Check this deal out - what do you think?

[Billy W.]

Hi,

I have found a guy who is underwater on his investment property. The guy bought the place for $156K in 2005 and now wants $70K for it.

4 Units - 1b/1ba
Rents are $400-$500
Lower/middle class neighborhood
Needs about $20K to be renter ready
City Appraised for $149K
Taxes: $1989 a year

Any advice?

Thanks

[J Scott]

Four-unit buildings are most often bought as investment properties, not personal residences, so I'd be more interested in the value of the property based on income than on comps.

With $400-500 in rent per unit per month, that's $1600/month in gross rents (let's be conservative and assume the lower end). That's $19,200 in gross annual rent.

If you assume operating expenses, plus vacancy and capital expenses will be about half the gross rent (50% rule), your annual expenses will be about $9600 and your Net Operating Income (NOI) will be about $9600.

If you purchase for $70K and have to put $20K of rehab into it, that's an all-in cost of $90K (let's ignore closing costs and loan costs for this approximation).

So, your cap rate on this property is about:

Cap Rate = $9600 / $90,000 = 10.6%

That's reasonable and probably worth doing a more thorough analysis of the actual NOI (using rent rolls and documented historical expenses) and the return based on your preferred method of financing.

Personally, I like to see a cash flow of $100 per unit assuming a theoretical 100% financing scenario.

In this case, your monthly NOI is about $800 ($1600 gross rents and 50% rule) and assuming a 30 year fixed rate loan at 6.5% on the $90K all-in price, you'd be paying about $570/month in debt service.

So, your cash flow would be about $230/month or about $60/unit -- a little bit less than my target number, but depending on your location and your actual NOI, might be reasonable.

And, of course, there are the non-financial considerations, such as location, market, property condition, surrounding properties, etc. But those are things you'll have to account for when making a final purchase decision.