14 Unit Multifamily. Is it a buy?

Question

Jason Chen · Answer

this property is a small potential gem. not a big gem, but a small one

offer as low of a price as you possibly can and take the property. i think you will like it. i rate this deal a 3.5/10 if you pay asking

if you get it for $425,000 and finance it with terms, id rate it a 6/10. anything above a 5/10 in my opinion is a solid deal

Jaysen Medhurst · Answer

@Dustin Moore, double check that occupancy and make sure it is "Economic Occupancy" (i.e. all the units paying all the rent), not "Physical Occupancy" (i.e. units are lived in, but paying late or not at all).

You have to get ALL of the properties expenses and income, for at least the last 2 years. Sometimes they won't be released until you make an offer, just make sure you have a due diligence contingency in your offer.

Based on that Gross Rental Income and taking into account the 50% rule, you're looking at a 9% cap. That's a little higher than normal. Especially, in a B+ neighborhood (typically 8% all things being equal, a bit lower in B+/A), but I don't know your market or the neighborhood. That might be right down the middle. You should confirm the local cap rate with your broker or a local property management company.

Craig Bellot · Answer

The issue with units that rent below $600 per month is there is usually not enough cash flow to handle the maintenance and capital expenditures that come down the line.

Whether you are in Bridgeport, CT or San Francisco, a water heater costs about the same amount.

That being said it's important to extrapolate the costs you will eventually have to endure down the line and see whether $550 per month per unit is enough to handle these.

In my experience, it is not.

Greg Scott · Answer

Based on the information here, this looks like a 9 or 8 cap, which would be a good deal.   But, you really need to know ALL the expenses before making an informed decision.   Missing are the following:

- Utilities

- Repairs and maintenance

- contract services (e.g. lawn)

- property management (you should always include a cost for that even if you intend to self-manage)

- Taxes for YOU.   In many communities taxes can change dramatically after purchase.  Know what you will pay in taxes not what the previous owner paid.

- Any major deferred maintenance

Brian Ploszay · Answer

Agree with Greg Scott's analysis.  Make sure you make a capital budget for the repairs.  If you fund the repairs down the line from your cash flow, you may have several years of reduced returns.

14 Unit Multifamily. Is it a buy?

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