6-Plex Analysis

[Tara Kinney]

Okay - so here goes.  I have two single family home rental properties that I am selling because they aren't cash-flowing and am looking at using the equity and a 1031 exchange to possibly get into some mulit-family housing.  

So I found a property - that looks to be structurally sound (all brick) 6-plex.  Very small - I believe all efficiency or one bed-room. 

I did an analysis on the property using some conservative figures and the numbers look good.  However the property itself looks like a slum.  

Purchase price is listed at $139K, the 6 units all rent for mid $500s.  The highest for $599.  5 of the 6 units are rented with new one year leases and all tenants have agreed to forfeit their deposit.  The 6th unit is currently being remodeled - with laminent wood floors and stainless steel appliances.  Looking at the 6th unit, I'm shocked they are getting $500's for rent on these units as I wouldn't think they wouldn't go over $400-$450.  (Efficiency).

Income: $525 *6 = $3150 (conservative as the owner says mid $500's and one going for $599.)

Monthly expenses

Cap Ex - 5% $160

Repairs 5% $160

Insurance - $75

Taxes - $210

Trash - $60

Snow/Lawn - $100

Water/Sewer - $150

Gas - $100

Property Management (11%) - $355

Vacancy - 7% - $225

Mortgage - P&I - $470

NOI = $1100 (monthly) - Annually ($13000)

(rough figures - but all rounded conservatively) - Downpayment 20% would be $28000 - so $13000/$28000 = 46% cash on cash ROI.

My questions are: 

1. Is there anything I am missing here in my analysis.  Seems to be well worth it from the money perspective.

2. When figuring repairs - should I be using 5% PER UNIT or just $5% of the gross rents?

3. I have no intentions on managing the property myself - I would have a property management company to handle it for me... so based on that - even though in my standards it seems to be a slum, would you purchase it anyway because the numbers work?

[Jennifer Beadles]

What do you mean the tenants have agreed to forfeit their deposits? That sounds kind of fishy to me, especially that the leases are all new except one. I've seen my fair share of landlords creating fake lease agreements or changing terms on the leases and providing those to buyers so I would be skeptical. 

It's common on these types of investments to request a schedule e tax return from the seller along with leases, walk through, and tenant applications so I would review those prior to making the offer or as a contingency. 

You might want to factor in for a higher vacancy rate with those small of units, and especially in a bad area. I'd suggest between 10-15%, or you can check with your property manager on what they're seeing in that area.

I haven't seen 20% down loans on commercial properties, at minimum I factor in 25%. Most commercial lenders will use a 25 year amortization so make sure your numbers are based on that. 

In terms of repairs, I consider age of the building, updates and age of appliances. The older the building the more you'll want to factor in.

The numbers look good, though it seems like theres more to the story of this place, and I'd dig on the rental history and existing tenants first.