5 plex need advice please

[Jennifer Jones]

Hello! Newbie here. would love your 2 cents looking at a 5 plex property to buy 85k purchase price. small town an hour from my house. units rent for $400/month utilities included yearly taxes $2,700 monthly utilities $400, lawn care $75 New Metal roof, ac, furnace, appliances included Nice brick building, wood floors, well maintained. I am super nervous about the possibility of making the wrong decision but also super excited about the possibility of making the right one. Should I take the leap?

[Ben Wilkins]

@Jennifer Jones - owner pays all utilities in a five unit?! Yikes!

However, at the same time, this looks like it might be a great opportunity to add value to the investment through splitting the utilities. What is the heating source (gas, electric, etc)? Are there separate water heaters for each unit?

If the property is well-maintained, then that is a good thing for you as there is less chance of deferred maintenance for you to deal with.

Did I read correctly that there are two units that are not rented currently? Is there a reason for that? If there are so few rentals in the area, is this a good market? Are there people in the area who want to rent?

And lastly: what is your situation for purchasing the property? Are you planning to finance it, or purchase with cash?

Now, on to the fun part:

Let's go over the income, since that's easy.

Income = $2050 per month

Expenses:

If you purchase at $85k with 25% down, and finance for 25 years, 5% interest, your mortgage payment is $375 (rounded up a few dollars)

Assume 10% maintenance = $205. This includes lawn care, snow removal, etc

10% CapEx = $205. This is savings for a rainy day (when something big breaks)

8% Vacancy = $164. This is usually a conservative estimate, but I don't know for your area.

10% Property Management = $205. Even if you manage it, your time is worth something. You might also decide not to manage it later, so please include this as an "expense"

Property Taxes = $225

Utilities (Ouch!) = $400

Insurance = $167. I estimated using $2000 annual for the insurance.

Total = $1946 per month

So your total cash flow would be $104 per month. Good news: this is positive cash flow, even with those horrendous utilities! More good news: if you cut out some of those insane utilities, you'll increase your cash flow!

Option 1: split the utilities between the tenants and add it to their monthly rent.

Option 2: split the utilities. This will require work and will cost money, but it will increase the value of the property by quite a bit. Commercial properties (5 units and up) are priced based on their ability to cash flow. If you increase that ability, you increase the value of the property. I strongly suggest finding a contractor who can quote splitting the electric and water for you. I wouldn't worry about paying Sewer and Trash

My advice: If you can afford the 25% down pay and if you can afford to split the utilities, do it. Consider a renovation loan, which will increase your mortgage payment but will also increase your cash flow since you get rid of those catastrophic utility bills.

This looks like a decent investment for the fact that it has an easy way to increase the value of the property. It also has the ability to cash flow positive even without that split, even if it doesn't leave a lot of room. Another positive is the newer CapEx items that you listed (AC, roof, brick, etc). Just make sure that you have a plan to split those utilities. Also, look into why there are vacancies and see if 8% vacancy is enough to cover.

I hope that helps!