4 plex second (third, fourth, etc..) opinions

[Ian Skelton]

Hey BP. I am learning analysis and want some second (third, fourth) opinions on a Brick Quad with (4) 2 bedroom 1 bath units. I would probably call this a C+ area. This is a buy and hold. Also, thanks in advance for reading all this...

Asking: $195,900 (obviously I try to get it for less, but I start with this price and see where I am)

Rents: $600 - $650/m per unit (estimated)

Taxes: $2,210/y (2016)

Insurance: $2,000/y (estimated)

Maintenance: 10% = $240/m

Cap ex: 10% = $240/m

Management: 10% = $240/m

Vacancy: 5% = $120/m

Mortgage: 30 years at 5% with 25% down = $790/m

Money borrowed from a HELOC = 20k = payment $100/m

So...

Gross Scheduled Income = $2400/m ($28,800/y)

Expenses = $14,290 (tax + ins + maint + cap ex + mgt + vacancy)

Net Operating Income: $14,510 (GSI - Expenses)

Debt Coverage Ratio = 1.9 ((GSI - tax - ins - mgt - vacancy) / debt service)

Debt Service = $9,480/y + $1,200/y (HELOC)

Net Income = $3,830/y OR $319/m which is $79.75 per unit

How does this look? What have I missed. Also, I will say that one concern is that the cash I need to close is somewhere around 52k (ouch). Very painful but doable (have to borrow from a HELOC)...

So cash on cash is: around 7.3%

It pretty much takes me out of the market for a couple years to recoup the cash invested (If I horde money like Scrooge). So is it worth it or should I keep looking for something cheaper that gives better cash flow and better cash on cash. I think it starts to look decent at 170k or less & 650/m. At what price would you (BP community of investors) buy this or would you...

[Richard Lindman]

@Ian Skelton - Aloha Ian,

I am still leary of the vacancy assumption and the true cost of vacancy (the landlords greatest expense).

Here is what I have calculated for the property based on 600 dollars per unit:

1. Vacancy rate of 8.3 %  - Based on the assumption of turning over two units each year requiring 60 days to fill the vacancy. With 4 units and twelve months, there is a total of 48 rent months in the year that you could collect rent.  Divide the empty months by the total rent months ( 4 / 48 ), and we will have the vacancy rate.  This will result in an adjusted gross income of 28,800 x -8.3% = -2390.00

2. Make ready / repair cost per unit: 600.00 (This is an estimate and assumes that the unit is currently up to Section 8 standards).

3. Other expenses per unit:

a. Rekeying locks: -150.00

b. Utilities (they will be in your name now) per unit: -120.00

c. Site trips by your PM for section 8 inspections per unit: -100.00

4. Tenant placement fee charged by the PM is normally one month rent per unit: -600

5. Reduced management fees while the units are empty: 240.00

This leaves us with a total cost of vacancy of 4,330.00 which in turn leaves us with an effective vacancy cost rate of 15 %. This is 3x what you were anticipating using a straight vacancy rate. The straight rate of 5% is what I believe to be normally associated with SFH. When dealing with MFH the vacancy rate is normally higher, particularly when dealing with low income housing.

So, my calculations (with your supplied numbers and my vacancy adjustment) are coming up with a NOI of 1,572.00 and COC return of 2.87% after mortgage or 32.75 per unit.

This is just an example of other numbers I would include when I am evaluating a property. This does not mean my assumptions are correct for your market.

There is wiggle room in the cap exp and repair fund. Once you have the actual detailed income statements for the last three years, you can get a feel for the true costs involved.  You will also be able to see if the owner has been deferring maintenance after your inspector has completed an inspection of the property.

On that note, before you have the property inspected, be sure that you already have your property manager in place.  He should be willing to go out with the inspector to review the property and tell you any issues he sees and provide an estimate of costs.

Be sure your property manager is experienced in Section 8 housing.  You want someone who understands how the system works and what the expectations are of the section 8 inspectors. This was a lesson I had learned the hard way in San Antonio.  

Keep me posted on your progress.

Good luck,

Richard