Buying a 6 unit

11 Replies

Hi everyone, 

I'm on the process of buying a six unit apartment in Addison il dupage county

Sales price is 450k 5 2 units and 1 1 unit 

Rents in the area are 850 for 2 beds and 750 for one bed.  Building noi is around 35k

Whoops you guys say I'm making a good investment or I could put my twenty percent to work better around my area? 

Any feedback is great 

Mark

Hi Mark,

I am not a big fan of 6,8,10 units etc.

You can't get good commercial financing because it's too small. Might as well get 2 quads and put long term 30 year debt on them.

When commercial properties and loans makes sense at least to me is larger scale where you are not buying yourself a job. 

thanks Joel how much down usually quads need? 25?

@Mark Malevskis  

 25% down is probably a good guess for a 4-plex although that will depend on the specific bank and you may find one that goes lower.  Also, if you owner-occupy, then the terms will be more favorable.

What Joel refers to is the breakpoint between "residential" and "commercial" loans.  A 4-plex is considered residential for lending purposes, but anything larger (e.g your 6-plex) is considered commercial.  Commercial terms are generally less favorable.  Larger downpayment, higher interest rates and shorter terms (no commercial 30-year loans - typically 5-10y is longest).  

thanks for info Andrew 

Does anyone have an opinion on this deal above that I'm closing? 

Mark you have not provided enough info.

I would focus on the rents the property is generating and not for the area. Your units could be in much rougher shape then the ones at a possible higher rent or they offer amenities yours does not have.

Let's do a basic here.

850 X 5 = 4,250 gross per month, 1 bed you are saying 750 but the 1 bed might be overinflated as a 2 bed usually has more value than 100 more a month so 750.

4,250 + 750 = 5,000 monthly X 12 = 60,000 gross expected income a year.

If landlord pays utility use 60% costs for eviction, PM, repairs, etc..

60,000 X .40 = 24,000 NOI

This is if the property does not need immediate repairs and if that's the case you lower the offer price.

24,000 NOI / 450,000 = 5 cap

Not even close to being a deal. You will probably respond back with the sellers says expenses are less and profit is more etc. ,etc. 

I have heard it thousands of times. Never believe what a seller is selling. Do your own research and trust the numbers you can validate.

I ran this quick formula off of the limited data you provided. If rents are lower it is even worse.

thanks Joel not what I wanted to hear but I appreciate it a lot! 

Remember you will hear all kinds of arguments from the seller. They will say they just redid this and that etc. and expenses are only 35%.

They say this to justify a higher number.

What they aren't saying that if your time horizon as the buyer is a 10 year hold before selling then costs might look like this.

Year 1- 35%, 2 - 38%, 3- 43%, 4- 47%, 5- 50%, 6 - 53% etc.

35% is unrealistic but the point is over the 10 year spread your average expenses will be much higher than what the seller is quoting plus they want you to pay a low expense price today. You will end up overpaying and might cash flow a little then in the future years the repairs really start rolling in and you have a loser of a property. Where is the seller?? Sitting on the beach telling friends about how they dropped one on a buyer for a great price.

Don't be the investor that overpays and becomes another statistic. I would rather not buy at all than deploy my capital into a marginal or bad deal.

  

Originally posted by @Joel Owens:

24,000 NOI / 450,000 = 5 cap

Not even close to being a deal. 

Comparable properties are selling at a 3% cap, $24,000 NOI / 3% = $800,000 so you could flip for a quick $350,000 PROFIT!! I'd like to see a better deal than that!

Not to deviate from the main topic but How do you find buildings like that? They're almost never on the MLS (at least in New England). I am not as connected to get them directly from sellers. Any strategy recommended from someone who just moved into a town and looking to buy an apt building?

Thanks

@Georges Arnaout get off BP and hit the streets. Today I found a deal at FW Webb in Salem, at Depot a 5 unit going on the MLS tomorrow on Rantool Street in Beverly and a strip mall in Marblehead. Let everyone know what you're looking for!

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here