Does this Deal Make Sense? 4-plex in Albuquerque

[Zachary Stoll]

Hey there BP Community. I'm a relatively new member. Been mostly creeping the forums, devouring podcasts and running numbers on properties. Probably ran the numbers on 75-100 properties and this is the first to actually cash flow. 

Here are the #s from the BP property estimator.

Purchase Closing Costs	$3,500.00
Estimated Repairs	$0.00
Total Project Cost	$248,500.00
After Repair Value	$245,000.00

Down Payment	$8,575.00
Loan Amount	$236,425.00
Loan Points	$4,728.50
Amortized Over	30 years
Loan Interest Rate	4.375%
Monthly P&I	$1,180.44
Total Cash Needed	$16,803.50

 $2,900.00 MONTHLY INCOME

$2,468.77 MONTHLY EXPENSES

$431.23 MONTHLY CASHFLOW

7.89% PRO FORMA CAP

$19,340.00 NOI

$16,803.50 TOTAL CASH NEEDED

30.80% CASH ON CASH ROI

7.89% PURCHASE CAP RATE

I assumed I'll do an FHA loan at 3.5% (or maybe 5%) and would pay closing costs out of pocket. Rents are $800 and $600 for the 2Bd and 1 BD, respectively. No W/D hookups though. Water, sewer, trash was at $175 combined for all 4 units. There is an unfinished large shed out back with water and electric hook ups. Not sure about sewer but believe there is because the previous owner wanted to rent it out. The owner didn't develop this because it would have pushed the property into the commercial realm at 5+ units and he wanted the next owner to have the flexibility to decide this. I haven't included any potential cash flow from this 5th potential unit in my calcs. There is a school a block away and a Walmart, Ross, Harbor Freights, Dunken Donuts and Goodwill in the adjacent areas (all 0.5 miles away).

This property was stripped down to the studs and has been completely redone with granite counter tops, stainless steel appliances, new carpet, tile, heaters, HVAC system, water pipes and electric wire. I even spotted a brand new master electric control panel outside. There is a new wood fence that encloses the backyard, which is shared by all tenants. A brand new roof was installed 6 months ago, not just shingles but all the rafters too I believe. Because of the improvements, i assume no repairs were needed.

So here is the kicker. This place is really nice. All 4 units were updated (2 x 2BD/1BA + 2 x 1BD/1BA) and it is fully occupied. My main hesitation is that it is in a lower-income area. It is not crime-ridden but other properties are much less appealing. Rough Zillow estimates and previous purchase price histories show places going for > $200,000, which puts the asking price at ~ 25% of the area. 

Because of the area, I assume that i'll have a property manager (costs included in my estimates at 10% of rent). Speaking with the current manager, he says there is demand for the units and when first renting out was getting 5 applications per day until filled, but that only 1 tenant in about 25-30 applicants was qualified. He states their screening process is rigorous and he seems nice, but know this is speculative. Is this a lot of applications or normal?

Rents in the adjacent 4-plex building (pending a deal at $225,000 but not updated) are $410 and $500 for the 1BD and 2BD units, respectively. Is it common to have such a high discrepancies in rent for an area? Are there any implications of this?

I am curious if others think this is a good deal and to jump on it or if it doesn't make sense (if so, what am I missing?). I like all the updates and cash flow but am worried about potential tenant headaches. I know this can be mitigated with a good management company but also realize these can be difficult to find.

Thanks in advance,

Zach

[Brent Coombs]

@Zachary Stoll, my guess is the Seller (read: Flipper) over-rehabbed it (for the area), but is still hoping to find an owner-occupier like yourself who'll overlook the fact that the sold comps / usual rents in the area do not support the asking price.

Over time, its value will tend to devolve to the lowest common denominator (ie. comps that have not had the same level of money spent on them).

Right now, the only thing I see going for it is that you'd get to live in a nice apartment (albeit in a sketchy neighborhood?), at minimal ongoing cost because of its added income (even though that'll likely decrease once you get tenant turnover, reverting to normal market rents).

But, that's not nothing. We can't decide for you. All the best...