All Forum Posts by: Matthew Ries

When evaluating a deal I use the following numbers.  I tend to error on the conservative side when estimating costs because I want a property that cash flows in a "worst case" scenario.

Property Management 10% 

(I have found 8-10% to be standard in the market and use this number when evaluating a deal whether I intend to self-manage or employ PM)

CapEX 10%  (major repairs like roof, plumbing, etc)

Maintenance & Repairs 10%  (minor repairs like paint, carpet, etc)

Don't forget vacancy (I use 5%, but have read to estimate between 5-10%), taxes, insurance, and like @Natalia Barriuso mentioned - any utilities you would pay (I've noticed some MFs have trash fees or pay electric, water, etc) and grounds maintenance (lawncare, snow removal, etc)

@Todd Dexheimer Thanks!  I do like the "economies of scale" that larger MFs offer.  I agree with you on that range, because I plan to put PM in place.  The numbers work better for the additional expenses with more units, and the smaller 4plex MFs I'm finding, seem to only meet the numbers when self-managing.

Chris,

Leap frogging off of @Frank Adams post.

I've run the numbers on this MF, they look great and I have a target # to offer.  After offering my target #, the seller accepts.  I already have my list of investors committed, and I'm ready for due diligence and I'm located out of state.

What's your next move?  Inspection, appraisal?  Would you personally travel there to be present during?  My fear would be that something major gets past me (something I wasn't thinking of or planning for because I'm new to MF, or gets by the inspector) and I'm costing my investors $$$.

Thanks

@Salvatore Lentini

Thank you for the input.  I like how you phrased that - knowing the competition for this asset and that they might be willing to pay more (similar to the SFRs).

@Jeff Kehl

Really appreciate your thoughts Jeff, very insightful and helping me to approach thinking about MF from different angles.  

I think I need to find the right commercial agent or find off market deals, because when I come up with a number for a smaller MF (well below the residential agent's listing price) they don't quite understand where I am coming from to develop this number and it's usually not well received :)

I like the idea of looking at rent:unit cost as well, its all about breaking MF down into smaller more digestible pieces.

Thanks guys

I have a question for everyone.  How do you value small MF properties (1-4 units)?

When I look at these properties (the true duplexes, triplexes, and quadplexes - not a SFR that has been converted into a MF) I notice they get listed on the MLS or LoopNet (yes, I know - not the best place to find these deals) with prices more reflective of the local residential real estate prices (comparable prices per sq ft). It can be difficult to make the numbers work when these MFs are priced based on a high $/sqft.

If you are evaluating a property, like a quadplex, are you looking more at the area's cap rate to figure it's worth? I would think I should evaluate any MF (2+ units to 100+ units) the same - based on financials, and local cap rate and cash flow, etc. because they are one dimensional - they will always be a MF unit (compared to a SFR that could be a rental, sold to a family, converted into a MF property, used as an AirBnB type rental, etc).

I hope my question makes sense, and I appreciate any and all input.

Thanks

Look for an additional agent.  I have found success having an additional agent or two looking for potential properties, as well as myself.  It is helpful to find an agent who owns (or has owned) investment properties as they tend to understand the actual numbers better (not just the appealing numbers some agents generate on paper to try and move a so so property). Good luck

Are you house-hacking this 4 plex (live in 1 unit and renting the other 3)?

The conventional financing for 1-4 units is the same as SFR. Meaning, as a 1st time home buyer you could qualify for some very favorable terms & lower down payment. However, the bank will want to see pay stubs (going back 3-6 months?) - so landing that W2 job will be very helpful.

Sounds like it's time to get a job, save up, and search for that first property.  Make sure you run the numbers, run them again, bounce the numbers off some of the great resources here at BPs, and then go buy the deal.

Congratulations on graduating!

Assuming your duplex is completely paid off - why not cash out refi & pay off the student loans?  You'd only be trading debt (at a lower interest rate), but then you could use your $70k in savings to look for another property.  You lose any potential benefits of the Loan Forgiveness Program (which I looked into and didn't qualify for, but it involved 10 yrs of employment by a non-profit and the government would grandfather - those already enrolled in the program - in after changing the rules).  Can't forget that student loans are forgiven in death vs. refinanced loans are usually at the company's discretion on a case by case basis - that's a negative to consider about refinancing privately.

It is unfortunate how the cost of education has sky rocketed the last 10-20 years.  I graduated professional school in a similar boat (with a wife in an equal amount of student loan debt).  The same generation saying they don't want to pay for someone else's education also went to college for <$10k and came out making 6-12x their debt load....now a doctor graduates with $180k+ in debt and is lucky if their 1st year's income is 1:1 with their debt load....but, I'll stop rambling about higher education costs - it's a racket.

I like the idea of refinancing the duplex - at a low rate 3.5-4.5% - paying off the student loan debt (if you are a high income earner their won't be any tax break for student loan interest, but you would get the mortgage interest break) and then look to invest some of the $70k into another property while maintaining a nice cushion for personal or RE related emergencies.

Good luck!

Does the property need any immediate improvements/repairs/deferred maintenance?  

I put these numbers into a spreadsheet I use - disclaimer I am by no means a seasoned MF investor, but my results are below:

Assuming it's turnkey, with an estimated 5% vacancy, and mortgage terms of 25% down @ 5% x 25 years

Allowing 10% of rent/mo for CapEX and 10% for Maintenance/repairs

This deal generates ~$108/unit/mo cashflow, Cap Rate of 7.5%, Cash on cash ~8.75%, DSCR 1.47

To me this looks like a good deal, but I think you'd want to look into a few more things - rent roll, are the tenants current?  Any trouble tenants?  Are rents competitive - room to increase them?  Need for upgrades/repairs to facilitate raising rent?  How is the PM company?  8% management costs and how is the contract structured?

If you are buying it from a friend, you might be saving some on the purchase side if you aren't going through an agent?  I factored in 3% for closing costs

I am always trying to analyze MFs and learn from running the numbers, so please let me know if I have missed something or where the flaws in my analysis might lie.

Thanks and good luck Vitaliy!

Chad, are these units in production already sold? Does the developer plan to put them on the MLS or would he consider a private sale?

Thanks