What do you think of this deal?

Question

Attempt number two to get pictures to work. 8 bed/4 bath fourplex built in 1920 in Troy OH. We're currently working on getting into our first small multifamily, and the numbers look good on this one. Area is decent. Only thing we'll need to change is rehab costs I'm sure, as we've only seen one unit so far and I'm sure we'll need more than $10k total, but we plan to upgrade the units slowly as tenants move out. The first picture is the income statement sent to us from the listing agent. Thoughts on our analysis? It's only roughly $100 "per door", but our goal overall is total cash flow, so $350-$400 total after all expenses and saving for repairs seems good to us.

Matt K. · Answer

10k does not go far at all in rehab....... and even less far in a fourplex built in 1920.

Another thing to consider is that typically a prop mgmt company charges fee for first mo/renewals of leases. That could be something like 50-75% (or more) of that month and then the 10% ea mo after. So really, spread over the year it's more than 10% or you gotta factor about 11 months of rent...

This doesn't seem like much of a deal though, you could make 350-400 on a single door.

Michael Plante · Answer

Exactly right

It is crazy to figure 0 for PM and 0 for vacancies

Cory O'Dell · Answer

I took the utility expenses over last 3 years on this property, averaged it out, and broke it down monthly to include it in my expenses.

Also congrats on finding that fantastic deal so quickly! You can have it though.

Cory O'Dell · Answer

Crazy to me you'd recommend a stranger assume 0% for PM (because HOA), 0% vacancy (because tenant will never leave), 0% maintenance/capex (because HOA), no rehab (but increase the rent), put more money down, and just hold onto $10k instead for reserves...all to make your fantasy cash-flow numbers work. Assume the numbers I just mentioned (0% everything, 60k purchase price, $500 year for taxes, $600 year for insurance, $215/mo HOA, 25% down and 5% interest rate, $900 rent), and your cash flow per month is still only $351, with a lot of bold assumptions in to make it work. Would it work for a year? Maybe. Two? Possibly. But it's certainly not good long-term advice. You can alter whatever numbers you want to make a random cash-flow number, that doesn't mean it makes sense or is smart. I could just put my vacancy to 0 on this fourplex and man, the cash flow let me tell you! It's great!

Is it really though? C'mon man. Hell, even as it sits with this fourplex with no rental increases, accounting for PM, maintenance, Cap-ex, etc etc it cash flows $350 per month. I'm not saying this is the best deal ever, but it's at least realistic over the long-term.

Cory O'Dell · Answer

Valid points. Thanks for your insight!

Matt K. · Answer

I should also point out, this was a random example that took me longer to break down than to find.... and doesn't require you paying utilities on a 4plex that's almost a 100 years old (which i'd assume will be more than 260 mo).

Matt K. · Answer

Look at the deal for what it is, not for what the software tells you.PM= 0 because it's a existing long term tenant. Assuming they paid rent on time, you really wouldn't need a PM since a) it's already rented and b) the HOA will take care of most issues for you. Loan Terms= Approvals doesn't matter, you can shop a better rate if you wanted. I have 2 30 yrs from last year at like 4.4/4.6 granted it's gone up recently but no idea if it's been a full point.

Vacancy- Sure take 8%, but again that's kind of a generic number. You already have a long term tenant, it'd make more sense to find the average length of vacancy and apply that number.  Say it's two months, then set aside that amount, take it out monthly if you want, but you don't need a flat %.

Maint/Cap ex= you already have this taken care of through the HOA for the most part. If you wanted to, figure out the useful life of stuff and budget from there... but again flat % isn't going to be the most efficient way to do that. Now don't get me wrong, you want reserves... that's the entire point of the % for the set aside. But you have 10k saved up for a remodel that you aren't doing... use that. That needs to be considered and adjust your rates accordingly. If you dumped that 10k into this place then your capex/maintenance shouldn't be 20% since almost everything would be new/reconditioned.

60k purchase

15k down payment (25%)

5.4% interest

555 per month

253 P&I, 215 HOA, 36 tax, 51 insurance,

900 rent

Leaves you with 345 mo, and 10k in the bank for reserves which is = to about 39 mos of set asides (20% maint/cap, 8% vacancy).If you get your loan to 5% vs 5.4 you're at 490 per mo and that gets you 410 left over.

Taylar Caraway · Answer

Regarding the property management with your sister, I still don't think analyzing with only 5% is a good idea because as I said before, the second your sister decides she doesn't want to manage the property anymore then your cash flow looks a whole lot different. Plus paying her only $100/month to manage 4 units... yikes! Could make more working at McDonalds!

Matt K. · Answer

That'll take some digging.... but till then

https://www.redfin.com/MO/Grandview/6068-E-129-St-...

do 25% down, get a better loan product say around 5% and figure something like 55/mo for insurance. That gets you to 575, and it's rented to long term tenant at 850. Skip prop mgmt, reduce cap ex since your already paying hoa (high, should be half that but whatever). Median rent for the area (through rentometer) is 900, average is 936..

So offer 60k, and raise the rents to 900...... and you're closer to 400 cashflow then you are w/ 4 doors of your other deal. This was 10 mins looking if that on redfin...Oh and take that 10k you had for remodel and toss in reserves... then you don't need to worry as much about vacancy etc...

What do you think of this deal?

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