Advice on 2 fourplex buildings deal. Columbus, OH. I'm a newbie

[Jason Bausman]

I’m a newbie at all this but have been doing as much research as I can get into a 24hr period. Any advice, criticism, or just a plain run the hell away from this deal would be appreciated!

Property is 8 Units in 2 buildings. 2BD, 1 1/2 Baths, townhouse style built 1986

Approved for section 8. Currently 50% occupied. 4 units have just been renovated and are ready to rent. Not in a Class D war zone but more blue collar Class C. Property is located at the end of a cul de sac with a school 2 blocks away, surrounding neighborhood with SFH

Our first rental property-strategy is to buy and hold for 20 yrs

Purchase price 405K

Current Rent at 625/unit- potential to be raised to 675.

Commercial Loan

20 yr fixed at 5.2% 1point=324,000 loan

20% downpayment $81,000 financed through HELOC on personal home at 5.63- Rate seems high but to pull maximum potential from home we had to go at higher rate. We are left with approximately 20k for an emergency fund in HELOC

Expenses:

Repairs $250

Insurance $305

Property taxes $1028

Water,Sewer, Garbage $386

Mortgage $2174

HELOC payment $844 (we factored this in to be paid off in 10 years. Starting out we are calculating to only pay interest until property is stabilized. So initially this won't be 844 but we included it for long term)

Property management-self manage

Monthly income with all 8 units renting at $625=$5000

Monthly expenses $4987

NOI $26,243

Monthly cash flow $12.70

Cash on Cash ROI 0.17%

50% rule $325

2% rule =1.21%

I know initially this does not look like a good deal or great investment. I have not included vacancy or cap ex, which is suggested by bigger pockets but we do have emergency funds in place to cover anything big. However, once the HELOC is paid off and if I can boost rents to 675 per unit ASAP, would be an additional $400. All efforts would be made to pay off the HELOC and then the property would cash flow approximately 1200 per month.

Considerations:

We are in the Columbus Ohio market and multifamily homes seem to be going fast. There was an identical property next door that was on the market a few days before it was in contract but fell through due to some buyer financing. There were multiply offers on this property within a few days and will probably go fast. Within 24 hours the property we are considering purchasing already had multiple offers. Our offer came in slightly better and we are in contract waiting for inspection to be completed. My numbers for repair, insurance, water/sewer/garbage come directly from the sellers expense sheet. (I know may not always be that accurate). I have thought about trying to have water submetered to decrease expenses but unsure at this point how much it would cost or if possible.

This is our first rental.

Is there too much risk here?

What am I forgetting or should I include in my numbers not stated above?

Section 8. I have heard good and bad. We are going to be attending the Columbus Metro Housing Authority meeting for landlords this month for more info. Any tips?

Thanks for any input it is greatly appreciated!

[Ed W.]

@Jason Bausman Welcome.

I've been in the business over 30 years and I've worked with a lot of newbies.   I'll buy you dinner at The Top if 3 years from now, looking back with some knowledge and experience, you aren't literally thrilled that you didn't buy this.  I'm dead serious that it is likely I wouldn't even take the time to look at it, let alone buy it.

Important lesson, ignore it at your peril.  You make your money in this business when you BUY.  Translated that means you set yourself up for success or failure by the deal you structure (price and terms) when you buy.  Your deal is all hope and prayers and I absolutely guarantee the odds are stacked significantly (if not absolutely to the point of certainty) against you.  

Important lesson number 2.  When you buy a rental like this, you are buying not only the "mortar and bricks" (the physical property) but you are "buying" the neighborhood and the TENANTS.  If your contract doesn't give you the right to sit down and talk to the tenants and give you the option to bail if you don't like them for some good reason, you are buying a pig in the poke.  With your management experience - none - BIG mistake.

Check the Networking forum for a meeting on Feb 16th that I am hosting.  If you can make it by 6:30, we can discuss this deal in more detail.  It will be a great lesson for all in the room for what NOT to do.

BTW, even though your plan to pay off your HELOC is for 10 years and that is an admirable goal (I doubt seriously the majority of the money to do that will come from the property because I think you've analyzed this far from realistically), for long term holds with our historically low interest rates I recommend fixed rate, term loans which would completely eliminate the risk of interest rates rising and cutting this already very thin (probably in-the-red) deal off at the knees.