4 - Plex Analysis - South Dakota

[Tyler Nation]

Hi all - Running some numbers on a 4-Plex to house hack for a year. Let me know what I am missing, and if this is a deal you could structure to make work! This is to help me understand multifamily analysis Here's what I am looking at: Purchase Price: $240,000 Loan Amount: $228,000 (5% down payment) - Owner Occupied for a year Taxes: $3,300 Insurance: $1,800 (being conservative here because I am unsure) Monthly Payment - $1,646 (per lender using above numbers) All 4 units - $700/month Gross Income: $33,600 Owner pays gas, garbage, electric (common area) and water/sewage totaling: $4,300/ year or $360/ month- this is taken from billing statements from the seller and rounded to be conservative. Assuming expenses at 3% a year or $600/ month total Occupancy over 5% but assuming 5% vacancy - $1,680/ yr or $140/ month Assuming the above Gross Cash flow is roughly $1,160. Net ~$500. (mighty thin) My thoughts are this: If I can eliminate a few expenses such as garbage, and gas that could help (separately metered). Also the amount of money I am getting into the property is minimal ($12k) so this makes it a bit more attractive. I would self manage as I enjoy doing so. This property is has very tight margins (I understand that) but I would be curious as to how you guys/girls would pick this apart! Thanks!

[Joe Splitrock]

@Tyler Nation you can't really eliminate gas and garbage expense. All you are doing is transferring responsibility. Let's say garbage is $30 and gas is $60. Now your tenant is paying $700 rent plus $90 extra in utilities, so suddenly their total cost is $790. It is basically the same as increasing rent to $790. If your competitors are renting units for $700 including garbage and gas, you are now priced $90 higher. In South Dakota tenants know gas/heat is a major expense, so they consider this in their decision. If they are not aware, then after the first winter paying the bill, you can expect turn over. You will notice apartments always advertise "Heat Paid" as one of their selling points and that is not by accident.

I am also going to guess that tenants looking for this class of property may have credit challenges. Often they have unpaid gas bills that prevent them from transferring to their own name. They may even need to pay a deposit to the gas company. As far as garbage, do you really want 8 separate garbage cans outside the property? (one for garbage and one for recycle) I guarantee tenants will put garbage in each others cans and you will have angry tenants. 

Calculating your vacancy of 5% that seems like it could be low. I know every multifamily in Sioux Falls is listed as occupancy over 95%, but in many cases that is just false. I know it is false because I look at the Zillow rental history on listings. Many of these properties have annual tenant turns and you can see a property listed for rent for 2-3 months. You could verify true income/expense for the last couple years bay asking for a copy of their Schedule E. That will tell you if their taxes match what they are advertising. 

The cash flow is very thin for this price range property. I am assuming it is a little older, so expect repairs. 

I am not saying hard pass, but rather trying to help make sure you consider everything. Whatever you do, make sure you hold an emergency fund of several thousand dollars. That is necessary to cover unexpected large expenses, like major HVAC or sewer line.