8 Plex Deal Analysis - Your Thoughts

[David Moore]

In Southern Minnesota town where we own 4 houses, there is an 8 unit, actually 2 four unit buildings on one lot, built in 1978, 3800 square feet per building, each with 3 2br and one 1br.

Asking price is $300K.  This town is one of my two backyards (shout out to J Scott).  This offer has lots of creative financing.  

First, a description.  Roofs are 5 years old, vinyl windows 7 years old, aluminum siding in 2013, new water heaters in 2015, one original boiler, one newer boiler.  Rents for 6 2br are $580.00, and 2 1br are $450.00.  Market rents for each $75.00 higher.  No garages.  Lot is in bad shape...cannot do a seal or pave over.  Have a bid from a local company for tear off and new asphalt for $25K.  We are financing 80% through out commercial lender.  This property was on the market in 2012 and did not sell.  Here is our offer:

$255K

Seller will pay $3K of our closing costs

Seller will pay us full rents in closing month.  Also will pay existing damage deposits.  

Seller will escrow 25K for lot repair. Funds left over disburse to seller after one year

Seller will carry back 10% of purchase price, at 5% interest, 30 year amortization, payable in 5 years, but no interest if paid within 6 months of closing.

Seller will pay 1st half year real estate taxes ($2300.00).

Rents plus laundry income total $4480.00. All expenses, including insurance, heat, maintenance, vacancy (5%), electric for common areas, trash, taxes, insurance total $2900.00. Cash flow is almost $1600.00 a month, or $200.00 per door, before rents are raised to market. NOI is $35K. My financing is 80% of purchase price at 5.25%, amortized 20 years.

Here is the risk.  This building will appreciate slowly.  I have to bid low because when I sell, no matter the rents, it is in Southern Minnesota, so I'm assuming only a 1% increase yearly in resale value. 

I like this deal for cash flow. CoC return is 35.08%, purchase cap rate currently at 13.48%, but will likely have to go 25K higher, so final cap rate about 12%. Caretaker on site for nominal fee. Your thoughts?

[Brent Neuenschwander]

@ I'm not sure I see $35k in NOI. Are you including property management, or do you intend to have the on-site caretaker do all of that for you - not sure what your plans or arrangements are for that. I plugged this into my spreadsheet and came up with ~ $27k NOI, PM difference making up most of that.

I'd also question the cash flow - based on current rent, if your NOI is somewhere around ~$30k, your debt payment is $1,375/month, right (80% of $255k, 5.25% over 20 years)? That is $16,500/year. If you add another 10% gross rent for Capex savings @ ~ $5,400, you're left with somewhere around $8k. I might have been a bit conservative with my NOI and capex savings, but still...

I still think this sounds pretty good, especially if you can get rents up to market. I see the purchase cap at more like 10.50% which isn't awful by any means. Just playing devil's advocate, sounds like it's a good opportunity - good luck!