Fiveplex - What would you offer for BRRRR strategy

[Adam Bradley]

Fiveplex built in 1986

All 5 unites occupied

4 X 4br, 1ba @ $525/mo

1 X 1br, 1ba @ $485/mo

http://www.realtor.com/realestateandhomes-detail/5...

Seller is asking $185,000

Market value per county is $152,900

All units don't necessarily need fixing but could sure use updating. This has been estimated to be $20,000 for the entire property.

My strategy is to buy and hold multifamily properties for long-term income (shooting for $150+ per unit cashflow). I am new to REI so I've got some easy questions for you.

The property is already fully occupied. To renovate, do you normally kick everyone out and then offer them first dibs to move back in at higher rent?

To employ the BRRRR method, if I did not kick everyone out, then I assume that I would need to just get the property well below value so that I could get all of my equity back out via refinance to "Repeat". How would I estimate market value --- I've read that sometimes this can be estimated by using the NOI.

Also, is cap rate important or not? I've read here that you can ignore cap rate and focus on cashflow.

Here are all of the monthly numbers that I have on the property:

Total Income 2,585.00

Tax $77

Insurance ? (How can I calculate this?)

Utils are paid by tenants.

Lawncare $40

Vacancy 5% of total income

Repairs 5% of total income

CapEx 5% of total income

Property Mgmt $325

For my understanding, how would you run the numbers on this property? (I've used the BP BRRRR calc but I'm screwing something up because even when buying at $100,000 with $25,000 for rehab, the short-term loan ends up with monthly payments over $8k.

How would YOU run the numbers and decide on an offer price that would make it cashflow $150/mo?

Thanks a lot for your input. I look forward to not being a newbie and asking stupid questions.

[Ben Wilkins]

@Adam Bradley - I'll just run down through the list of easy questions. Also, be warned: Wall of text, and some math.

1. To renovate, it depends on the property and the work being done. If the work is unobtrusive, I usually start with the worst unit and vacate it for rehab, then go from there. There's no point in vacating the entire property if you're only working on one unit at a time.

If there is work that needs done on all of the units and it is easier to do them all at the same time (for example: have all of the plumbing or flooring done at the same time in all units), then it might make sense to vacate all of the units from the beginning.

I screen all of my tenants, even the ones that I inherit. It's a business, and in the end I want to make sure that I get paid. If one of the original tenants passes all of your screening criteria, then you can give them first dibs. Don't bend your criteria because you feel bad about vacating the unit.

2. For a five unit (and all commercial properties), the market value is generally based on comparable cap rates. Formula: Cap Rate = Annual NOI / Purchase Price

So find out the average cap rate in your area for small commercial residential properties and the NOI for this specific property. Purchase Price = Cap / Annual NOI

3. Cap rate is technically important to determine purchase price. I usually only use it when evaluating what I believe a property is worth, but cash flow is generally the deciding factor for my investments.

4. Insurance: Call a few agencies and ask for a quote for a five-unit rental. After a while, you'll have an idea of what the average is based on property size and location.

5. Not a question that you gave, but an observation: Maintenance and CapEx of 5% is marginal. I would aim for a more conservative 10% as best practice, or 8% as a safe practice. Don't decrease these numbers in order to make a property look good on paper - you may lose a lot of your future savings if (when) things start breaking.

6. Your numbers are at $8k short term because you amortized $90k over one year. You won't be paying the full $95k in one year. Your initial loan will have wording of "$X for Y% interest with Z amortization". Even though you are planning to refinance in 1 year, you still use those terms when determining your short-term cash flow.

7. If I was going to do a full analysis, I would determine all expenses and income based on once it was fully rehabbed. From there, I would back-calculate to a purchase price. Here is my longhand math approach at determining a purchase price. There are online tools that can do this for you, but it's always good to understand how they work.

So let's assume that your rehab will allow you to raise rents 10%. Initial rent numbers are $2,585.00 * 1.1 = $2,843.50

Now let's get your monthly NOI:

Taxes: $77
Insurance: $2000 Annual = $167 / month
10% Maintenance: $284
10% CapEx: $284
10% Management: $284
8% Vacancies: $227
Utilities: $83 (just in case)

NOI = $2843.50 - All of that = $1437.50

Your desired cash flow is $150 * 5 = $750, which means you can have a loan payment of $687.50 per month.

Fun fact of the day: Excel has a function that will give you the loan amount based on the interest rate divided by 12, the length of the loan in months, and the monthly payment. So in excel if I assume 5% interest rate, 30 years:

=PV(0.05/12, 360, 687.5) 

will give $128,068.61 as your total loan amount. Subtract out your renovation cost, and the most you should pay is roughly around $103k purchase plus $25k renovation in order to achieve $150 per door per month.

Since you are looking to refinance, you have to take into account your closing costs which I won't do for the sake of running numbers.

I hope this helps! There are no dumb questions: each and every question will help someone else, and there's always something to learn.