4 plex offer advice
Columbia, MO · Member since 2012 · 18 posts · 0 votes
4 plex offer advice
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Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14yAt $175K you're paying $43,750 for $550 in rent. And you're paying for property management, so you bear the full brunt of the 50% rule. I get a bit under 11% cash on cash with 25% down and 5%, 30 year financing:
Rent: $2200
NOI: $1100
Price: $175,000
Down: $43,750 (25%)
Loan: $131,250
Payment: $704.58
Monthly Cash flow: $395.42
Annual Cash flow: $4,745.06
Cash on cash 10.8%
Doesn't seem like a great deal to me, but its not horrible, either. You could improve your cash flow by self managing. Perhaps you're using different assumptions, but don't underestimate expenses (and vacancy and capital) to make the deal look better.
I have a lot of family in you area, Jeff City, Rolla and that area and looked quite a bit at Columbia a few years ago. I didn't find any deals that were very good. This actually looks fairly good for Columbia. If this were a single unit, it would be much better because you would only deal with one tenant. With four tenants, it looks like a lot of work for a pretty low return.
You might look at Kansas City and some of the not-so-good areas. You can buy that much rent for considerable better. You're probably stuck paying for a PM, but at least you close enough to get there in a few hours if you need to.
11 Replies
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes14y
At $175K you're paying $43,750 for $550 in rent. And you're paying for property management, so you bear the full brunt of the 50% rule. I get a bit under 11% cash on cash with 25% down and 5%, 30 year financing:
Rent: $2200
NOI: $1100
Price: $175,000
Down: $43,750 (25%)
Loan: $131,250
Payment: $704.58
Monthly Cash flow: $395.42
Annual Cash flow: $4,745.06
Cash on cash 10.8%Doesn't seem like a great deal to me, but its not horrible, either. You could improve your cash flow by self managing. Perhaps you're using different assumptions, but don't underestimate expenses (and vacancy and capital) to make the deal look better.
I have a lot of family in you area, Jeff City, Rolla and that area and looked quite a bit at Columbia a few years ago. I didn't find any deals that were very good. This actually looks fairly good for Columbia. If this were a single unit, it would be much better because you would only deal with one tenant. With four tenants, it looks like a lot of work for a pretty low return.
You might look at Kansas City and some of the not-so-good areas. You can buy that much rent for considerable better. You're probably stuck paying for a PM, but at least you close enough to get there in a few hours if you need to.
- Columbia, MO · Member since 2012 · 18 posts · 0 votes14y
Thanks for your advice. Columbia is a tough market so this is a good opportunity. But as you say not the best.
Another investor has offered me a 4plex in the worst part of town for 75,000 with rent per unit of 380. Most property management companies would not go near that property. But one person who owns 4 plexes in the same neighborhood offered to manage it for 7%. He would manage the 175,000 one for 6%.
Thanks,
Kelli
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
Just remember the adage... "You get what you pay for".
Anyone can collect a 6% fee... what is he offering and what will he actually do? It's probably best to assume you'll end up paying market rates for Property Management in the end.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes14y
What about lease up fees? Is this student housing? Student housing turns over pretty much every year and if the lease up fee is significant, that can really hurt your returns.
If its student housing, do the tenants pay 12 months a year? One area I considered (Greeley, CO) mostly had 10 month tenants. You would be lucky to have a tenant at all in the summer and would probably have to give a significant discount.
- Columbia, MO · Member since 2012 · 18 posts · 0 votes14y
Thanks for taking the time to reply. The manager I talked to is a real estate investor in town. He is a realtor and attorney also. I haven't checked references yet but will before I hire him. I hope to self manage but wanted to see if numbers work with a manager since this is my first property.
The unit is near Columbia Regional hospital so nurses or others connected to the hospital may be interested. Students generally sign 12 month leases in our town. But some of the bigger complexes do offer 9 month leases.
Thanks,
Kelli
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
Kelli,
"Rent is 550/unit."
For what you offer with those units is that High,Middle,or Low for the area??
Is this person short selling because they bought to high OR is it because there are also issues with the tenants,repairs needed for the property,and they are slow paying??
The list price of 175,000 is that already "short sale approved" by the listing broker??
Based on 175,000 your returns are minimal already.By short sale approved when I used to do residential and list a property I would go ahead and get a price approved by the bank and the bpo ordered. This way you as a buyer know the bank will already accept at that price.
It is important as well knowing that the bank will not pursue a deficiency against the seller.Sellers have squashed these deals before when the bank will not give them their terms.
In that case you can try to buy the note at a discount and then give the seller what they want in terms in exchange for signing over the deed.You just have to know timelines and foreclosure costs for your state to protect yourself.
The condition of the property is critical along with lease agreements in place.Your returns can be severely diminished over time if you do not allocate for immediate repairs needed and the reserves needed for capital items down the road.
