Potential first MFH purchase

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Potential first MFH purchase

Omi C.
Investor · Santa Cruz, CA · Member since 2013 · 86 posts · 47 votes

Hi everyone,

I'm considering making an offer on my first property. I'd love to get the advice and wisdom of the BP community on this deal. What have I missed??

The property is a 4-plex in a nice family/community oriented suburb. Each unit is a 3/2 with a garage. Schools are above average. Crime is non-existent (1 theft in the last 30 days, summer was the same). Building was built in 1990. The property is fully rented at present.

Here are the numbers:

Purchase Price: $230,000

Down payment, 25%: $57,500

Loan amount: $172,500.00

Loan payment (conventional, 5%, 30 yr): $926.02

Monthly rent: $3100.00

Monthly costs (see below): $1,456.50

Monthly NOI: $1,643.50

Monthly Cash flow: $717.48

Yearly CCR: 14.97%

The monthly costs include:

5% vacancy

10% Maintenance

10% Capex

9% Property Management

~1.5% Property taxes

~0.6% Insurance

I normally would put vacancy at 10%, however the tenants in the area seem to stick around for a while and it seems unrealistic to assume that every unit will turn over every year. 5% to me means that I am planning on 2 units turning over every year, and that it won't take longer than a month to fill those units again.

I am also expecting the 20% of Maintenance+Capex to cover turnover costs. It seems reasonable for a newer building like this, but I'm not sure?

These numbers are my best shot at "worst case within reason", and 15% CCR seems like a pretty good worst case.

What do you gals and guys think?

Omi

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Mike H.
Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
11y

Given how new the building is, I think you're right on with the numbers. 

And the fact that they're all 3/2's is even better. You should have higher occupancy there than a typical 4 plex that I see here (2bdrms/1bath). 

The only other question is what is the place going to appraise out for? Are you paying absolute retail for it or are you getting any type of equity capture in the deal.

At the end of the day, I don't think it really matters if you're paying retail if the rental numbers work for you. My only concern is that 60k seems like a lot of money to sink into an investment. If there is some equity there, it'd be nice if you could somehow get some of that initial deposit in a year or two.

Outside of that concern, the simple facts are the numbers look great. What I'm really amazed at is how low the taxes are out there. 1.5%???? Jeepers and here I thought california had crazy high taxes.  I've got houses here in Illinois that I'm paying 4% taxes on. Yea, as in a 100k house would mean I'm paying 4k in property taxes.  Thats not the norm but I have a couple. Most tend to be running around 3% right now so thats not much better for the norm.

For that age and that style unit (3/2s), I definitely think thats a solid deal. I hate having to put so much money down. But if thats what it takes, thats what it takes......

Better than any other investment you're going to make. Your Cash on Cash (15%) is great. But don't forget, you're going to have principal paydown on that loan for more of a return. You're going to have appreciation 2% a year even is going to be another 4,600 a month, etc. 

And, over time, your rents will go up and your payments will stay the same. So your rental profits will increase as well. Meaning your cash on cash will go up over time even more. 



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  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    11y

    @Omi C. 

    Looks good.  I don't see any mention of Sewer and Water.  Are all units metered seperately?

    Is this one large building?  I like to save $150/month per roof minimum.

    0Reply
  • Omi C.
    OP
    Investor · Santa Cruz, CA · Member since 2013 · 86 posts · 47 votes
    11y

    Thanks for taking a look @Aaron Montague !

    Yes, tenants are currently paying all their own utilities. I've presumed that means that they are separately metered, but I'll ask.

    Yes, this is a single building with a big roof. Each unit is 2 stories. Is the $150/month/roof in addition to the 10% capex?

    0Reply
  • Account Closed
    Omaha, NE · Member since 2014 · 201 posts · 85 votes
    11y

    Sounds like a decent deal. price is a little high compared to rents in my opinion but how you describe the area, the value is probably justified.  

    208k sounds better, would be 1.5%/month. but again, how nice the area is does have a cost so if thats the best you can get then probably would go with it. 

    0Reply
  • Sam McPeek
    Investor · Richland, WA · Member since 2014 · 71 posts · 29 votes
    11y
    Looks good. Is there options to raise rents over time? $800 for a 3/2 w/ garage is low for my area, usually that would go for $1,200-1,400 per month. What are the rent comps around you?
    0Reply
  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    11y

    Given how new the building is, I think you're right on with the numbers. 

