4plex Deal - I like it, do you?

Question

The property is a 4plex with four 1/1 units in a nice neighborhood filled with SFR.

Asking price: $120,000.

Disclosed Operating expenses:  
- $80/month for landscaping.
- Tenants pay water/sewer/cable/phone/garbage/electricity

Reserves I Calculate:
- 6% for vacancy. ($96 per month)
- 6% for repairs. ($96 per month)

Estimated property taxes: $1,462/yr.
Estimated insurance: $1,482/yr.

Lending Terms:
25% down payment = $30,000.
$90,000 @ 4% over 30 years = $429.67/mo.

Each unit currently rented at $400/mo.  NOI = $12,996/year.  Positive cash flow before taxes: $653/mo.

----------- Disclosures to BP:  
Property inspection has not happened.  If it reveals issues, the numbers will have to change or the deal will be cancelled.

Am I missing anything?

Michael D. · Answer

Then invest somewhere else. Don't let your excitement to DO SOMETHING trick you into losing money.

- You don't have to manage it.
- You don't even have to see it - ever. That's what inspectors, managers and agents are for.

Joel Owens · Answer

"Disclosed Operating expenses:"

RUN your own numbers.

400 rent X 4 = 1,600 monthly X 12 = 19,200

19,200 gross income divided by half.

10% vacancy
30% operating and expense
10% management

You have then 9,600 a year.At a 10 CAP you have 96,000 purchase price.

1 beds have a lot more turnover than 2 beds do.The people get a boyfriend or girlfriend,get pregnant,family member or mom moves in and they now need a 2 bed.

Pay attention to if 400 is at market or below market rent.If it's below market you can keep tenants staying for a long time.If it's high for the area or at market people will move as soon as their income starts falling to a cheaper alternative which creates more turnover.

For each turnover you will have lost rent and re-condition costs.

The 96,000 purchase price does not include immediate fixes.Example the roof needs redone,mechanicals only have 1 or 2 years left before having to replace etc.,bad siding,galvanized pipe,knob and tube wiring.

Watch out for clay pipe or galvanized pipe from the meter at the street to the building.Could costs tens of thousands to over 100k to fix depending on the length of the run and if you have to cut open the parking lot to replace the pipe.

Look at how much land you get with this property.What year is it??

Jon Holdman · Answer

No. For $400 rent I would want to be under $20,000 per unit. A bit less really, given the low rent.  And 1/1s aren't going to get good long term tenants. So you have more than typical turnover.

Rob Simpson · Answer

Oh, and no - I didn't do the deal.  I've called it off.

Rob Simpson · Answer

So, in the end I shot in a bid starting at $91,200.  He goes to $105,000.  I countered at $93K, he finals at $99K and a $5K seller's credit saying any less and he's in short sale territory.

It'd cost roughly $2,500 (if the numbers my agent collected are accurate) to split off the water and pin the utility to the tenants.  10% for management and another 12% for vacancy/repair reserves and I'm still looking at a 20% cash-on-cash return.

You guys are pros, and I'm not.  I just look at my stock portfolio, my IRA, and my 401k and see my tiny returns and think:  20%  whoa!

Joel Owens · Answer

A majority of buyers overpay for a property and underestimate the expenses.

They are either a new or uneducated investor about that asset type.

The seller is hoping the buyer makes the same mistake they did and overpay for the property and bail them out.It is hard to find deals that  pencil when buyers are purchasing bad deals.

Think of this.You would rather be in NO PROPERTIES than have money tied up into LOSER PROPERTIES you overpaid for. Those take all your cash,keep you up at night,and strain friendships,family,and marriages.

DON'T DO IT !

Rob Simpson · Answer

I agree, Bill.  You just don't see those kinds of prices, nor get sellers willing to let go of their properties for $60K less.

Bill Schultz · Answer

Hey Guys

I understand the frustration when looking at multifamilys like this.  Where I am, this sounds exactly like the kind of property you would find.  Probably around 120k, needs some significant repairs, rent similar.  The usually go for around $105-$115k.  Its gets frustrating because they just dont go around here for $60k or even $80 or $90.   Oh and where I live the taxes would be at least $3,000 a year.   I really think real estate can be tough depending on where you live.

Bill

Joel Owens · Answer

Statistics show that tenants use up to 40% more water when they do not pay for it.

Your options are usually to:

1.Have the total rent include water,sewer,and trash.
2.Sub meter out the units from the water company if they allow it
3.Prorate the amount of water usage for the building an bill each tenant.
4.Have a company bill them instead of you.
5.Have a private company install meters which is cheaper and they bill the tenant for what they use.

This avenue you are still responsible to pay the water to the city/county even if you bill the tenant and they do not pay.

On lower income housing I see about 60 to 65%  pay their water you bill them for every month and the rest you have to chase for the money.You have to pay the water company regardless.

The other factor is tenants will let friends was cars with the outside spigot,take showers,do their laundry,etc. and the tenants will also usually not report leaks or drippy faucets as they do not pay for the water.

Another thing to look out for is what does the city/county charge for water and sewer rates.If you research a county you might find they have upped the water rates by 50% in the last 6 years.

So one county using 1,000 gallons costs you 100 and in another county it costs you 56.You have to really look at how old the water and sewer system is for the city/county etc. and look at all the costs.

I can tell you water is the talk of the town with buyers of multifamily.It can just crush your bottom line.

Michael D. · Answer

You asked for advice, so here's mine: Based on the numbers you've given, and EXTRA especially in light of the water, I would only pay $60,000 for it nowhere near $120k.

Also - ask to see the water bill. I found out the hard way that "water" also includes garbage and sewer. For me that was a large unanticipated expense. Make sure you know who's responsible for it.

And management is an expense - even (in fact especially) if you're the one doing it. Never it out.

4plex Deal - I like it, do you?

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