Looking for help in analyzing a very big deal.

[Chris H.]

I've been stuck in a bit of analysis paralysis the last 24 hours, and it's driving me nuts.  I've never purchased a deal this big.

Here's the basic deal:

I have the option to purchase 6 almost identical duplexes as a package for $770k.  Each duplex is two units, each unit is 2 bed, 1 bath.  (Two of the duplexes have a garage as well, the others car ports.)  Total of 12 units, as a result.

With recent market upticks, they should rent for $800/mo/unit.  They're currently rented at closer to $650/mo each.  I have not used a property manager in the past, but the one that came recommended to me has offered to, if I take the deal, work for free until they're brought up to market rent, which he said is $775-825, because he's very confident in it.  His rate is 8% of the rent and half the first month.  He says it is in good condition and each unit will take between $2-5k in cleanup (mostly carpet, paint).   I'm going to just estimate $40k in repairs and consider this a $810k purchase.

I have not personally walked through yet, but the property manager did (he came recommended by the broker, who walked the property manager through with him).

The seller will finance $120k of the duplex package at 5% interest.

The recommendation I've received is: buy it using hard money for 85% of the purchase price and the seller finance for the other 15%.  Then get the rents raised, and refinance (either in a commercial loan as a package, or conventional) away the debts.  That will get me all of the units with 100% of the purchase price financed, and I'm only out the repair costs.  Downside?  $20k in points on the hard money (3 points on $650k).

I keep going over the numbers again and again and I can't decide if this is a great deal or average.  I've always done single family homes before.

The numbers look good to me, but the margins are slim- then I look at maintenance since there's 6 properties with 6 roofs, and I question myself.

I crunched all the numbers, and if I take purchase price + points + rehab costs I get $835k.  

Total monthly rent: $9600

Total monthly costs: $3097.67   (taxes + insurance + utilities + management + 3% vacancy)

Total net: $6502

Total net @ 5% vacancy + 5% maintenance: $5830.

Estimated mortgage payment (100% financed @ 5.5% interest): $4798

Total take home:  $1704 w/o maintenance, $1032 with 5% maintenance.  (Is 5% enough?)

Analysis methods:

1% rule: Pass. Comparing to single family homes...if you take out the utilities ($190/mo), you get a net (before tax/insurance) of $1410/mo.  By the 1% rule, I can pay up to $141k per building .  Each building would cost $139k after points and rehab.

50% rule: Fail.  The 50% rule is to assume taxes/insurance/vacancy/maintenance/property management is 50% of the income.  After subtracting utilities, the principal/interest is slightly more than 50%, which means slightly underwater.

Basic ROI: Pass. If I'm out of pocket $40k, to make (after vacancy/maintenance) $1032/mo, I'm making a 31% return on my $40k.  That's pretty good.

PITI-to-income: On my SFH's, which I BRRR on, I usually get numbers like 900/mo rent on 600/mo payments, or a 1.5x ratio. On this property, it's $6.5k rent on a $5k mortgage, or a 1.3x ratio. Slimmer than I like.

Cap Rate Analysis: If I add up all the rents, and subtract all the costs, take the net with vacancy and maintenance, and divide the total NOI at 7% cap rate, I get a value of $166.5k per building. I would obtain each building at $139k (after points + rehab). I am getting the building for 84 cents on the dollar based on this. I normally target 75 cents on the dollar.

However, I haven't used property management on my SFH's. When I look at the last two- PITI-to-income and Cap Rate analysis- the numbers actually look identical to my SFH's if you take out the property manager. (1.4x ratio and 73 cents on the dollar- value rises with less expenses in cap rate analysis.) So maybe I should expect this slimmer ratio because I'm using a property manager, and I'm being too picky.

Last negative issue: holding costs. With hard money + owner finance + HELOC fees for my rehab money, holding costs will be $6108/mo. However, rent will not be at market initially, which means I'll be losing money for the first few months until we get up to market rents, and then I'll be barely breaking even or taking a slight loss until I get the refi. And I'll be praying that the duplexes appraise well enough to refi most of it.

What is BP's thoughts on this?  Am I overanalyzing a solid deal that requires almost no work on my part (property manager will clean up the units and move in new tenants), or rushing to grab a deal that isn't much better than retail?