How does this deal look? 1st timer.

Question

Hey Everyone,

I am looking at a current deal in Belleville, Illinois.

4 Unit multifamily complex.

Rent #1 is  $550  for a long time tenant, now is on month to month lease.

Rent #2 is $500; lease ends July of 2011.

Rent #3is $450; lease ends April of 2011.

Rent #4 was $550, but now is vacant.

Expenses for this building are as follows:

Electric        $119 a month
Insurance     $140 a month
Water           $20 a month
Sewer           $15-20 a month
Trash           $40 a month

Taxes on this property are around $3800 a year.

The asking price is around $130,000, but the sellers are decently motivated.

What do you guys think for a 1st timer?

Thanks!

Uwe S. · Answer

Hello Billy,
          You live in MO and the propertie is in IL so you must take an PM for it. Thats plus 10% expenses of $2,050 rental income monthly.
          
          Now is the question, cash payment, financing through bank or owner financing? If financing how high your down?
          
          This Deal looks like for me as excample with 10% down and owner financing @ 7.0%:
          $24,600 gross income - 50% = $12,300 for a 10% CAP rate sale price must be $123k (only excample!!) - $12,3k down = $110,7k financing at 20 year armortisation = $859 per month or $10,3k per year.
          $12,3k NOI - $10,3k = $2,0k extant (no deal).
          
          Result: You must negotiate price under $100k for rational income or you need more cash for the downpayment (30%).
          
          -Uwe

p.s. Taxes and Insurance payments = $5,5k per year thats 2.67 month of rent income to pay these. I prefer max 1.5 month!!!

Sharad M. · Answer

Hi Billy,

Based on the 50% and 2% rule that you may have read on this forum, the numbers come out to:

Gross monthly rent = $2,050
minus $1,025 (operating expenses @ 50% of gross rent)
NOI = $1,025

Let's say you end up paying $120,000 for the building and finance it at 75% LTV at 7% for 30 years. With these numbers, your monthly payment comes out to $598

NOI = $1,025
minus P&I = $598
Net monthly cash flow = $427
$427 of monthly cash flow comes out to $107/unit/month, which is slightly above the minimum of $100/unit/month you should get.

NOI of $1,025 comes out to about 10% of CAP rate. $1,025*12 = $12,300/120,000 = 10%

As far as the cash on cash return is concerned, your down payment will be $30,000 and at $427/month cash flow, your cash on cash return comes out to about 17%. (I am ignoring any closing cost for this calculation.)
$427*12 = $5,124/30,000 = 17%

According to the 2% rule, your gross monthly rent should be 2% of your purchase price. 2% of $120,000 of your purchase price comes out to $2,400. Your rent of $2,050 is a little less than that.

Based on the numbers, it is not an outstanding deal, but I am not very familiar with your market, so I am not sure what sort of returns other investors are getting.

Have you joined any REIAs in your area? That's a great place to meet other investors in your area and find out from them what sort of returns they have been getting. That way at least you have some sort of comparison with your deals.

There are some major things that can change these numbers greatly:

1) Are the utilities included in the rent or tenants pay their own utilities?
2) Have you confirmed with the city of Belleville or the county that the building is a legal 4 unit? You want to make sure that all 4 apartments are legal and none of them are in the basement or attic and won't pass the city inspection.
3) Is there any deferred maintenance that will need to be taken care of?
4) How long has the property been listed for? If the property has been on the market for a long time, you might be able to get a pretty good deal on it.
5) Have you looked at the comps for the building in the past 3-6 months?

I am not as experienced as some of the other members on this forum, so I am sure other people will have more to add to this.

Good luck!

Uwe S. · Answer

If the seller afraid enough you should have no problem. 
I negotiate a multi unit in Cleveland from $119k to $91k but takes 4 month :). So you need time, otherwise there some better deals on the way or present.
Look at this actual deal and look also for other deals and it will work out in the end.

-Uwe

Uwe S. · Answer

Billy,
Its depending of your capabilities, if you have this money cash then you have the biggest advantage, if you have an bank for the financing you have also an advantage (seller gets also cash) but If you need the seller for owner financing then you need negotiating skill.
IÂ´m on your honest side, but this is your business (even if first) and your money.
 I would offer $100k with owner financing (he hold paper) and min 15% down or only $90k with cash - but thats not my deal ;).

-Uwe

Billy W. · Answer

Uwe - I just took a look at the neighborhood, it looks like a good blue collar neighborhood, however there seems to be a lot of houses for sale in the area.

Also, should I be up front with the owners? Just tell them exactly where I am at? ie- I am going to need you to significantly lower the price for this deal to happen, etc? Or be more methodical? Personally, I like to be more honest and to the point.. how do you guys usually go about it?

Billy W. · Answer

Thanks for the replies Uwe and Max!

Great responses!  I will look into your suggestions - I know they are motivated, but I dont know if they are $30K motivated.

Any suggestions on how to go about getting a owner to reduce the price significantly like that?

How does this deal look? 1st timer.

Most Popular Reply