1 Deal Per Day Feedback.

[Jack Amaral]

This deal is a 4plex in St. Paul MN from Realtor.com. All units are 2 bed, 1 bath. Asking Price is 875,000. The plan would be owner occupancy, 3.5% down for an FHA Loan.

Looking at this chart from my excel sheet it looks to be a bad investment, Even bringing the purchase price down by over 100K still brings me negative cashflow over the first 2 years due to the rehab budget.  

I'm having trouble determining how much the expenses will be per unit per year. If you have any tips I'd love to hear them. I also wrote in 3 units rather than 4 because since I would occupy one i wouldn't be getting rent from myself. Also because I only put 3 rooms the expenses per unit would actually be higher making this deal even worse for me. 

If anyone notices any problems with my calculations or any suggestions for analyzing deals please share!

[Nick B.]

$875K for a fourplex that only rents for $1400/unit is way too much. Borderline where a deal might make sense is "1% rule": your rent must be at least 1% of the purchase price. If it's less than 1% you will have negative cashflow and your only way out is appreciation.

As for expenses, check with local property managers to see what they spend on average on small properties (less than 10 units)

[David Barnett]

To be blunt, you're not going to be able to cash flow on Summit Ave in Saint Paul (especially a property on the MLS) on long term rentals. I believe on Summit, a lot of operators rent out by the room due to the local universities and the demand for student housing. I personally do not like the economics of Summit Ave...

@Nick B. The 1% rule is not really applicable in the Twin Cities, especially in multifamily.  If you're lucky at this point, you'd be at .9% price to rent ratio.  

[Todd Dexheimer]

This 4 plex should be selling for $550k max on the financial numbers, but it's on Summit. There is no way to make money at $775k, unless you convert it to a single family home for $100k or so. 

[Amber Gonion]

@Jack Amaral after paying pmi and fha costs on the loan it would be impossible on Summit. Typically in suburban and nice areas your are looking at a .8 rather than 1% rule. The comments of @David Barnett and @Todd Dexheimer are correct.

There are other opportunities for you to be in good areas without losing your shirt in the process.

[Jack Amaral]

Thanks for the feedback!  Seemed like a bad deal, but I'm just starting to learn to analyze so I appreciate the help!

[Jack Amaral]

I have not been good at 1 deal per day. But I'm trying to simplify this one cause its bigger and bigger seems to be more fun for me to look at. 

311 7th St S - Herbshire Apartments

48 Unit Apartment Building Offered at $3,224,327 at a 7% Cap Rate in Waite Park, MN

Found on Loopnet. 

https://www.loopnet.com/Listing/311-7th-St-S-Waite-Park-MN/19090256/

Looking at the proforma, Market rents= $384,961.00 (looks like they're based on market rents rather than their current rent roll maybe?)  

List price is $3,224,327

2% /1% rule- $384,961.00/$3,224,327= 0.119= 11.9%? Why do i feel like this is wrong? or am i using the wrong numbers?

50% rule- 384,961/2= $192480.5  projected expenses (not including loan) 

Lets say 20% down so a loan of 2579461.6 w/ interest rate of 3.92 for 30 years= monthly payment of 12,196 

(12196*12)+192480.5= 338832.5 (total annual Expenses including Loan)

Projected Rent-Projected total expenses= annual cashflow/12= Monthly Cashflow

$384,961-$338832.5= $46128.5/12= $3844.04/month. 

Let me know your thoughts, comments, suggestions, anything! I'd love to hear some feedback!

[Aaron Barber]

Originally posted by @Nick B.:

$875K for a fourplex that only rents for $1400/unit is way too much. Borderline where a deal might make sense is "1% rule": your rent must be at least 1% of the purchase price. If it's less than 1% you will have negative cashflow and your only way out is appreciation.

As for expenses, check with local property managers to see what they spend on average on small properties (less than 10 units)

That 1% rule doesn't work in ALOT of markets. By the way its a small world. I grew up in NRH before I joined the military. Alot of family/friends still live there. Take care

[Nick B.]

Originally posted by @Aaron Barber:

Originally posted by @Nick B.:

$875K for a fourplex that only rents for $1400/unit is way too much. Borderline where a deal might make sense is "1% rule": your rent must be at least 1% of the purchase price. If it's less than 1% you will have negative cashflow and your only way out is appreciation.

As for expenses, check with local property managers to see what they spend on average on small properties (less than 10 units)

That 1% rule doesn't work in ALOT of markets. By the way its a small world. I grew up in NRH before I joined the military. Alot of family/friends still live there. Take care

I agree. However, my point was to use 1% rule to quickly disqualify a potential deal rather than trying to fully analyze it and still arrive to the same conclusion. 

[Nick B.]

Originally posted by @Jack Amaral:

I have not been good at 1 deal per day. But I'm trying to simplify this one cause its bigger and bigger seems to be more fun for me to look at. 

311 7th St S - Herbshire Apartments

48 Unit Apartment Building Offered at $3,224,327 at a 7% Cap Rate in Waite Park, MN

Found on Loopnet. 

https://www.loopnet.com/Listing/311-7th-St-S-Waite-Park-MN/19090256/

Looking at the proforma, Market rents= $384,961.00 (looks like they're based on market rents rather than their current rent roll maybe?)  

List price is $3,224,327

2% /1% rule- $384,961.00/$3,224,327= 0.119= 11.9%? Why do i feel like this is wrong? or am i using the wrong numbers?

50% rule- 384,961/2= $192480.5  projected expenses (not including loan) 

Lets say 20% down so a loan of 2579461.6 w/ interest rate of 3.92 for 30 years= monthly payment of 12,196 

(12196*12)+192480.5= 338832.5 (total annual Expenses including Loan)

Projected Rent-Projected total expenses= annual cashflow/12= Monthly Cashflow

$384,961-$338832.5= $46128.5/12= $3844.04/month. 

Let me know your thoughts, comments, suggestions, anything! I'd love to hear some feedback!

Proforma is always about market rents, so no surprise there.

As for the "rules", they are meant to be used as sanity checks on your numbers or as quick disqualifyers but not as a way to calculate anything. 

E.g., for expenses you need look at the current (not proforma!) P&L statement and determine which line items are likely to stay similar (utilities) and which ones may change because you would run this property differently (e.g.: payroll, taxes, insurance, maintenance).

For rents, you need to determine if there is a difference between current rents and market rents. If there is, what improvements need to be done to be able to charge those market rents. The price of those improvements would be your capex budget. 

Also, don't forget a vacancy factor! This listing has it at 5% which is unrealistic. I prefer to have it no less than 10%. That was pre-COVID. Right now, I would probably use 20% or more for the next 6 months and gradually reduce it to 10-12% 12 months from now.

Once you find your rents and expenses, create your own proforma P&L statement.

Then add debt service line to the P&L to see if your projected cash flow is positive and meets your criteria. If not, adjust offer price until it does. 

Then divide year 5 (or whenever you want to exit) NOI by expected cap rate to get the sales price. Subtract broker's commission and principal balance. That's your sales proceeds. Compare it to your initial equity (downpayment + capex + closing costs + reserves). If your have a gain and it meets your criteria, you have a good deal.

If your capital gain is negative or less than desired, adjust the offer price until it gets to where you want it to be.

The result of all these calculations is your offer price, projected returns, and a path to get there (your own proforma).