SJ 4-plex - what's the proper way to calculate annual rent income

[Garmeon Y.]

Hello all,

I'd appreciate any helpful input from the BP community. I've been told by my family that a rental analysis should calculate income with current rent, versus market rent, if there are tenants currently living on the property listed for sale. The logic being it'll be difficult to raise rents or get them to move out.

Also, I feel unsure whether I've accurately captured all the property's expenses. I have reached out to local property management companies in order to give me a better picture. However, I get a sense that the seller-provided information is incomplete -- most notably whether there are any rehab costs necessary.

Finally, as I'm still waiting on my lender's reply on what I qualify for, I used the 3.875% rate I previously qualified for with respect to a SFR purchase. I am trying to get a FHA loan and put 3.5% down. Still feel uncertain whether FHA offers would be competitive in my market. I have enough for a 20% down payment, just not sure how much I should put down.

I'd appreciate any suggestions for my analysis, as well as what you think the best financing strategy would be. I understand that this deal is far from the ideal $100+/unit cash flow, but I was told in another one of my posts that we're banking on appreciation in my market.

See link below for analysis performed:

San Jose four-plex property

[Chris Grenzig]

@Garmeon Y. I can't attest to financing really, but with an FHA loan you do pay a PMI which is an additional cost monthly v putting 20% down.

As far as the actual property is concerned it looks like it is really overpriced. The image is a little small to read on my end, and a bit blurry when zoomed in, but I think I have the right numbers. Current rents I can make out are $1900, $1512, $1300, and $1300 which would be $6012 a month. I know you mention owner occupied, but seller won't base price on the 3 units instead of 4, so I'm including the 4th unit as well. That gives you a Gross Potential Rent of $72,144 a year. With a 5% vacancy loss that's $68,536.8 (and I usually underwrite to 90% to be safe), 50% expenses (general rule of thumb) would give you $34,268.40. It looks like the purchase price is $1,400,000 which would mean they are selling the property at 2.45% cap rate. That is insanely low!!

Even if you calculated with the market rents you 3.8% cap rate roughly! ($3,100 + ($2,100x3)= $9,400x12 months= $112,800x.95 (5%vacant)= $107,160x.50(expense estimate)= $53,580/$1,400,000(purchase price)= .03827).

As far as appreciation, in my experience 4 units pricing will be based on your NOI and not market value of surrounding houses like SFR. Even duplex's are based on NOI mainly because you would rent it out. If you owner occupy, your NOI will go down significantly and wouldn't increase the value of the property. Maybe I am missing something drastic but it just doesn't seem to make sense to me from the picture you provided. If you want to chat more about it let me know.