Do I have a lead worth pursuing for Buy and hold??

Question

Hey Guys,

So I found a 4 unit multifamily that cash flows pretty well. It may be a retail value as far as comps for the asking price are concerned but my question is should that matter if the cash flow is on point. Here's the numbers

Asking Price: $279,000

Funds: Conventional 20% down

Tenant occupied in all 4 units

Total Income: $2550 rent per month

Property taxes: $154 per month

Insurance: $72 per month

Utilities: (Tenants take care of Gas and Electric) - Gas - $9 per month, Electric - $31,

Water - $220 Trash - $79, Yard Maitenance - $50

Extra Monthly Maintenance - $50

Cap Ex - $100

Vacancy - $100

Property Management - $200 (I will actually plan on managing myself for now but calculated this for the future)

Mortgage - $1,079

Total Expenses: $2144

Income - Expenses = monthly cash flow

Total Monthly Cash Flow - $406

Down Payment: $55,800

Closing Costs - $8,500

Rehabs needed - $0 (Already Rehabbed Kitchen and no repairs needed)

Total Investment - $64,300

Annual Cashflow/Total Investment = Cash on Cash ROI

4,872/64300

7.6% Cash on Cash ROI.

Now honestly I would like to at least try and get a 8% cash on cash return so I wouldn't offer full price but if I was able to get to the 8% point, is this a lead worth pursuing or is it not that great?

Thank you in advance for your advice!

Ralph R. · Answer

@James Allen  One thing that's not being said here is that most turnkey SFR's have been rehabbed  Most turnkey providers admit that when you purchase them you are paying top dollar rehabbed market price.  there is little or no way to force value add.  the 4 plex you are describing you said needs paint.  there's a value add right there.  many turnkeys are in areas where there is little to no appreciation.  while its a gamble to count on appreciation it makes little or no sense to me to deliberately invest some place that has a slim chance at best to appreciate.  Cash flow pays the bills, but value add and appreciation are the real wealth builders.  As to who's doing the work, only a fool would purchase a rental based only on another persons numbers.  Purchasing turnkey not only requires vetting the property but adds the burden of vetting the very people you are buying from, as well as the PM they are using.  the wrong PM can drag you to the bilges of Davey jones locker as well as break you.  I agree your cap ex and vacancy are a bit low.  I would say $50 dollars for maintenance is maybe a tad low as well.  if your taxes and Insurance are real numbers and not estimates I would say you have a fairly accurate projection here.  you've thought the thing out well researching the financing, and eliminating the PMI as well as the pre approval.  in my area I use about 1.5% for buyer closing then figure loan closing separately.  I would research the rents a little bit if you haven't done so.  you might be able to do some work with those as well.  If its got good tenants you don't want to run them off but if they've been there a while they might be paying under market rent.  that's a judgment call.  Good Luck!!  RR

Mike D'Arrigo · Answer

@James Allen You didn't mention where this property is but personally, I would want to see a higher COC from a MF unit. You can easily get that kind of ROI on single family which in general, has less tenant issues and vacancies. Your vacancy and maintenance factors are way too low. Do you really think you'll only have 4% vacancy rate? Also, as @Christopher Phillips pointed out, you will most likely have to put 25% down.

James Allen · Answer

Thank you everyone for your thoughts. This helps a lot!

Jon Q. · Answer

Where's your vacancy rate factored in?

I suggest you factor in a 7% vacancy rate.  You should be using this APOD (Annual Property Operating Data) form to conduct analysis on any deal you're looking at:

www.cimls.com/data_sale/documents/document1_11248.xls

The CCIM Institute (Certified Commercial Investment Member) has created this standardized form to evaluate all commercial real estate investments, however I believe you should be using it to evaluate all investments.

I also think your property management fee is light.  Fourplexes are usually located in "fourplex neighborhoods" and they do not attract high-quality low-maintenance tenants.  So your tenant quality will be lower in general than you'll be able to attract to a high quality SFR in a decent neighborhood.  For these reasons, I don't invest in anything between the 2-59 unit range.  Property management is problematic.

Finally, I think your expenses are also light.

Also, if no rehabs are needed, WHY IS THE OWNER SELLING?  Guess what, he's likely selling because he's not making money.  ONLY buy properties you can IMPROVE that you can negotiate at a discount.  This will lower your risk.

Also, as already mentioned, you'll be required to put 25% down, which will lower your return.

I personally would not invest in this.  I don't think you will achieve your target of 8% or anywhere close.

I wish you the best.

Christopher Phillips · Answer

@James Allen Where are you getting 15% from? Non owner occupied you'll probably will have to do at least 25% like @Benjamin Burket mentioned...

Your buyer closing costs are not related to the house being FSBO. The seller, in any case FSBO or MLS, pays the agent commission. The buyer has their own costs due to the lending fees. You should get a better estimate for that. Will your lender require points?

Benjamin Burket · Answer

@James Allen I'm interested to know where you located a 15% down (or even 20%) conventional mortgage for a non owner occupied multi-family?  I've done quite a bit of searching and asking around, and everyone I've spoken to (banks and investors) said that 25% down is required on this type of property.

Also, I agree this deal seems thin.  I just had a 3-family with rents of $2,300 a month under contract for $75K in NY.  The deal just fell through because the seller was crazy, and I didn't quite have enough cash to fix some issues that came up in the inspection, but those deals can be found.  As others have said, some of the expense estimates look low in your analysis, and the ROI is pretty slim to begin with.  I would invest your cash elsewhere and get a higher return, but that's just my opinion.

As you mentioned, it may be worth pursuing for a significantly lower asking price.  It never hurts to ask.

Good luck whatever you decide!

Jeff Wallenius · Answer

@James Allen this is a fair deal, but I think you can do better if investing out of state. If you figure on a cashflow of $200-300 per month per $90,000 investment that you could easily achieve with turnkey products your looking at $600-$900 a month cash flow if you transitioned into 3 single family turnkey products. Make sure you explore all the options prior to investing outside of your home state. I'm happy  to assist always.

James Allen · Answer

@Shawn M. - Would you mind telling me what monthly cash flow you would hope to get out of a property this price to make it worth your time?

James Allen · Answer

@Christopher Phillips - Yes, I can do as low as 15% conventional but I plan to do 20% to avoid any PMI. Interest rate would be 4.875% based on pre approval. Closing costs I did about 3% of the price given that this is also a FSBO.

Based on the pictures the place looks in great shape, maybe could use new paint if I wanted to increase the value of the house and such but for a rental, I figure it's not a neccessity. Nice hardwood floors and updated kitchens.

Do I have a lead worth pursuing for Buy and hold??

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