    And the fact that they're all 3/2's is even better. You should have higher occupancy there than a typical 4 plex that I see here (2bdrms/1bath). 

    The only other question is what is the place going to appraise out for? Are you paying absolute retail for it or are you getting any type of equity capture in the deal.

    At the end of the day, I don't think it really matters if you're paying retail if the rental numbers work for you. My only concern is that 60k seems like a lot of money to sink into an investment. If there is some equity there, it'd be nice if you could somehow get some of that initial deposit in a year or two.

    Outside of that concern, the simple facts are the numbers look great. What I'm really amazed at is how low the taxes are out there. 1.5%???? Jeepers and here I thought california had crazy high taxes.  I've got houses here in Illinois that I'm paying 4% taxes on. Yea, as in a 100k house would mean I'm paying 4k in property taxes.  Thats not the norm but I have a couple. Most tend to be running around 3% right now so thats not much better for the norm.

    For that age and that style unit (3/2s), I definitely think thats a solid deal. I hate having to put so much money down. But if thats what it takes, thats what it takes......

    Better than any other investment you're going to make. Your Cash on Cash (15%) is great. But don't forget, you're going to have principal paydown on that loan for more of a return. You're going to have appreciation 2% a year even is going to be another 4,600 a month, etc. 

    And, over time, your rents will go up and your payments will stay the same. So your rental profits will increase as well. Meaning your cash on cash will go up over time even more. 



    1Reply
  • JT Spangler
    Buy and Hold Investor · Nashville, TN · Member since 2013 · 264 posts · 102 votes
    11y

    I'm assuming this property is NOT in Santa Cruz, right?

    0Reply
  • Shane Pearlman
    Rental Property Investor · Las Palmas de Gran Canaria · Member since 2014 · 220 posts · 256 votes
    11y

    Hey Omi,

    Shoot me a copy of your spreadsheet. Curious to see how you put it together.

    Other things to consider: 

    Does it get cold there and will that affect your cashflow in any way

    Landscaping

    Turnover costs has two parts - any fixup + fees from your manager. Are both factored in?

    As an idea, since you are buying remote, I would cold call 3-4 local managers and tell them you are considering buying in that area. Ask them what the demand looks like, what rents they are seeing and 

    Besides that, I have two fourplexes which are both 3brs and really believe in the formula, especially in strong neighborhoods.  

    0Reply
  • Brad M.
    Rental Property Investor · Glen Allen, VA · Member since 2013 · 85 posts · 39 votes
    11y

    @Omi C. From what you have provided, looks good to me. I've got a quad that I paid $320k for, gross rents are $3,260/month, and it cash flows nicely. Lots of similarities to your deal (but I paid more). Water and sewer separately metered, very low taxes (historic tax rehab deal), and insurance $950/year. Maintenance isn't too bad, 1920's construction but gutted and rehabbed (not by me) 7 years ago.

    Go for it!

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    11y

    Wow - sure wish I could find value like this in my area. Is $230k just the asking price? They probably only expect about 92% of that if it's an MLS listing. As an aside, I always thought MFH was ManuFactured Housing (mobile's). Makes sense why there's so much talk about MFH!

    0Reply
  • Kyle Evans
    Flipper/Rehabber · Naperville, IL · Member since 2014 · 83 posts · 12 votes
    11y

    @Omi C. I like the numbers! Nice find!

    0Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    11y
    Originally posted by @Omi C.:

    Yes, this is a single building with a big roof. Each unit is 2 stories. Is the $150/month/roof in addition to the 10% capex?

     No. 

    That is my minimum amount.  Essentially I base it off the fact that I'll need to replace 2 hot water heaters, 1 furnace and 1 roof every 20 years.  You'll need to replace 1 roof, 8 hot water heaters and 4 furnaces in 20 years... well you may not, but I'd save like you are going to.  

    If I were you I'd bank $250/month for Cap Ex and repairs.  20k for a roof, 22k for furnaces, 8k in water heaters and 10k misc.  Adjust it for other obvious things, new gutters, a driveway, etc.

    1Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    11y

    @Omi C. 

    Here is how I see your numbers at $230,000. I'd pay $219k at the most for this place. That would get me to $125/door/month AND 15% CoC return. If the tenants are paying the Sewer and Water portion of this it turns into a very good deal even at 230k.

