WHO WOULD BUY THIS? 4 family in Cincinnati

Question

Deal or no deal?

4 family building, all 1 bedroom units, Cincinnati (Norwood), working class, B- neighborhood, but near a good and growing private university.

Rent $450 (1 rented, currently 3 vacant)

If all 4 are rented for $450, gross income = 21,600 /yr

Owner pays common electric, gas & electric for boiler, water, & trash = $4400 /yr

Taxes = 2600 /yr (per owner)

Insurance = 1300 /yr (per owner)

Landscaping = 936/yr estimated

All expenses = 9236 /yr

NOI = 12,364 /yr

Purchase price = $85,000.  (I'm seeing 4 families in this neighborhood selling at $150K on average)

I am estimating 10% of rents for vacancy, 10%for repairs, 10% for capex.

I'm putting 25% down, and the loan rate would be approx 5%, I'm getting a estimated payment of 342.22 (principle & interest).

I'm looking for a simple way to gauge if this is a good investment or not, so I thought an easy way to compare it to the stock market is just looking at a simple cash on cash return.

In this scenario, if I put $21,250 down, and my cashflow is 1773 per year.  that's an 8% cash on cash return.

If I take 3 of the 4 rents up to $500 (which I think is achievable, that bumps this up to a 14% cash on cash.

My target criteria was to get as close to 15% cash on cash as possible, taking into account the vacancy, repairs, and capex.  If I can make 8% historically in the stock market, why would I go to the trouble of owning real estate if it's not making considerably more.  Is 15% cash on cash too much to ask for?

I have managed rentals in this neighborhood before, and sold real estate in the area, and I think I'm being very conservative with my numbers.  I believe the 10% vacancy can be taken down to almost 0% with strong management.

If vacancy is only 5%, and repair is only 5% over time, the cash on cash is 18.5%.

Jacob Murphy · Answer

@Matt Clark I own a 4 unit in pleasant ridge and can attest that getting renters is easy in this area. If you are on top of it with move outs then you will beat that 10% vacancy.

I see these properties with owner paid utilities all the time. The best solution I have come up with is to separate the electric meters then install ductless mini splits in every unit. You can do this for about $2000 per unit. Ductless mini splits will do heat and AC. They also don't look cheap like the window AC units. It is expensive up front but is a game changer for cap rate long term

Aaron Montague · Answer

@Matt Clark Here is how I see the numbers broken out.

I don't recommend using a % for Cap Ex.  If you know things are coming due in the near term, you might want to float the money to the business now and pay yourself back with the Cap Ex expenses over the course of the years.  Here are my thoughts on Cap Ex and how I figure it.

Everyone else makes good points about moving some of the expenses to your tenants.  This is not a good deal otherwise.  I keep my numbers conservative and then enjoy it when I beat my own financial predictions.

My added suggestion: Eliminate the lawncare with a zero-scape.  I'm not sure what that would look like in your area but it should pay for itself quickly.

Mortgage Rate

5.00%

Length of Mortgage in years

30

Monthly Mortgage payment

$342.22

Last Years

Taxes

$  216.67

$  2,600.00

Sewer and Water

$  100.00

$  1,200.00

Trash

$  100.00

$  1,200.00

Heat/Utilities

$  166.67

$  2,000.00

Lawncare

$  78.00

$  936.00

Cap Ex and Ops

$  200.00

$  2,400.00

Insurance

$  108.33

$  1,300.00

Mgmt Fee

$  180.00

10%

Vacancy

$  180.00

10%

Total Expenses

$1,671.89

Unit 1

$  450.00

Unit 2

$  450.00

Unit 3

$  450.00

Unit 4

$  450.00

Unit 5

$  -

Unit 6

$  -

Total Revenue

$  1,800.00

Cashflow/month

$  128.11

Cashflow/year

$  1,537.31

Cash on Cash Return

6.61%

Craig H. · Answer

If this is walking distance for Xavier University students you should be able to get more than $500 for a one bedroom apartment.

Matt Clark · Answer

Thanks everyone for the great comments.  @Andrew Johnson

@Kendra B. @Matt Kauffman. @Caleb Heimsoth

Although it is customary in this area for the landlord to pay water and trash, water in this city is very high, so maybe I'll look into RUBS to bill that out to the tenants.  The rents are $50-100 low in my opinion.

The boiler is only about 3 years old.  Roof and windows are old, and the property has a little deferred maintenance, but is in rent ready condition.

The 75% vacancy I think is due to this owner divesting his whole portfolio and he hasn't even put a sign up to rent them.  They are in rent ready condition.  He bought 3 buildings 20+ years ago and now is ready to get out of the business.  I've managed a building just two blocks away, with a more awkward layout,  and everytime I tried to rent it, I had more calls than I could deal with and 3+ applications submitted (with credit reports) within 1-2 weeks of posting the vacancy.  I had people move out on the 31st, and new ones on the 1st.  So I think the vacancy is just laziness.  I will probe the rent rolls much further and make sure this isn't a long term rental issue though.

On the open market, I'm seeing this same cashflow and the asking price is twice as high, and the buildings are selling.  I do not understand how anyone is making money if you were to buy this cashflow at $130-150K.

Does anyone think I'm being too conservative figuring in 10% vacancy, 10% repair, 10% capex, and still asking for 15% cash on cash?  If I see 12% should I pull the trigger?  I've sat on the fence for years.  We might be moving towards a high in the market and that's why no on market deals make sense, but I'm also looking at this long term.  I don't need income, this is more of a retirement/wealth building activity because I have cash sitting doing nothing. But I'm not interested in buying a building that is a part time job making 0-5% cash on cash.

Kendra B. · Answer

For me, it would depend on the quality of the building. If there is no significant delayed maintenance, why not? Looks like a reasonable deal especially if you can increase those rents. But if utilities are old and roof is iffy, I'd pass. My 2c.

Matt Kauffman · Answer

@Matt Clark I agree with @Caleb Heimsoth All those expenses you pay for are killing your cash flow. Figure out if there are ways to pass some of that over to your tenants, like water. If it's customary for tenants to pay water then figure out how to put on water meters. There are also third party utility billing companies that can bill you tenants too.

WHO WOULD BUY THIS? 4 family in Cincinnati

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