Midwest Multi-Family Analysis Assumption Feedback

[Patrick Malinowski]

Looking for feedback on the assumptions I'm using for a buy and hold 4 unit multi-family analysis in the Midwest (Cincinnati). Each of the 4 units rent at $500/mo and are 1BR/1Ba. Separate electrical and heat. Owner would pay for water/sewage and common area electrical. Here are the numbers:

Property Purchased: $80k

Debt Service: $350/mo

Taxes: $275/mo

Gross Scheduled Rent: $2000/mo

Operating Expenses (per month):

- Vacancy: 10% ($200)

- Maintenance: 15% ($300)

- CapEx: 10% ($200)

- Management: 10% ($200)

- Owner Paid Water/Sewage: $150

- Trash Service: $85 (for 3 bins + recycling)

- Insurance: $150

- Owner Paid Electric: $50

Total Operating Expenses: $1610

NOI: $4680

Monthly Cash Flow: $39.05

The neighborhood is at best a C- if not D class neighborhood (high crime, high tenant turnover, low income tenants). Thus my assumption for slightly higher vacancy and maintenance rates. My main question is related to the disconnect I see in with this property vs. the 2% rule and the 50% rule . . . this property pulls in around 2.3% rental income vs. property value and seems to barely cash flow, especially for a multi-family. I know that a lot of people tend to stay away from lower income/high crime neighborhoods due to some of the inherent issues with tenants and high maintenance costs but I've also heard that there's a lot of money to be made in these neighborhoods w/ the right property management team and tenant screening. I would have expected based on the 2.3% rental income that on paper this property would have looked much more appealing vs. what I'm seeing. So what do you guys think - am I being too conservative with my operating cost assumptions (vacancy/maintenance/capex/prop management) or am I correct here and just need to re-evaluate my REI plan?

Thanks for any and all feedback!

-Patrick

[Chris Sellers]

Patrick,

High crime, low income properties have always been good to me.  Just have to buy them right.

I'm not from Ohio, but your property tax and insurance estimates look high to me for an $80k property (Cinci rate 1.68% according to Google).   Here in Charlotte, I'd line up to buy $80k 4plexes that rent for $2k.  

Good Luck,

Chris