Too good to be true?

Question

I apologize in advance if this has been discussed recently. Here goes...

Yesterday, I went to view a 4-unit property for under 116k. Two units rent for $190/week and the other two units rent for $180/week.  The owner pays about $850-900 in utilities (electric/water/direct TV).  He ran the place himself, collecting the rent weekly. He doesn't have any leases or rental income documentation. He disclosed there is one tenant who is a few months behind. I live about 45 minutes away, so I would use a property management company.

Any suggestions on this one?

Thanks!

Brian Garrett · Answer

Why is the property being rented weekly?  It sounds as if he's operating like a short term rental.

Also if the units are being rented weekly how on Earth is a tenant several months behind?

I would suggest you check the sales comps to see what the property is actually worth first and foremost.

Then I would check the rental comps to see what this property would generate on a normal annual lease.

Joe Villeneuve · Answer

Yes...My first thought is to pass.

My math says you would be making about $3200/month in rent (if they all pay on time, and nobody vacates), which after expenses (inc. PM) would leave you with about $550/month in cash flow.

One week's rent (all 4 units) is $740, so if you have one month behind by all, you just blew away your CF ...AND, you're now paying them to live there.

Sometimes the best deals you make are the ones you don't.

Account Closed · Answer

I think I'd call the police department and ask how often a month they are called to the property.

Joe Villeneuve · Answer

This is a shiny object of distraction, rationalized to look better than lipstick on a pig.

Ben Zimmerman · Answer

The numbers are probably fine, however the way it was ran, the tenants, and the overall condition of the property are what would be worrisome.

Weekly rentals tend to be S*holes, how much deferred maintenance is there?

Currently he is clearing roughly 2300/month in rent after deducting utilities, which at 115k purchase price is at the 2% mark, assuming @Joe Villeneuve's calculations of 550/month in cashflow is accurate, that puts it at roughly 23% CoC assuming 25% down payment.  So unless you have some crazy high taxes or insurance rates you should be profitable.  If someone is a few months behind in rent they need to be evicted immediately, but that is a management problem, not a problem with the building itself.  The good news is it's usually it's pretty easy to get rid of tenants with a weekly lease.

If you can keep the same rental amounts, but change it to monthly billing with a decent quality of tenants you should be good to go.

Michael Kistner · Answer

@Brian Garrett

Yea he'd have to if they're only staying weekly which could be a bad sign.

If he's just doing it because the tenants weren't paying on time and has trained them that way then I think there could be an opportunity there. There's a lot of unknown factors here

Korie Apgar · Answer

@Daric Carter Is this a multifamily or a run down motel?  I question whether these people would meet your renting requirements when doing leases.  Once you accept someone with a so so credit or start turning a blind eye to things that pop up on background checks or income requirements, what you do for one you must do for all.  If you can't turn any utilities over to tenants I'd be a bit concerned considering you said the rents are at market price.  For the price of the property it sounds like not a bad deal but does sound like you'll have many headaches.  Who wants to collect rent weekly?  That's all you'll be doing all year, running around, for an extra $3000 year.

Take into account: Accounting, Advertising, Cleaning, Insurance, Lawn/Snow, Legal Fees, Maintenance, Cap Exp, Utilities, Taxes.

If you pay cash are you looking to refinance to get your money out to buy more properties?   Know What the place is worth right now and when/if you add value. You have a lot to think about.

Depending on your refinancing rate/terms...will the place cash flow then?  Always run these scenarios.

Nathan Gesner · Answer

Nope. He checks on the property weekly but still has a tenant that is a couple months behind. He's paying 25% of the income on utilities but the rents are at market which indicates you don't have room to do any better.

You don't indicate how you would finance this but it looks like 50% of the income would be going to utilities and your mortgage. You still have 10% property management, 10% repairs, 10% capex, taxes, insurance, etc. I don't see this as a good deal.

Michael Kistner · Answer

@Daric Carter

I would see what the rents are going for in that area and see if you can have the tenants start paying the utilities. That in itself would be a huge savings.

Based off the numbers you gave he's grossing $38,480 in rents a year and paying roughly $10,800 in utilities. Sounds like a good opportunity to increase cash flow there.

If you plan on moving into a unit you can come in with 3.5% down and probably still cash flow.

I'd keep looking into it.

- Mike

Ben Leybovich · Answer

Haha the numbers don't spark my interest. And I also live far away...hmm...go figure :)

Too good to be true?

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