9 units 420K, a good deal?

Question

I have negotiated a deal that is in escrow, but I just found this site and now I am not sure I should do this, I could back out or renegotiate, potentially losing my $1K earnest money. This is a 9 unit property in El Paso, TX on 0.84 acres with 5 single family homes and 2 duplexes, most have nice fenced yards and garages. They are all in very good condition and currently rented with mostly long term tenants at under market value in a fairly low income, but popular area with virtually no vacancies.

Here are the numbers

Total monthly expenses-utilities, prop management fees, insurance, taxes= 1564
Total monthly income 4850

My mortgage payment is 2448/m 15 year fixed.

I am planning to buy and hold (save for retirement, I am currently 41).

I am putting 100K down.

This will give a cash flow of around $800/month which I plan to save for potential additional expenses. According to the 50% rule, I will likely need much more than this to cover potential expenses.

Any thoughts on this deal would be greatly appreciated!

Mike

Account Closed · Answer

Mike, There's only one thing I don't like about this deal is that it's in a low income area, whatever that means. If you go with a 30 year loan, your payment would drop to $1,740/month. Using the 50% rule, you still net about $700/month. That's about 8% cash on cash return. You mentioned rents are below fair market. A rent increase of $25/month would give you a 10% cash on cash return. Given the properties are in very good condition, this deal is not bad in my opinion.

Michael D. · Answer

$1000 is nothing to save yourself from a hard lesson here. Who is paying the utilities like water, garbage and sewer? Are you sure? Management is an important expense, regardless of whether you're doing it yourself or not. I hope you're not. How much have you budgeted for maintenance like the pest guy when there are roaches, refrigerator breaks, roofing cost? The type of mortgage you get shouldn't affect the deal, but it does affect your cash flow and ability to weather rough spots. You should try for a longer amortization if you can.

Nick L. · Answer

Depends on the area and tenant base. I have a nice 8 family in an appreciating area with solid tenants and rehabbed units. I paid $495k for it and the income is ~$5600/month. It's not a cash cow and it doesn't meet the 2% rule but it is easy to maintain with pleasant tenants who pay on time and treat the place with respect. On the other hand I would not even pay $300k for the same building in a crappy area where I would be evicting people every other month and expecting a gun in my face when I knocked on the door. The best of all is if you can reposition the place. For example if you notice that the place attracts lower quality tenants than the surrounding area you can buy it for a low price, get rid of the bad tenants, perform some cosmetics, attract quality new tenants and raise the rents. I did this with another place locally and raised average rents from $565 to $695 in a year. I wish I had more deals like that one.

Al Williamson · Answer

M Parsa welcome. Posters above gave you some great advice. My initial concern is that you have a lot of roof exposure over these 9 units. I associate the need to build reserves proportional to the roof exposure. Make sure you can feed the kitty. Best to you.

Uwe S. · Answer

Hello M Parsa and welcome to BP Nation. As Jon Holdman told you it looks like more a bad deal. $4,850 monthly rents is not much for this price with buy and hold. Who gave you the expenses? Do you have an 3 year rent roll of this propertie or better the P&L of last three years? Will look into it - problem is the 15 year armortisation, here you need 30 years for better income but at this price its only marginal. With our 50% rule you will get $2,425 NOI per month so there is nothing in your pocket if you have any problems/maintenance. Steve K gave you an estimate price my calculation is max $245,000 for this propertie with an 10% CAP. Reasonable is max $275,000 for me but not more. So you too far away from this asking price, I see no chance for an renegoating. Its better you lose now $1k instead of thousends more in next few years. Thats only my reflections and my 2cents. -Uwe

Jon Holdman · Answer

How much are the rents? I'm not sure if any of you numbers are the rents. If $4850 is the total rents, then you're averaging $540 per unit. You're paying about $47K per unit. That doesn't seem like a great deal. Are the units filled? Easy to fill? Do the properties need work? Are the tenants long term, or do they come and go? Realize the 50% rule of thumb assume you're using a property manager. They will typically keep 10% of collected rents and many will want half a month's rent or so to fill a vacancy. If you do that work yourself, your actual expenses (cash out the door) will be more like 35-40%. But you are buying a job, and you are earning that 10-15% with your labor. With 9 units, you're going to be dealing with filing a vacancy most of the time.

Steve K · Answer

You need to knock $100k off of that purchase price to make that look like a decent deal.