Example you plan on holding for 15 years.Based on building inspection the roof has another 5 years left max before replacing.
So you factor in a cost in year 5 for the replacement with an estimate on what labor and materials will cost at that time.Short sales can be great deals if most of the work is already done upfront.If not you can spend up to a year in some cases and the deal not work out.
Good luck
- Columbia, MO · Member since 2012 · 18 posts · 0 votes14y
Thanks for the good suggestions. They have talked to the bank. We ended up offering 148,000 and plan to replace the roof right away (hopefully rolling that into the loan).
550/unit is lower medium. I think the previous owner bought too high. He bought with a note from the seller before him for the down payment so I think he was in over his head with no money left for repairs. The location is great and tenants should be the sort that pay on time because of the nice area it is in.
If we get it at 148K, we have the reserves to make the needed repairs.
Buying the note is a new concept to me. I glad to be able to learn from people on this board.
Thanks for your time and ideas.
Kelli
- 14yMark UpdegraffBusiness MemberReal Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 713 votes
Joel Owens advise is spot on. Let us know how you make out dealing with the Bank and buying the note. Beware of the condition of all the major elements and you should be OK. I like to factor in the "unnoticed" repairs like plumbing, and unexpected equipment failures. With that many units you're bound to find things that you need or will need soon.
Also, try to get the rental rates up to market. If it is a nice area and the units are big enough, you should be able to get more than 550. Don't let existing tenants stay at their current rate. You should always increase straight off. If you don't it sets you up for tenant dissatisfaction later when you do. Start now, use the opportunity to get to market rate. If they leave, find a new tenant at market rate.
I also agree with Jon Holdman in that it isn't a great deal, but it isn't horrible either. I would hope to see higher rental rates in the area, or at least rising rates. Rates can be cyclical too, so start high and test the market. Bring it down as a function of response until you start getting a good amount on interest from qualified people.
Best of luck!
Mark
Updegraff Group Realty4.742 Reviews - Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
Were concessions given for the 550 rent?? Look at the leases for any security deposit waived or first months free etc.
Then you will get the true rental rate after the credits. Raising the rents to market is a factor.You need to see what other rentals are renting for and concessions given.Not what they are asking but what the unit is renting for.
For example yours are at 550 for low to medium.Research shows for 600 to 650 tenants expect in unit laundry and granite counter tops.
To install in unit laundry connections and upgrade to granite from your laminate you find out will be 2,200.Plus the existing tenant will not pay 625 and wants to move and now you are out a month in rent.
So 2,200 plus paint another 800 to recondition for the higher rents plus 550 in one months lost rent.
So if you ask 650 and get 625 with no concessions you are talking 3,550 divided by 75 is almost 48 months ( 4 years ) to break even from the higher rents on what you spent upfront.Might be a little sooner if you raise rents each year after the initial increase.
The problem with being in the top tier of your rent bracket is the tenants expect a lot for the extra they pay.When they hit rough times with the job and income their is no cushion to pay the higher rent.
Turnover is much higher and you get crushed on reconditioning costs.
When buying an apartment complex you will need to factor months of lost rent if you raise the rent due to vacancy,moving,and reconditioning.Even though it would cost a tenant more to move they do not think like an investor does.Many live day to day.They don't think if I move I have to pay for a moving truck,first and last months,security deposit,and the place I am moving to does not cover utilities like where I am now.
All they see is where I am now is going from 550 to 625.I can move somewhere else to 550 and SAVE MONEY.It's not the reality but how they process stuff.
The name of the game is to keep good long term tenants and make it hard for them to leave.Yes raise rents annually to keep up with costs but do not get greedy.
- Columbia, MO · Member since 2012 · 18 posts · 0 votes14y
Thanks for the continued suggestions. I am having 2nd thoughts about the offer and can withdraw it this weekend as they haven't replied yet.
All units are vacant. Another person got a roof quote of 7200. He decided not to make an offer. The kitchens are older cabinets. At least one furnace and water heater look like they could be replaced now. 2 of the AC units look quite old. Many of the units need new carpeting at least in the living room. I would like to put a laminate in instead but haven't priced that yet. There are laundry hookups in each unit.
A unit nearby sold for 180,000 a couple of years ago. At that time rent was listed at 500/month on that one. (They said the rent for this unit was 550 each. And I don't know any details about concessions that were made.)
It also has a large parking lot that would add to the cost of operation.
But it's the best opportunity we've seen in our town that is in a desirable location. And even if I put in 175,000 for purchase price (which would give us 27,000 for improvements) the mortgage is 705 at 30 years. Because it's empty now, it won't do well the first year.
Sorry this is long and thanks for the suggestions and guidance on our first investment.
Kelli
- Sandy Springs, GA · Member since 2011 · 126 posts · 31 votes14y
Thank you Jon Holdman for that breakdown, I am looking at a quad also and your breakdown helped me.
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