Evaluating Quadplex deal

Jay HurstBusiness Member

Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes

2y

Looking for some more experienced advice/perspective on a quadplex I want to make an offer on. I'm new to this and looking to make this my first deal. This property is on the MLS currently listed at $540k. It fell out of contract a couple months ago but it had an inspection and appraisal done at that time. It appraised at $553k and the inspection showed lots of minor to moderate deferred maintenance, mainly needing a roof and some foundation repairs and a few water leaks inside that need addressed. It has tenants in place until 2025 paying $1150/unit. I've been trying to wrap my head around what an appropriate offer would be and the numbers just don't seem reasonable.
I’m coming up with:

$4600 monthly rents

$450 insurance
$950 taxes
$690 Cap ex, Maintenance and Vacancy 5% each
$400 water/electric from current financials
$130 landscaping from current

Which leaves me right under $2000 for a mortgage payment just to break even, which is a purchase price of $375k with 25% down. Not including any repairs or renovations that’ll be necessary. I know I’d be able to adjust rents and/or pass on at least water and electric expenses down the road.

My questions are:

Does offering $375k to break even but cash in on equity make sense? It’s hard for me to think someone would consider an offer at this price but I’m not in their shoes.
Would you offer higher, like $450k, and just eat the water and electric until the leases renew and you can adjust that out?
Is this a deal that really just needs a large down payment to make sense?

Any other thoughts are greatly appreciated!!

- Austin

Couple of questions:

right now it sounds like owner is paying all bills? Is this because the property does not have separate meters?

is the 1150 with all bills paid market value or under market value?

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0 Reply

Tanner Lewis

Lender · Austin, TX · Member since 2021 · 448 posts · 441 votes

2y

Just offer what makes sense with your numbers, there is no point in overpaying if it does not make sense with your numbers.

2 Reply

Travis Main

Lender · Orlando, FL · Member since 2023 · 220 posts · 183 votes

2y

Hey Austin,

This is a recurring challenge observed in certain multifamily markets, typically those with 5 or more units. In these cases, interest rates tend to surpass cap rates, compounded by rapid appreciation. Consequently, sellers often overestimate their property's value, failing to recognize its actual performance.

Moreover, if the property requires significant repairs such as foundation work or a new roof, it may not qualify for long-term financing. In such situations, a bridge loan to rehabilitate the property followed by refinancing becomes necessary. However, if the property is tenant-occupied, accessing it for renovations might prove difficult.

If your intention is to purchase a distressed property for value addition, I would caution against acquiring properties with existing tenants, as this can pose challenges in the renovation process.

0 Reply

Austin WeberPro Member

OP

Ft Worth, TX · Member since 2017 · 5 posts · 1 vote

2y

@Jay Hurst

Hi Jay,

I believe the electric is being paid by tenants as the financial sheet only showed about $15-20/month for electric. The other $375/month appears to be water and I’m not sure if it is metered separately.

Rents are a little low but on par with current conditions. Minor cleanup could probably get them up to $1200-1225, and some larger updates could get it close $1300.

0 Reply

Brian Adams

Residential Real Estate Agent · Dallas, TX · Member since 2013 · 232 posts · 173 votes

2y

@Austin Weber I just finished my DFW Duplex/Quadplex report if curious to see what folks are up to in the 2-4 family market up here!

I also did a quick underwriting on what you described and the building I assume you are talking about. As you say, it looks like pro forma rents are $1200/mo so you could push a little next year!

The MLS rental listings for surrounding quadplexes all show the utilities as tenant responsibility, including water. That would make a major difference on the underwriting.

You didn't mention property management; are you going to manage it yourself?

Assuming the repairs come of their current asking price and are ~$40,000, I did a quick underwriting and come up with a 5.7% levered IRR at a 10 year hold period and 6.5% interest rate.

But if the water are tenant paid, that jumps to a 10.8% levered IRR.

Either outcome is cash flow negative in Year 1, but that is not uncommon.

I think their price is probably pretty reasonable depending on the scope of repairs and deferred maintenance?

3 Reply

Brad S.

Investor · Pasadena, CA · Member since 2017 · 613 posts · 523 votes

2y

There are a few basic questions to consider when considering a potential deal:

* What is your purpose ("why") for purchasing this? current/immediate potential cashflow, flip/rehab, longterm equity building, etc.
* Does the Subject property/deal coincide with your purpose or can it be tweaked to?
* Does the current asking price reflect your best outcome or close enough? ..and If not, Is the seller potentially motivated enough to accept an offer that would position this deal to meet your goals?

...this is not meant as an all-inclusive list, just a general starting point.
*********************
IMO - a deal should not be forced into your "buy box" because you are overly motivated for any reason. Those type of deals have the potential to go South quickly and ugly, then they can be an anchor on you.
**************************
This specific deal you mention, does not appear to meet any promising criteria. There is current negative cashflow at the listing price, little potential for upside, a significantly reduced offer price is required just to break-even or significant rent increases and utility decreases. Basically, it does not appear to have a clear, confident path to a positive outcome. The potential return % does not appear to justify the risk. The risk/reward ratio does not seem worth it, there are other less risky places to park your money with better returns at the moment.

Also, as someone pointed out, you didn’t account for property management. Property mgt should be an expense, even if you do it yourself. Otherwise, it’s like buying a retail business and having to work it yourself to make a profit – that’s called buying yourself a job, not a business.

Appreciation has historically been sluggish in DFW, the most recent uptick is somewhat of an anomaly and may be at a relative high point, or lower relative affordability at the moment, which typically translates into pressure on prices. I don’t have multi-res experience in DFW, but I have owned multiple rental sfr’s there from prior to the gfc.

In this business, especially now, you may need to kiss a lot of frogs to find your prince/princess, or turn over a lot of rocks, or any other metaphors that you like.

1 Reply

Austin WeberPro Member

OP

Ft Worth, TX · Member since 2017 · 5 posts · 1 vote

2y

@Brian Adams

Hi Brian!

That’s a great resource, thank you for sharing it.

Changing just the utilities and bumping rents really would change the whole picture, creating roughly a $600/month swing. I do plan to manage it myself, at least to start. It would be my first investment property and I’d like to get a feel for it before handing it to somebody else.

I agree with you, I don’t feel like their price is unreasonable but I couldn’t figure out how to make it make sense. The interest rate I was quoted was 7.5% but I’ve also reached out to another lender just to compare. Would you expect a 6.5% rate to be available currently for a non-owner occupied property?

Knowing you wouldn’t expect year 1 cash flow makes me feel a little better. I know it’s about the long game but I hate to sign up to lose money on my first property. I guess if I can manage it until I can adjust rents and flip utilities it still has potential to be a good investment over the next decade.

I really appreciate your insight!

0 Reply

Austin WeberPro Member

OP

Ft Worth, TX · Member since 2017 · 5 posts · 1 vote

2y

@Brad S.

Hi Brad,

I appreciate your perspective. Not every property for sale is a good deal and I think that has to stay top of mind. It’s easy to see a property and want to make it a good deal but if it doesn’t work that needs to be respected instead of trying to force it like you said.

I think there’s a price at which it could work but I also understand that price is pretty far off of the asking price/value and to the seller it likely wouldn’t make sense to sell at that price.

0 Reply

Jay HurstBusiness Member

Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes

2y

Quote from @Brian Adams: