50% Rule on a quadplex with 20% down.

[Elliot Mendoza]

So I've been reading the boards for a while, I am currently deployed and I refined an excel spreadsheet I had worked up before I left the states.

As of right now these are the numbers I'm looking at, and I -THINK- I have the 50% rule and 2% rent thumb rules down for the most part.

So here's my analysis:
Asking Price: Brand new quad(built dec 2012) 330k
20% down = 66k
4% interest loan, 30yrs: 1,260.38
Taxes: 583 monthly
Insurance (Allstate gave me the best quote): 72 monthly
PM: Century 21 - 1/2 months rent to fill vacancy + 10% monthly
All 4 units rent at 825: Gross rent monthly: 3,300
All closing costs payed for by builder.

So those are the base numbers, now based off the 50% Rule:
19,800 Yearly NOI
14,717 Yearly Debt Serivce (Princicple & Interest payments)
5,083 Yearly income left over, about $105 per door monthly.

Actual rent is only 1% at current rental value's (3.3k monthly)

So do I do my COC based off the 50% rule income? Then it would be 7.7% COC return per year.

So are my calculations correct? And to -me- this seems like a good deal as such. Any input would be appreciated. I have this all worked out on an excel spreadsheet and will continue polishing it up as need be to make it near dummy proof for myself.

Thanks in advance :)

[Ben Leybovich]

Elliot Mendoza Fist of all, thank you for your service! In my opinion, this deal is too skinny. The basic rule of thumb is that the CF needs to be at least equal to 1 monthly rent ($800). Your price per unit is too high at 80k. Be mindful that new construction is more expensive in the current market than existing inventory. I can buy “solid” units for 40k-45k all day every day with rents of $575-$600. If those type of prices are not achievable in your market, it may be necessary for you to research other markets.

Also, try to get away from 50% rule. All these rules are mostly there to give you a birds-eye view of the investment. CAP rate analysis will provide you with a much clearer picture.

[Elliot Mendoza]

Well, thanks for your reply Ben. I was thinking this was a good deal, but i've spent the last hour reading other "Related discussions" regarding 4-plex's and started realizing my deal was too thin lol.

And unfortunately, this is probably one of the best deals i could find in quadplex department in my area. So I'm definitely down for investing else where, I'm just trying to get the analysis part down first so i know when i'm looking at something worth throwing my money at.

I will gladly take suggestions on where to look though :) My entire goal is to eventually own large apartment complexes, but I figure starting out with quads' is a good first step. Financially speaking, I have almost 0 debts and make decent income. I'm in the military so I don't really get to choose where I live, so the idea of investing in unfamiliar territory is almost a given in my book, I just want to do it someplace that I can consistently make money in.

So I guess the next thing I need to ask is: How do i calculate a CAP rate?

[Ben Leybovich]

CAP = Annual NOI / Value

Where on a purchase Value represents purchase price and up-front repair costs, closing costs, etc.
NOI = Income - Expenses (all expenses EXCLUDING cost of money)

I just close on a 10-unit on Monday:

NOI: $3,400/month ($40,800)
Purchase Price: $373,500

CAP Rate = $40,800/373,500 = 11%

In this market, I personally don't look at anything under 10%, and only if the propertyn is mismanaged so that with some work I can get it to 11%-12%. This 10 unit is going to be at 12% within 18 months.
Hope this helps.

[Jon Holdman]

While I don't disagree with Ben Leybovich about calculating a cap rate, its VERY dependent on an ESTIMATE of NOI. The 50% rule is simply a way to estimate NOI. The 50% rule says that 50% of your gross scheduled rent will go toward capital, expenses, and vacancy. Its been shown to be a good estimate for a large number of units over many years. It won't be accurate for any particular unit in any particular year. You may have good years with nothing but taxes and insurance and rent collected every month. You you may have a bad year where you have a large expense. The 50% rule is NOT a conservative rule. If you manage your property well, get good tenants, and do reasonable maintenance on the property, you will hit that number. If you're sloppy with tenants and the building, you can do much worse.

Note that the 50% rule does include property management. Around here, that's 10% of collected rents plus about half a month's rent to fill a vacancy. At one vacancy per year, that works out to 14% of that 50%. In other words, if you manage yourself, you could use 36% instead of 50%. But do realize you're "buying a job" if you do the math like that.

The trouble with trying to identify every possible expense, line by line, and putting a number on those is that its easy to slice the tomato too thin. You think "naw, that's too much for maintenance, let me drop that a little". You do that to all the lines in your analysis and the property looks OK. But you're using a total number like 25% or 30% for the expense, vacancy and capital total, and experience shows (and several large studies that have been posted in the past) that's just not realistic.

Realize too that any estimate is just an estimate. The actually numbers will be determined in the future. Those will be whatever they turn out to be. The 50% rule is just a way to be a little more conservative in doing the initial estimate. Its not a guarantee of your actual results, good or bad.

[Bryce Y.]

Elliot Mendoza

What lender quoted you 20% down? I am under contract to buy a 4-plex and I'm pretty sure the minimum is 25% for a 3-4 plex, regardless of if you plan to live in it or not. See link below:

https://www.fanniemae.com/content/eligibility_information/eligibility-matrix-082112.pdf

[Elliot Mendoza]

Bryce Y.@Bryce Y I was quoted from a smaller local bank in el paso, Tx. They wanted 20% down, originally I was going to do a VA loan, but I didnt realize that the VA loans add an additional 2.25% to the loan total and it must be OC'd. So for this property at least, I opted for the 20% down. I backed out due to the deployment coming up and the fact that I could not control how long it would take to rent in the middle of the winter season. So I figure'd i'd buy it once I get back after it's been rented out and such.