What Would You Pay for this MultiFamily Property?

Question

A four unit quad-plex, built in early 1900, renovated/updated over the years. Each is 2BR/1BA, about 850sq ft each. Utilities are separately metered, owner pays for water/sewage/trash. Monthly rent per unit is $525. Assume no more than $3,000 in repairs/upgrades needed at purchasing. Assume roof is good for another 10 years, appliances are good for another 5. Property is in a B/C+ area, within walking distance to bars, restaurants, historic downtown, small grocers. Assume buyer would put 20% down at 4.5% APR.

Other facts: Located in an urban area of about 50,000. As per Wikipedia, population growth by decade has only declined twice in the last 160 years (by -0.7% and -3.0%) and has increased on average over 10% per decade (i.e. no reason to believe vacancy rates in this area would be any different from the national average)

What would veteran BPers offer for a unit like this? What about if all the same scenarios were in place, but rents increased to $750?

Joel Owens · Answer

The early 1900 part would concern me.

Were proper permits pulled over the years?? If you have to go in and fix something are you then not grandfathered and have to bring all of this stuff up to code??

I like that utilities are separately metered but I do not like the landlord paying for water/sewer/trash.

Find out if that is common for the area or just something this landlord is doing??

On average when the landlord pays tenants will consume about 30% more water etc. Yes you can set a cap etc. on monthly water bill in some states and try collect the overage  but many times they do not pay.

Then you are left with eating the cost or evicting them over a small amount. The  tenants also do not report water problems as often as they are not paying the bill.

The immediate CAPEX and ongoing repairs of a building that age can crush your cash flow.

How much are rents appreciating yearly for 2/1 mix in that area??Does the building offer in suite laundry?? Coin machines etc.??

How much land is this building sitting on?? Can a higher density be built on it ?? Is this building in a historical district limiting adding onto it later for a marginal cost without expensive architectural controls or demolishing and building new??

750 rent is hypothetical so I wouldn't base what I pay on a maybe. If it happens I did better than thought but if it doesn't I am still okay.

If the area is nicer you might not can get a 10 cap but I will use that for this analysis.

525 rent by 4 units = 2,100 gross monthly X 12= 25,200

Since the building is older and landlord pays utilities I am going to do 60% operating costs instead of 50%.

25,200 X .60 = 15,120 operating costs

25,200 gross rents - 15,120 operating costs = 10,080 net yearly before debt service

At a 10 cap you would look to pay 100,800 - 3,000 (your stated immediate repairs) if they are accurate = 97,800 purchase price

Keith Weinhold · Answer

Yes, I'm generally with Tom S. on this one.  The only exception is that I believe you would need to put 25% down Conventional rather than 20% down on non-owner-occupied 2 to 4 unit buildings (20% down still works on non-O/O SFHs) per Fannie Mae.

Of course, owner-occupying by living there for the 12-month minimum with an FHA 3.5% down loan maximizes your ROI.  It also results in a wealth-building 28:1 leverage ratio!  (100 divided by 3.5 = 28.6).  Of course, with FHA, you also have to pay 1.75 points in upfront PMI plus monthly PMI of about 0.1% of the loan amount.

Cash flow is important.  But leveraged appreciation almost always builds wealth faster.

It looks to me like you're asking a lot of the right questions and research a lot of the right topics, Will K.  This makes me confident that some property - whether it's this or another - will result in a resounding success for you!

Tom S. · Answer

The banks generally aren't going to allow the 10% down and some seller financing.  Most of that went out a few years ago.  Maybe you can do 20% down with your funds already, close the deal,  and then 10% seller financing back to you right after the close.  That's a big maybe.  It would have to be approved by the bank, and generally only a small local bank where you already have an established relationship would allow it.

The main option for avoiding the large payment is to live in one of the units and get more favorable owner-occupied financing.  Live it in for 2 years, learn to manage the property, then in 2 years move out and repeat with another place.

- Tom

Will K · Answer

Keith Weinhold I understand that. But starting out, I'd have to tie up almost $40k in cash for this property, which is a substantial portion of my "beginner cash." How do you get around that? 10% down with seller financing of some sort?

Keith Weinhold · Answer

I am a buy-and-hold investor of four-plexes.  Actually a buy, hold, and let-others-manage investor.  Real estate is attractive because you can do less to get more.  To me, life is too valuable to spend time rehabbing properties and dealing with tenant relations.  Nothing wrong with detracting viewpoints there; it's personal.

My 1% rent ratio quoted is for properties that don't need any rehabbing.  It sounds like the subject needs almost none ($3K).  Someone that wants to rehab may be looking for more of a 1.5% to 2% rent ratio due to more upfront rehabbing costs.

As is so often the case with real estate, the answer is "It Depends."  PIP - Personally Investment Philosophy - is certainly an "It Depends" variable.

Will K · Answer

Mike M. Thanks Mike, and I will do that. I plan to offer quite a bit below asking so I would be surprised if I get it. Oh well, they say you make money at the purchase.

-Will

Mike M. · Answer

Will K, let us know how it goes.  I've been keeping tabs on a duplex that has been on the MLS for the last several months.  Listing is for 199,500 with 1900/month gross rents, which is probably why the bank owns it again.  Like you, this would be my first property purchase, so I'm interested to see how your experience works out. Good luck!

Will K · Answer

Keith Weinhold Interesting. Most people here attempt to provide by the 2% rule, but I find that cuts out all but the extremely best deals.

Interestingly, putting $210K into my spreadsheet model, I still get a positive cashflow of $1,000 per year. This takes in to account $10K/year in expenses and another $10k/year in mortgage. The post-tax cash on cash ROI is a measly 2.2%, but the Total equity return ROI (mortgage payment towards principle+post-tax rent) is almost 9.0% (which will go up every year given that expenses and rent stays the same, based on how much extra you put towards principal every year). However, the CAP rate is at 0.5%. Goes against a lot of BPer's strategy...

as an FYI the property is listed at $150k. I am going to look at it in the next few days and potentially make an offer on my first property.

Keith Weinhold · Answer

Thanks for the question.  Why $210,000?  The rent ratio of 1%.

That is, when the ratio of monthly rent to purchase price is 1% or greater, that asset typically provides enough cash flow for a sound investment in a market with appreciation potential.

This is just a "rule of thumb".  Of course, there is often more maintenance with a 100+ year-old building.  This may be offset with the atypical fact that the tenants apparently pay for the heat.

Uwe S. · Answer

Maýbe you have too much money in your pockets and need a big loss Keith Weinhold.

Will K, Joel is right more than $100k is not worth this 100 year house if you looking for an investment and future gains in rent you cannot involve in your calculations.

-Uwe

What Would You Pay for this MultiFamily Property?

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