    Mortgage Rate 5.00%

    Length of Mortgage in years30

    Monthly Mortgage payment $926.02

    Taxes $287.50

    Sewer and Water $166.67

    Trash $75.00

    Heat/Utilities $100.00

    HOA $-

    Cap Ex and Ops $250.00

    Insurance $115.00

    Mgmt Fee $310.00

    Vacancy $155.00

    Total Expenses $2,385.18

    Total Revenue $3,100.00

    Cashflow/month $714.82

    Cash on Cash Return 13.62%

    No Sewer and Water expense:

    Cashflow/month $925.77

    Cash on Cash Return 18.44%

    0Reply
  • Omi C.
    OP
    Investor · Santa Cruz, CA · Member since 2013 · 86 posts · 47 votes
    11y

    Wow thanks for all the advice everyone - this is awesome!

    @Isaac Essex  - 1.5% would have been nice! I think if I was getting a property which needed some rehab, I'd be able to achieve that. This is my first property so I'm trying to reduce some of the unknowns. Like you say, it still seems like a good deal.

    @Sam McPeek - according to padmapper and rentometer the rents are about average. This is a suburb of a big city, and the rent is what it is. 

    @Mike H. - I actually couldn't find comps for this property. The offer was lower than list, and the numbers made sense, so I figured it was worth a closer look.

    @JT Spangler  - 230k in Santa Cruz gets you the cupboard under the stairs and bathroom priviledges on nights and weekends. :-(

    @Shane Pearlman    - ahoy neighbor. Yes it does snow there. Regular snow removal is part of the maintenance estimate I have. Didn't think about turnover costs from the PM, will add that to my model. Thanks! Will send you my spreadsheet in email.

    @Brad M.    - thanks for the encouragement. 

    @Steve Vaughan   - $230k is the offer price, which is less than list.

    @Kyle Evans  - thanks for taking a look!

    @Aaron Montague - Understood. My current numbers have me reserving $300 (10% of rent) for Capex, so I think that should have be covered. I just saw the seller disclosures, and the roof is 5 yrs old, but all the HVAC systems are original. So this cash might get spent before the cashflow comes in. *gulp*? I have reserves though, so I should be ok in the long run.

    Thanks again, all!

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  • Troy Fisher
    Specialist · Kirkland, WA · Member since 2013 · 1k+ posts · 817 votes
    11y

    Watch that mgmt cost.  9% is not going to tell you everything.

    For Instance, It costs me 1 month's rent to place a tenant!  There's a 4% mgmt fee on repairs being done. Some places have service call fees (a tenant calls for repairs, you get charged $25).  The one that I ran into was my rents at 8% was less then the minimum the pm would take, so I had to go up to I think it's close to 10.25% .

    Congratz!  Can't wait to hear more about this deal @Omi C. 

    1Reply
  • Omi C.
    OP
    Investor · Santa Cruz, CA · Member since 2013 · 86 posts · 47 votes
    11y

    @Troy Fisher  Thanks for looking at this. You're totally right - I am underestimating some of the turnover costs. Shane raised a similar point. I'll adjust my numbers to include PM fees on turnover (75% of rent) for 2 units every year. So thats 3.5 unit rents per year.

    From talking to a couple of lenders, my rate will be closer to 4.5%.

    After both these changes the CCR for year 1 is 14%, which is still ok for me.

    1Reply
  • Omi C.
    OP
    Investor · Santa Cruz, CA · Member since 2013 · 86 posts · 47 votes
    11y

    Just to follow up on this thread. Closed on this property yesterday! Thank you all for the insights, advice, and encouragement!

    My first success story!

    1Reply
  • Account Closed
    Omaha, NE · Member since 2014 · 201 posts · 85 votes
    11y

    Congrats man!! happy for you. 

    0Reply
  • Mike Richter
    Investor · San Angelo, TX · Member since 2014 · 27 posts · 5 votes
    11y

    Way to go, snapping up your first four doors! That's a great start, keep it up!

    0Reply
  • Brad M.
    Rental Property Investor · Glen Allen, VA · Member since 2013 · 85 posts · 39 votes
    11y

    Good job @Omi C.! Congrats and good luck.

    0Reply
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