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Updated almost 7 years ago on . Most recent reply

User Stats

48
Posts
7
Votes
Jack Barkow
  • Investor
  • Califonia
7
Votes |
48
Posts

8-unit Deal Analysis.. Is it a good buy?

Jack Barkow
  • Investor
  • Califonia
Posted

I'm currently looking at an 8-unit building in a C- neighborhood and trying to justify it.  One of the bigger concerns for me from a snowballing perspective is that since I have to put 30% down it is going to significantly eat into my available cash for other investments.  The other concern is the current leases and the timeline to raise rents.  Here is the information.

8 one bedroom units currently renting at $500 each with all utilities included (My PM thinks they can rent for 650-675 with hot water and heating included.  I think that the current owner is even paying all of the individual heating and electricity meter bills)

The heating is one system with radiators in the units.  The hot water is one central water heater.  Both systems are more than 10 years old.  Heating the units and providing hot water is a significant cost (pro forma around 5k annually, but I'm thinking closer to 6k or 7k).

This building does have coin op laundry and claims 1k annual from that on pro forma... I'll just call that icing on the cake.

Taxes 5k annually, insurance 3.5k (pro forma.. i'm not sure why its so high), and management/repairs/capEx/vacancy @ 33%

One thing that has me totally confused is the water usage.  In this area water is not sub metered so the owner pays that bill.  The city is claiming monthly bills around $150, which for an 8-unit that is 7/8 rented makes no sense to me unless people are using the place as a glorified storage unit in most of the units.  I usually budget 40-45 a month on water/sewer per unit.

What do yall think of the deal? What price would you pay for this place considering the 30% downpayment requirement (Seller wants over 200k per the MLS listing). I considered that I could get it for lower on account of the lower rents and then get it reappraised in 6 months with the higher unit rents and do a cashout refi based on the higher value of the property due to higher rents since its technically a commercial property or at least a commercial loan. I'm expecting to need to replace the furnace and water heater in the next 10-15 years (I'll have a better idea when I tour the property).

Most Popular Reply

User Stats

31
Posts
15
Votes
Jeff Smith
  • Investor
  • Spring, TX
15
Votes |
31
Posts
Jeff Smith
  • Investor
  • Spring, TX
Replied

I think a key question that you'll have to work with the property manager more on is how they are justifying the increase from $500 to $650. Does the market in the area justify that increase and do you have to do any upgrades to make that happen? When will the existing leases expire and how do you think the tenants will respond to the increase? You can start by laying out the lease expirations and switching them to the full amount to help in your evaluation on the income statement. I have a couple of fourplexes and it took about twice as long as the property manager said in order to get the rents up to where the local market had them. You'll just need to ensure your strategy is sound and not wishful thinking by the property manager, though they should be incentivized to make the increase.

You can also eventually look into making the tenants pay for a portion of the utilities. On my fourplexes, I pay for a base cost up to a certain volume of water and then split the gallons over that amount to the tenants. It isn't much in cost to them, but it has made them a little more cautious about the water usage and they report back to the manager if there is a leak.

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