

I am currently looking to invest in my first multi family apartment. I found a fourplex in Union City, NJ. Each unit has 2 bedroom and 1 bathroom. I would love to get some feedback on the deal. I am going to finance this property with a 203K loan.

Price and Renovations: $420,000+$25,000=$445,000

Downpayment (3.5%) - $15,575

Mortgage with PMI: $2,266

Rent: $6,000 per month for all 4 units. However, I will be receiving $4,500 since I will be living in one of the units.

Taxes: $14,000/12=$1,166

Expenses with Vacancy, Repairs, CapEX, Property Management Included: $2,110

Cash on Cash Return: 19.92%

Cap Rate: 7.69%

Cash Flow: $424.60 per month

*These numbers are based on the $6,000 per month rent*

Could anyone please help me evaluate this deal and help me confirm if my numbers look correct? Any advice or guidance would be greatly appreciated. Thank you!

[John Errico]

Hey @Ryan Cheung sounds very exciting! Here are some of my off-the-cuff thoughts (I own a number of multifamilies in Union City):

It looks like you're assuming $1500 for a 1 BR. I'm not sure where this is exactly in Union City, but that might be a little optimistic. If you're near 30th St, or in the 40s, or closer to Park or Palisade, you might be able to get that, but if you're somewhere else, I'd budget more like $1200-$1300/mo. to be very conservative. If you make the units up nice (which maybe you can do for $25k depending on the current condition of the property), maybe you can get more. I think it's fair when evaluating a deal to consider the worst case plausible scenario: so I think you'll be able to rent the units, but I would say, in a worst case scenario, you're getting $1300/mo.

I also usually budget at a month's vacancy in all units as a vacancy expense. Even in high demand you might lose a month's rent just because people are moving in and out, presuming you'll have new tenants every year (again, worst case though plausible scenario). So at $1300/mo/unit, that's $5200 in vacancy expenses. Repairs and maintenance etc. I budget for maybe $2000/year... again, that's a worst case scenario, but, particularly with these older homes, things will come up (not sure how much of everything you are replacing with the $25k, but, every single one of my properties has required some type of expense that I would consider non-trivial ever year: boiler breaks, central air conditioning breaks, roof leaks, bathroom and plumbing issues, electrical issues, etc.). 

You might also consider the cost of utilities. Not sure if everything is separate but I would be (pleasantly) surprised if each unit had their own furnace/boiler. If anything is shared, such as the boiler, you'll have to budget for heating costs for the whole house, plus, perhaps, other shared utilities (water, sewerage, etc.). Depending on what is shared and not shared, that might be $500-$2000/year. 

You'll also have insurance which will be an added cost, maybe $1500-$2000/year, oftentimes this is paid monthly with your mortgage payment.

Not sure what that all boils down to but, just back of the envelope, $445k for a 4 family in Union City is an OK deal... kind of depends exactly where it is and what investing $25k in improvements will get you. If it's mostly cosmetic stuff, that sounds good to me (although $25k is a lot to spend in cosmetic improvements). If you're going to gut renovate the units, replace the roof, etc. then $25k is probably not going to be enough (and the deal doesn't sound as good).

One thing to keep in mind about 4+ families in Union City is rent control. Because you'll be owner occupying the unit, your house will be exempt from rent control (rent control applies for 4+ families, unless you are owner occupying a unit, in which case, 4 and 5 family buildings are exempt). I mention it only because, unless it is vacant, there are likely below-market paying tenants in there currently. You can legally get them out and/or raise their rent, however the process of doing this may be somewhat difficult, given that the city will try to convince you to allow the tenants to stay until the end of their lease (or whatever). Moreover, once you move out of the unit, the amount money you can increase rent per year will be capped. This is less of an issue if/when you sent the rent to market rents, but the whole process of doing this is not trivial due to the insanity of the Union City building department and other agencies involved. Less of a long-term financial concern but more of just a general thing to consider.