Fourplex price and structuring seller financing

[Taylor C]

Here's a property I've been considering

* 4-plex in Ontario, Canada
* Gross $23,760
* Asking $189,000
* Actual expenses: $7531 (3600 heat + 720 electric common areas + 1200 water + 2611 property taxes + 600 insurance)

Using 50% rule, Expenses would be 11,880. This is not far from "actual" expenses + 5% vacancy + 10% property management (which would total 11,095)

After checking out some other spots, I think the seller would have better luck in the 155-165 range.

What would you pay. And I could use your help figuring out if and how seller financing might work for me as the buyer and for the seller.

Thanks~

[Jon Holdman]

The "2% rule" is a quick and dirty rule that says the monthly rent needs to be 2% of the purchase price for a property to be a good deal. Since the market sets the rent, this rules really says you can afford to pay 50 months of rent for a property.

Honestly, I don't like this rule very much. Its pretty close if the rent is $500. It over prices the property if the rent is higher, and under prices it if the rent is lower.

A more detailed calculation is this:

Rent: $495
Expenses: $247
NOI: $248
Desired Cash flow: $100
Left for payment: $148
Max loan (and price): $24,685.16

The expenses and NOI are based on the 50% rule, which says all operating expenses, vacancies, and capital expenses will total about 50% of the gross rents. This rule's been debated at length in the Rental property forum.

Then, knowing your NOI, subtract off your desired cash flow. $100 per unit per month is a common goal, though its often pretty ambitious. What's left is your max payment. Use that and the "present value" function in Excel or a financial calculator to calculate the loan amount. In this case, $24,685.16.

Now you'll say, what about the down payment? Can't I add that back on? Sure, if you want your money to work for free. By using this calculation to get a price, then applying a down payment, you're making the property stand on its own. Commercial properties often calculate a "cap rate", like Uwe mentions. That calculation assumes 0% financinging, and computes a value as if you had paid cash.

So, given this price, and assuming you do 25% down (about the best you can do for outright purchase of investment property), the rest of the story is:

Down: $6,171
Loan: $18,513
Payment: $111 (assuming 6% & 30 years for these calculations)
Actual Cash flow: $137
Cash flow per year: $1644
Cash on cash return: 27%

Very nice!

If you pay the asking price, $47,250/unit, with the same terms, your cash flow is -$35 a month. Not good!