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Updated almost 6 years ago, 03/06/2019
Four Unit Deal Analysis...ready... set... comment...
*This link comes directly from our calculators, based on information input by the member who posted.
This four unit seems like a solid deal. Appears to be a hardened property. Only thing that worries me is estimating vacancy rates as all units are 1 bed 1 bath. Going to view property on Tuesday. Any thoughts or comments appreciated.
#5 General Landlording & Rental Properties Contributor
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- Erie, pa
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#5 General Landlording & Rental Properties Contributor
- Rental Property Investor
- Erie, pa
@Chris Taylor
Not much cash flow for a fourplex . One vacancy and you go negative . I’d want way more than 400$ on a four unit . That being said it looks like a decent place and there’s some potential there
@Dennis M.
Thanks for the feed back. The vacancy is what worried me. The current owner seems relaxed and would rather let a unit sit to find the “right” tenant. He has two recent vacancies but he doesn’t plan to run ads until Spring even though they’re rent ready. A lot more turnover with 1bd/1ba I’d imagine too just by nature of the type of tenant.
I'm looking a a 4 unit right now that's almost identical. 4 one bed units. It's turnkey with one unit vacant but rent ready and currently used for storage by the owner's niece rent free. I would put in the contract that the unit would have to be cleared and cleaned before closing so I can fill ASAP. The rents are a slightly lower (with a little room for increase), but overall numbers match up the same.
My max offer is 100k to ensure cash flow with vacancy and expenses. Owner is free and clear on the building. Owners seem to be less concerned about vacancy when they don't have a mortgage. Is that the case with your deal? I have already brought up the idea of owner financing and hope to buy on terms. Seller is currently getting numbers together and I plan to contact early next week to hopefully begin negotiation.
@Jesse Aiken
Thanks for the reply. I am assuming he owns it free and clear because he is open to seller financing. He mentioned it not me. Plus he mentioned several times he takes his time on turnovers because he’s not pressed to rent them. He’d rather make sure he gets a good tenant. I will be sure to ask on Tuesday if he has a mortgage but I would doubt it.
Another plus is it’s an off market property so he may deal a little more since he’s saving on a realtor. A?downside is no on site laundry or hook ups. I’d think that would matter to renters but maybe not as much as I think.
If you don’t mind could you direct message me to give me an idea of the term structure you’d propose to your seller. I have an idea of what I would offer I just want to see if I’m in the ball park. I’d love to talk more even if it’s not about these deals.
@Chris Taylor. The numbers for
Price and rent look pretty good but why are you paying electricity? Do have to pay water and sewer? (Probably if you’re in Cleveland, I hated that when I invested there). If that’s the case you’re probably going to spend more on water sewer then you are budgeting. I averaged 80 a month for a 2 bed 1 bath unit. (Water and sewer). So you’re probably looking at 2-300 minimum. Have you asked the current over for that information? You want to be careful when you’re paying tenant utilities, you could easily go negative
Originally posted by @Chris Taylor:
*This link comes directly from our calculators, based on information input by the member who posted.
Looked decent at a quick glance, but you're missing one big piece.
Property Management.
I recommend factoring in property management into your initial numbers even if you're planning on self-managing. Your time and involvement are important, and would cost you if you tried to hire it out someday.
You're also leaving out lawncare, the grass will need cut regularly and if the property is in Cleveland, I would estimate 18 cuts per year.
Garbage - is this part of city services or are you having to lease out a dumpster? If leasing, I would factor in $120 for something like a 4 yarder.
Add in these factors and see how your returns look, whether it still fits your investment profile. Building looks good in the picture.
