First Deal Second Opinion, Cincinnati, Quad

[Nick Howard]

Hello BP,

Long time lurker, looking for my first property, aiming for a live in multifamily. We’ll live in for the first few years, hopefully having $1,000 per month from having no rent.

I’m a bit long winded, so I apologize ahead of time.

My wife and I are going on a second visit to a property here in a small village on the border of Cincinnati.  AreaVibes lists this village as a 77 Livability (Extremely Liveable) and a A- on Crime.  Last week we saw the one of the four units (supposedly the “worst unit” which only appears outdated). The other 3 have supposedly been remodeled (the one that hasn’t has an 8 year tenant in it). What I really like is the owner has just installed new water heaters, new AC, new windows, new concrete parking lot adding 7 offstreet parking (in addition to the attached 2x 2 car garages), and “newer” breaker box and furnaces. I feel like these improvements could really help my wife and I create a strong foundation, hopefully limiting the number of early Cap Ex, lets us build some reserves.

Unit 1 (3:2): $900

Unit 2 (2:2): $650

Unit 3 (2:2): $550 (assuming the unremodeled one)

Unit 4 (Eff): $325

Laundry: $80

Gross Inc: $2,505

10% Vacancy: $250.50

10% Repairs: $250.50

10% Cap Ex: $250.50

10% Property Management: $250.50

Taxes: $304.58 ($3,655 LY)

Insurance: $100 (no quote yet)

Expenses: $1,406.58

NOI: $1,098.42

I’m also currently assuming I can move the cost of water from the owner to the tenants via some simple sqft ratio or even one of these remote hookup things (haven’t researched that too much yet). (Tenants pay electric and gas already)

Will likely need some landscaping, and snow removal? Unsure if that’s built into some property management. Haven’t looked into Property Management yet since we’ll be living in and getting our feet wet the first couple years.

So here's my dilemma. Asking price is $189.9k at asking, it gets $46/door, CoC 10%. My original goals after all the information I've consumed is to aim for $100-$200 per door. To get $100/door, my MAO is 33% off, $146k. I don't think that's in the realm of possibilities. 10% seems more realistic but still maybe not (since I have no experience in buying multis in Cincinnati in 2017). 10% off, MAO is $170k, units cash flow $69/door (17% CoC).

The last scenario is rent increases and value-adds. There is a neighbor I've seen list a 1:1 (900sqft) for $650, indicating my 2:2 may have room for improvement, let's say $665 for both (would need to remodel the older unit, +$15 & +$115). There are 8 efficiencies across the street renting for $450. Not sure if they're bigger or nicer than the 4th unit in this property, but let's say I can get the efficiency to $375 (+$50). I could also try and rent the garages. I think a modest price would be $25/2car/mo (+$50). So the NOI is now (+$15+$115+$50+$50=) $2,735. That brings the $/door to $104, CoC 25%, with the same MAO of $170k. Again, not sure if this is realistic, or if I'm trying to make an okay deal into a great deal by messing with numbers.

Tags: Cincinnati, Multifamily, Quad, First Deal, Deal Analysis

[Johnny Hastings]

Everything you've laid out here seems sensible. Here's some things that stick out to me.

Make sure you insist on inspecting each unit, don't take their word for the fact that they've all been updated.

You don't say it, but I'd guess the laundry income is from coin-ops? That number seems a bit high to me, but I've seen it fluctuate over time with different tenants. I have a 12 unit with coin-ops. The most I've ever pulled in a month is $350, but usually it's in the $200 to $250 range. I know it's small beans in the big picture here, but you may want to be more conservative with that one.

Insurance seems low. I have a duplex here in Central, WI, built in the 80s, in great shape, insurance is ~$1,400. You could call for a quote on that. It'd be a good time to meet and get a relationship going with an insurance agent if you're going to get into this business!

Your assumption on the water bill is correct. Do a google search on a RUBS (residential utility billing system). That's what you're looking for there.

I don't know if snow removal or landscaping are worked into property management contracts or not, since I've been self managing. I can tell you that plowing isn't cheap. I have an 80' drive with a small (4 car) parking area at the end, and every time it snows over 2" I get charged $55. That adds up quick, and really gets in the way of winter cash flow! If you're living there and doing this yourself, obviously it doesn't matter, but for future calculations you should consider it. If you want an exact price, call a local plow guy; have him swing by and give you a quote on the property you're considering. At least you'd have an accurate number for that for future reference.

I think you're correct that you aren't going to get the place for 33% off asking price. That scenario doesn't seem plausible. 

What's the condition of the roof? Considering all the things you've noted that the current owner has replaced, you may be able to cut the CapEx and maintenance expenses down a bit. Seems like some of the main cost culprits have been handled, at least for the time being. If you're doing remodels, perhaps the up front cap ex should be higher, then reduced once you have funds for those.

I think your last scenario of rent increases and value-add ideas all seem legit. You may have to cycle tenants through to get the increases to stick, but that's the business. I've never yet increased rent over $15 a month and not had the tenant leave, lol. I have a row of single car garages for one of my properties. The garages have space for a car or midsize SUV, and a bit of storage space in front, aren't heated, and go for $55 a month. Our climate may make a garage a bit more desirable than yours, but I think at $25 you're selling them a bit short there.