4 plex in Madera - Good deal or no

[Jay Orlauski]

Hi BP  community - 

I wanted to pose a question to the community to get some feedback - I am working on project that could  lead to us having 3 brand new construction 4 plexes built in Madera, Ca - Currently , we are looking at a sales price that reflects a 6% cap rate.  I am figuring that even though we are in the Central Valley - it will likely go to an investor from the Bay Area or even Southern California - as we have a lot of coastal investors starting to look in our area. 

We are looking at building 3 bedroom , 2 bath units of around 1200 sq ft with  a  1 car garage and laundry hookups inside the unit. In the area 3b apartments / houses  are easily getting $1200 a month and considering that these will be brand new - I can see them getting top dollar for rent. 

Even if you only collected $1100/ month - have 5% vacancy , use management @10% and have your other basic expenses ( minus cap x for being brand new) .. we are pricing it so that it has a 6.11% cap rate. For a brand new building - that is a good cap rate - if you get top market rents at $1200/ month the cap rate jumps to 6.9%  - based on the numbers we are looking to price it out at around $525,000  -  

Some investors  I have spoken to feel like the price is a little high - but considering that there is no maintenance and everything is brand new there should be very little cap ex and a strong demand - I feel like we are in the right ball park - I even consulted with an apartment manager in Madera who says we are on the right track. Right now there is a 3 month waiting period to get into an apartment according to one of my investors who has tenants looking for a new place to rent  -   I would like to be able to price these to move quickly , but without leaving a lot of value on the table.  If the numbers I've come up with are correct - does $525,000 seem too high for a brand new 4-plex with a 6% cap rate?  Any feedback you have for me would be greatly appreciated. 

Here are some of the numbers I am using : 

Monthly Operating Income	Scenario A
Number of Units	4
Average Monthly Rent per Unit	1,100.00
Total Rental Income	4,400.00
% Vacancy and Credit Losses	5.00%
Total Vacancy Loss	220.00
Other Monthly Income (laundry, vending, parking, etc.)
Gross Monthly Operating Income	4,180.00
Monthly Operating Expenses
Property Management Fees	418.00
Repairs and Maintenance	-
Real Estate Taxes	546.88
Rental Property Insurance	300.00
Homeowners/Property Association Fees
Replacement Reserve
Utilities	240.00
Pest Control
Accounting and Legal
Monthly Operating Expenses	1,504.88
Net Operating Income (NOI)
Total Annual Operating Income ( Gross Monthly x12)	50,160.00
Total Annual Operating Expense (Monthly Operating Exp x12)	18,058.50
Annual Net Operating Income	32,101.50
Capitalization Rate and Valuation
Desired Capitalization Rate	6.00%
Property Valuation (Offer Price)	535,025.00
Actual Purchase Price	525,000.00
Actual Capitalization Rate	6.11%
Loan Information
% Down Payment	20.00%
Down Payment	105,000.00
Loan Amount	420,000.00
Acquisition Costs and Loan Fees	5,250.00
Length of Mortgage (years)	30
Annual Interest Rate	4.500%
Initial Investment	110,250.00
Monthly Mortgage Payment (PI)	2,128.08
Total Annual Debt Service	25,536.94
Cash Flow and ROI
Total Monthly Cash Flow (before taxes)	547.05
Total Annual Cash Flow (before taxes)	6,564.56
Cash on Cash Return (ROI)	5.95%

Thank you  - I look forward to reading your feedback

[Chris Mason]

Originally posted by @Jay Orlauski:

Yes... that's why we stopped at 4 units ... we did not want for it to be considered commercial - ideally , we would like to be able to have as many potential buyers as possible.

What we would really like to do is to get them all sold before they finished or at least build the 1st one , then sell the other two ahead of their build or during construction. I would be interested in hearing more about what you have to say on the subject..

I'll share some of the things I see the big time developers do when they build a zillion houses, or condo units, at once:

• One of the games the big time developers do is sell off the crappiest lot first to "set the comps" and then they gradually go up in value until the final one, on the nicest lot, sells for the highest price possible.
• They also often kick back a chunk of closing costs to work with their preferred lender because, like you, they are time sensitive and don't want to waste two or three months with a buyer that isn't truly qualified & is now asking for yet another extension that you've got to eat the carrying costs for. They view a few grand as a cost they are perfectly glad to pay for assurances that it'll actually close and they can get it off their books.
• And they love to screw buyer's agents out of their commissions when a buyer is initially shown the home without their agent present.
• The selling point they use to sell them before they are done being built is the availability of custom upgrades.