@Jad Boudiab
Thank you for the reply. All utilities are factored in using actual numbers the seller provided. One of the units does pay their own electric. I’m guessing the utilities are not separated so the owner pays. You could always do a bill back but from what I am seeing .... in that rental market.... is that these types of apartments include utilities in their rent. This is about an hour south of Cleveland. My analysis includes water, sewer, electric, gas, and garbage based on the owners information. The lawn care and snow removal are provided by one of the tenants who gets a discounted rent. Rent roll is based on what the current owner gets fully rented so it accounts for the discounted rent mentioned previously. I didn’t calculate management as I would self manage but I get what you’re saying about accounting for my time. I’m gonna add 10% for management and adjust the purchase price down for the numbers to work and go from there. Thanks again.
@Caleb Heimsoth
All utilities are included in the analysis based on what the current seller pays. This information was provided by the seller but I’d be sure to verify by requesting copies of previous invoices.
What is the rationale for your 4% annual appreciation in property value? All I've ever heard about Cleveland is that property values are flat. You might be painting a prettier picture over time than is realistic.
@Abi Wegman
I have read on BiggerPockets that the national average for long term appreciation is 4% to 5% per year. Obviously this changes by market and also by year. You may have a 10% gain one year then be flat the next. I guess it also depends where you are pulling your data from. I read the following sometime last year regarding the Cleveland market...
“Cleveland home values have gone up 21.1% over the past year and are predicted rise 3.4% within the next year.”
Not sure how accurate this is but 3.4% is not far off from what the long term national average is.
Also this unit is about an hour south of the Cleveland market. No one can predict appreciation. I may be off base but with long term buy and hold Multifamily properties the appreciation only matters when you need the equity or want to sell.
@Chris Taylor
Use actual not a 50 percent rule. Use proforma taxes using current taxable and comparing to after purchase assessed to 50
percent of value. Get an actual insurance quote. Get rental comps. Get a list
of capital improvements that may be needed in 3-5 years and average it out to get your monthly CAPEX plus some for repairs. The calculator is so vague that its too hard to say. Get the actual numbers, get under contract and then post so nobody takes your deal. Use the inspection clause to backout if the deal is not what you think it is
@Charles Kao
Thank you for the advice! I have most of the actuals you mention including comps. Visited the county auditors site. I am told the plumbing has all been replaced with PEX recently. Roof is supposedly 6 years old. Appliances have been replaced recently as they are owner furnished. Not sure on hot water tanks and furnace but I planned on finding out Tuesday. I did not get an insurance quote which is a great suggestion. Emailing my agent tonight. Obviously I plan to verify all this information including the utility pricing the seller gave me. Thanks again for looking and commenting.
@Chris Taylor
Amazing! I’m closing on my first four unit in 5 days and have been combing through my financial analysis non-stop over the last month. Our numbers are veeeerrryyy similar....except one particular area. Insurance. My initial estimate projected by my mortgage lender was $75/month as well. Do you plan to owner occupy? If not, it’s greatly possible your insurance is going to sky rocket. I’m now at about $210/mo insurance (non-owner occupy). Be ware! My opinion, $400 cash flow is a little bit tight. Just my two cents. Good luck with everything!
@Damon Rucker
Thanks! I’m getting an insurance quote to be sure. The number I used was based on the sellers actual cost he provided to me. Seller does not live on the property but I still have no idea what type of coverage he has. So that could definitely change things.
@Damon Rucker
I just talked to my insurance agent and he quoted a policy for this property at about $80 per month which is about what the current owner pays. This does not cover replacement cost of the building if it burns to the ground but it covers your payoff or any associated costs. $200 per month is the high end which is similar to insurance you’d have on your primary residence. He also said 99% of his “landlord” clients just go with the basic plan at $80 per month. I guess it just depends on your property and what kind of coverage you want.
I guess I should be more specific. The basic landlord plan does not just cover payoff. It covers whatever amount you determine. In this case I just used $150k. I’m sure you could adjust that amount as you build equity and your property appreciates.
@Chris Taylor
I’ve been shopping around like crazy and nowhere have I been able to find those type of numbers!!! Pppllleeeaaassee help! Lol. Since I haven’t closed yet, I have the power to swap out insurance coverage. Can you refer me to this agent/insurance company?
