What do I offer on this?

Question

The seller is open to financing my purchase, which is what I'd like to do if only to avoid a monthly PMI payment (~$140). There's always more to be made in seller financing from what I understand. The unit is in a semi-decent part of Kalamazoo Michigan.

It's been converted from a SFH to a 4-unit and is listed at around $120k. Here's some other numbers from 2012 (2013 was similar):

Gross Rental Income: $23220

Expenses: $12760

• Water/Sewer--$560
• Utilities--$6500 (all paid by owner)
• Insurance--$2000
• Trash--$300
• Taxes--$3400

Leaves an NOI of $10460. Add in vacancy and management at 10% each and it's still cash flowing around $150/door/month, right? Despite the age of the house (1920 I believe), this guy had fixed it up very well. Roof, furnace, and water heater were all 5 years old or newer. He was more tired of managing the property than anything else. No problems with tenants, just far away.

How would you structure a seller-financed deal? Our other option is an FHA loan.

Wayne Brooks · Answer

Not practical.  Tenants who conserve won't want to pay for those who are wasteful and you have no way of proving who uses how much.  How did you find this property?  I suspect the owner is willing to finance because no one wants to pay his price for this situation.

Josiah Swartz · Answer

Yes, @Wayne Brooks, it's zoned, registered, and cleared for the rentals. There's a certification process in Kalamazoo and it's good for another 2 years. Of course, that's info from the seller, which I would confirm in the due diligence period.

What do you think of writing in utility cost percentages for the leases? Any experience with that?

Wayne Brooks · Answer

First, the numbers look to be no good for investment.

Is the property zoned for four units?

Were permits pulled, and inspected, for the conversion?

Rerouting all the plumbing and the electric on the interior of the house to separate the utilities would be crazy expensive, if it's even possible, which is why the owner didn't do it.  Owner paid utilities properties will always sell at a discount since you can't raise the rents far enough market rates to cover for tenants tendencies to waste the utility usage since they are not paying for it.

Brandon Krieg · Answer

Hey Josiah,

I work mostly in flips, so cash flow questions are not my expertise.  However, have you talked to any landlords in the Kalamazoo local area?  I bet they would have quick answers to a lot of your local municipal questions.  I know a couple of folks that focus on rentals down there - if you need a reference, shoot me a message.

Josiah Swartz · Answer

I could try to convince him to lower the price to get to that 2% range, @Brandon Hall. There's some potential to also increase the rents and decrease the expenses.

Does anyone know how costly and/or difficult it is to separate utilities? I suspect the process could vary widely based on the local ordinances.

Brandon Hall · Answer

@Josiah Swartz I'm getting a cashflow around $25/door/mo. I'd have to agree with the above posters, based purely on the numbers provided, this isn't a good deal.

**Edit: Also note that your monthly rent is around 1.6% of your purchase price which isn't too bad. You may want to double check those expenses as I have them sitting around 70% of annual rent based on your numbers.

Patrick L. · Answer

Here I pay $23/unit/month for trash for small multifamily (less than 10 units) so for 4 units I'd be at $1,104.  You're under $30/month which seems really cheap for trash pickup for 4 units, it's more in line with what a single family home would be.

Aaron Montague · Answer

this deal is so tight that $25 can make or break it.

I pay $75/month for trash. Some municipalities include it in their taxes, other do not.

I would work to transfer the utilities to the tenants. @Patrick L. Is right about the utilities, they are going to eat you alive. I doubt those utilities will hold their costs over the years. I assume that my tenants are going to heat their apartments to 85 in the winter and cool their apartments 24/7 in the summer.

Josiah Swartz · Answer

No idea about the trash bill, @Aaron Montague. I could ask to see a bill. How much do you pay?

Thanks for your input, @Patrick L.. I played around with the numbers and it's looking a lot less attractive.

Aaron Montague · Answer

how is your trash bill that low?

I'd offer 10% down and 6% interest on the rest.

Get a private mortgage to protect the seller.