Should I buy this 4plex? $94,000

Question

I have the option of buying a 4plex at 94,000 (Cash) that's generating 1,460 a month and 17,520 gross yearly. They all are occupied at 365 a month and are paying there own utilities. My NOI would be 13,156 and I got that by subtracting 10% for managing, $1000 for insurance, and taxes where $1612. Of the bat my cap rate would be 14% but there are some minor repairs probably around $2000 but I would't repair until the tenants leave. Should I buy?

Ryan Halverson · Answer

Humberto Garcia

Although the profits of 13k+ sound great on paper try to compare apples to apples.  Something I do for this is assume 10% PM, 10% maintenance, 10% vacancy, then plug in taxes and insurance.  If the property can sustain 150+ (preferably 180+) per door with 25% down then it is worth an additional look.  Even though you aren't doing 25% down what if you refi this property?  You don't want to lock your cash into a property that you can't refi out to invest into other properties.

As Jon Klaus mentioned a rent of $365 might be hard to find quality tenants that stay for a long time.

My analysis on this property is as follows:
94k Purchase (25% down @ 6%, 5% Closing)
$1460/month Gross Income
-$146 Maintenance
-$146 Vacancy
-$146 PM
-$84 insurance
-$135 taxes
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803.00 NOI/month
-$422.68 mortgage 
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+$380.32/month
That comes out to +$95.08/unit
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With that being said $95/month does not meet my purchasing threshold, if you ever plan to refi the property (to invest in others?) you would significantly reduce incomes and possibly lose money.

In order to make the property more appealing you would have to force appreciation with increasing rent to ~$450/unit or purchase the property for $56k.  You could also combine both options and increase rent to 415 and purchase for 80k

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Just remember you don't want your equity locked up in a property; you want to be able to leverage it against more properties and cutting it too close would eliminate that option.

Ryan Halverson · Answer

Questions to ask
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1. Are these rental prices at the top or bottom of neighborhood range
2. Are tenants likely going to be civilized or cause headaches (request current tenant background checks that landlord pulled?)
3. Does the building have room for improvement? (twin building sold for 150k and this is 94k)
4. Ask yourself is this somewhere you would live if you were renting.
5. Are there a lot of vacancies at other rentals in the area, request viewings at competing units and compare these to them, find out how much you would have to invest to make them as nice...
6. Age of the water heaters/roof/furnace...if the owner is selling he is selling for a reason.  Did he find out ALL of them are ~20 years old and would require a large investment soon?
7. Does the profit amount allow for mistakes or would everything have to be flawless to make the profits you are saying?

And remember you should look at reasons NOT to buy this property as opposed to reasons for buying it, don't let your psyche rationalize buying this property just because you want one .  If you cannot come up with enough reasons to avoid it...then buy it.

Brandon Turner · Answer

Hey Humberto Garcia. I'm negotiating a similar deal right now, actually.

There is a 4 plex, listed at $120k.  Rents are $450 a month. I offered $80,000 - they countered at $100,000.  I'm sticking to my $80,000 number though. However, this property has a 5th unit, that I could fix up and get another $450 out of, which is what excites me.

So - on your deal, I'll use the 50% rule (cause I like it and it works well.)

$365 per month X 4 X 12 months = $17,520  x 50% Expenses =

$8,760 (NOI) annual or $730 monthly.

So, if all cash ($96,000 with closing costs) - that's an ROI of 9.1%. Not so hot (but, better than the stock market, with appreciation potential and tax benefits, so still better than most investments.)

If financed 100% at 5%  - then the Principle and Interest is $500 or so a month, so the total cashflow would be $230 per month.  Not bad for having nothing invested.

If financed with a 20% down payment, at 5%, it's around $400 payment so a cashflow of $330 per month. 20% ROI.  Not too shabby, but that's only $82.50 per month, per unit.  So, the ROI is nice, but the cashflow - I always shoot for more. At least $100 per unit per month but preferably $200 per unit per month.

SO, in long answer to your question - I think if the rents were not able to be raised, I'd probably aim for around $70,000 with a $20,000 down payment if I really liked the property. That would give a little more than $400 per month in cashflow. HOWEVER, I'd only do that if I really liked the property. I don't want a so-so property for $400 per month property, cause I know I could find a Single family house that would give $400 per month in cashflow.

Hope that helps some. I know, clear as mud,right?!

Michael Heisterkamp · Answer

Do you plan on pulling the cash out with a REFI?

Steven J. · Answer

This is a very helpful thread for those of us starting out. Its a great analysis of what to expect in a larger unit property.

Thank you much guys. i'd love to see what comes of it!

William T. · Answer

This was a very interesting thread and provided great analysis for a newbie hoping to have my first property by the middle of 2014...still working on credit.  As a wholesaler, I actually consider cash reserves when looking at multi family properties.  I believe buyers will appreciate this factor in my formula when evaluating prices.

@Ryan Halverson Great job with the analysis breakdown

@David Beard Your spreadsheet looks pretty cool....

David Beard · Answer

Humberto Garcia Wow, that is ridiculously cheap for 2BR units.  For something on this lower end of the scale, I'd be reluctant to pay more than 50x mthly rents (i.e. the 2% rule), unless you were absolutely convinced that the landlord was extremely naive or uninformed, and the rents can be effortlessly raised $100/mth without major updating.

I'd still encourage you to think through all the expenses that you'll likely encounter over the span of time.  I understand that the units are currently leased, but you still have to build leasing fees into your long term projections based on your expected average tenancy.  And you need to set aside reserves for major items, and factor in yard and common area maintenance, cost of turnovers, etc.

Good luck to yo.

Humberto Garcia · Answer

David Beard they are 2 bed 1 bath and all are currently leased and have been for over a year. That was one of the pluses for the property it has a low turnover and yes they pay all the utilities. That's why I'm highly considering buying this property. In my opinion you could easily raise the price but it would probably create a higher turnover

David Beard · Answer

These must be 1BR units at that price.  The turnover will likely be high, which means higher maintenance for make-ready, and high leasing fees with the PM.  Many PM's charge a leasing fee minimum, if they have any sense (such as $300).

For small multi-family, I think it's virtually impossible, using a PM, to run it at less than 50% for vacancy/expenses/reserves.  Generally a more reasonable level is 60%, and it could be more depending on whether the owner picks up any utilities.  Do the tenants really pay for ALL utilities including water?

You should get prior 2 years worth of Sch. E's and financial statements if at all possible, since you're dealing with a private seller.

You may want to run your numbers through this simple worksheet:

http://www.biggerpockets.com/files/user/d1beard/file/buy-and-hold-analysis

Humberto Garcia · Answer

Iv'e heard that investors aim for 10% cap rate on multi units but I could be wrong. Brandon Turner What would you pay for this and why>

Should I buy this 4plex? $94,000

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