@Damon Rucker
Direct message me and I will send you his info.
I've got a good insurance agent in the Cleveland market, DM me.
I would be very cautious about counting on appreciation in Cleveland.
@Eric Wagner
I understand. I was just being clear that you would adjust your coverage amount depending on appreciation. No saying you will get appreciation. Cleveland is flattening out. But I did read that over 2017 and 2018 property appreciated 21% and expected to be 3.5% in 2019. But you can look at different data to from different sources and get different information so I know that may not be accurate. My goal is buy and hold cash flow properties so as long as I'm not doing a BRRRR and the property doesn't lose value I'd be satisfied. Hopefully with more experience I can venture to different markets and invest based on growth and appreciation.
@Chris Taylor. Are you getting a loan on this? If so your bank will require replacement value type insurance. So this will likely up your insurance premium a lot.
I paid 35k for a property (brick built in 1948) and my initial quote was based on that. Lender comes back at last minute and says replacement value is 110k, so you need coverage for that. Premium doubled. I suspect you’d be in a similar situation here
You may be correct. I have received different feedback from different people. I am definitely going to be checking on this a little more with different lenders to see if it varies by lender. Replacement cost insurance really ends up being similar to the cost of the insurance you would have on a primary residence. Obviously the premium is based on the value of the property and its replacement cost.
Basically to insure at replacement cost it would be double the cost of what my agent called a "landlord" policy. The way he explained it to me is that the "landlord" insurance covers you from any loss. The insured amount would be for whatever amount you specify but more than likely you are going to use the fair market value of your property or the amount you owe your lender, whichever is more. I am not positive on this but lets say one of the units caught on fire and needs repaired. It is my understanding that your insurance will cover this up to the amount you specify. In my case I used $150K. The landlord policy also covers loss of rents in the event you lose rent while repairs are being made.
If your lender is only owed $35K I am curious as to why they would require you to be insured for more than what they are owed.
Originally posted by @Chris Taylor:
You may be correct. I have received different feedback from different people. I am definitely going to be checking on this a little more with different lenders to see if it varies by lender. Replacement cost insurance really ends up being similar to the cost of the insurance you would have on a primary residence. Obviously the premium is based on the value of the property and its replacement cost.
Basically to insure at replacement cost it would be double the cost of what my agent called a "landlord" policy. The way he explained it to me is that the "landlord" insurance covers you from any loss. The insured amount would be for whatever amount you specify but more than likely you are going to use the fair market value of your property or the amount you owe your lender, whichever is more. I am not positive on this but lets say one of the units caught on fire and needs repaired. It is my understanding that your insurance will cover this up to the amount you specify. In my case I used $150K. The landlord policy also covers loss of rents in the event you lose rent while repairs are being made.
If your lender is only owed $35K I am curious as to why they would require you to be insured for more than what they are owed.
Call
Your agent back and ask if the quote you we’re givem was for ACV (actual cash value) or replacement cost. I am guessing it was ACV. If that’s the case you’ll need him to requote it based on replacement value because every bank I’ve ever talked to requires this. Not sure why it is but that’s how it is.
I’m going through this again on another property I’m buying but it’s a cash deal so I can have ACV insurance. I’m purchasing it for under 40k, built in 1985. A lender would require Replacement insurance and that value was 110k. So you bet the premiums look prettt different. Just trying to help you avoid a surprise at the closing table.
Good luck.
I just wanted to thank everyone for taking the time to comment and provide feedback. After considering my immediate goals I don't feel a multifamily turnkey fits my plan. Since I am using a HELOC to get started, I really need to be able to force some equity on my first purchase. A turnkey property such as this 4 unit would tie up my money for the next 3 to 5 years. While it may be a good fit for someone with an established portfolio it does not allow me to generate equity or provide enough cash flow for the next down payment. I will need to focus on the BRRRR strategy or finding properties far enough below market value that allow me to do a cash out refi to recoup my initial investment. Thanks again!