Need hand on a potential deal

25 Replies

Thanks in advance. This seems too good to be true so I need some insight.

3 family for sale for $359,000. Verified that it's fully rented for $3500 gross/month.

Tenants pay all utilities except trash removal at 900/year.

We'd put down 25% ($89,750) and finance the rest.

PITI will be an estimated $2097.58/Month

It was built in 1972, the only unknown is one of the 3 boilers (2 replaced in last 3 years). Roof is 4 yrs old, etc.

We're going to look at it tomorrow, how does it look to this point?

Originally posted by @Matt Crow :

Thanks in advance. This seems too good to be true so I need some insight.

3 family for sale for $359,000. Verified that it's fully rented for $3500 gross/month.

Tenants pay all utilities except trash removal at 900/year.

We'd put down 25% ($89,750) and finance the rest.

PITI will be an estimated $2097.58/Month

It was built in 1972, the only unknown is one of the 3 boilers (2 replaced in last 3 years). Roof is 4 yrs old, etc.

We're going to look at it tomorrow, how does it look to this point?

 Depends a lot on the location.  Some towns, with significant appreciation potential, it could be a decent deal.  In others, not so much.

$3500 a month for an investment of $365k (including closing costs) is not great, even for New Hampshire.  I'm not saying you're going to meet the infamous "2% rule", this isn't the Midwest.  But still, nothing about that says, "Too good to be true" to me.  

So bottom line, if it is in Manchester, Nashua or almost anywhere North of Manchester or West of Milford, I'd say it is not a good deal.  Rockingham County?  I'd consider it.

@Matt Crow

I'd second Richard's opinion. What town is this in? Unless it's downtown Portsmouth, I wouldn't say "too good to be true"

As an example of what I am talking about, there is a 3 family in Manchester for sale right now with gross rents about $4700 a month.  Not built in 1972, will require more maintenance, and has basically no real appreciation potential.  But an extra $14,400 a year forgives many sins.

Biggest question I'd have is what are the property taxes and how stable is the tax base in the town? Some NH town's have raised property taxes substantially in the past 10 years, and some have additional increases and/or property value decreases coming. Is the house anywhere near where Kinder Morgan is planning to put their proposed gas pipeline? If so, if you buy the house, you may never be able to sell it. Folks won't want to take it off your hands. Is it in Brookline or Hollis? There's a move afoot to break up their school district and that would impact both property value and taxes. The numbers you've presented don't paint a very attractive picture, and if any of these other issues factor in, your profit would end up being negligible.

Hi @Matt Crow  I agree with @Richard C. and @Will Stewart this is not a "too good to be true" deal.

Other expenses to consider: Property Mgmt of 6-10% (even if you self-manage), vacancy rate (at least 5%), water/sewer (I, as the owner, pay quarterly for my multis in Manchester), and Maintenance/Repairs.  I also include closing costs (approx $8-10k for a building of this price) when I run my numbers.

I suggest using the rental properties calculator under the "Analyze" menu or a similar cal

@Richard C. @Will Stewart @Kevin Kovalsky

Thanks guys, looking back the too good to be true statement was rather rookie. I'm looking at a potential $1,000 month cash flow and got excited.

That said, the property is in Pelham, NH. What would you suggest is a good formula for this area? Would a lower offer on this property make it work? If so, what would that offer be?

I would say your real cash flow would be more like $500, assuming financing costs of about $1200. That would make your return about 6.5%. 

I a skeptical that the pipeline will have the impact Kathy says it will. But right now, it is slated to go through Pelham.

@Kathy Jackson

I think you're sensationalizing the pipeline a bit. Natural gas pipelines run by multi million dollar all over the country. 

Incredible how much cheaper energy could be in New England if they'd just build a couple pipelines. I just can't fathom the opposition to it. But that's a rant and topic for another day. 

The tax rate here in Pelham is obnoxious, and only going up. They've been trying to build a new high school to compete with Windham for years, and we keep voting it down. They did an end run around the voting to put in the new fire station where they would only raise taxes to raise 1mil and take the rest out of a fund that they didn't need a vote to pull from. Now they're going to keep the increase in place to replenish the fund they pulled from. There are already increases in the books coming for the next few years, I don't remember the exact numbers.

The 2014 tax rate is $22.87 per $1000 value and going up a couple bucks per year for the next few years. They're also currently reassessing all the houses right now, so I'm sure that the home values are about to jump, thus increasing the taxes yet again. 

If the sale price of $359,000 is the assessed value, the taxes are already $8200 per year ($683 per month) and going up quick!

Derreck Wells, Contractor in MA (#MR000910)
978-866-2020

And don't forget about the potential for lead paint which can create issues if refurbing anything.

Not to pile on but those numbers were not at all anywhere near too good to be true.  And 360k for Pelham is high.  

One factor nobody mentioned that I caution you about is septic.  No public sewage is great for cash flow bc on multi's us owners usually have to pay water/sewer but you better budget for a new septic!!

And when I say budget for it I mean financially and with regard to your sanity.  Your tenants will flush whatever they want, look up what bolimia does to septic tanks and imagine that happening to your septic (it happens, I know from experience!) tenants will flush drano and liquid plumber and take years off that septics life, is their washer machines at the property?  They will kill the septic too.  

Imagine you net your 500 per month for two full years and you feel good about yourself, then BOOM, 18,000 - 25,000 for a new septic!!  That's a bad day brother!

Brokers / agents think they are in the drivers seat on multi's in southern NH right now and they are jacking prices on eager investors.  

I see a bubble, I really do.  Math doesn't lie, if a property is priced and sold such that it yields 5-6% that property will be for sale again in short order at a lower price. Money finds the path of least resistance. Being a landlord for 5-6% is a market in balance in my opinion.  

We are headed for a correction.  Can't wait :)

Wow.. I think I just got a tour of the entire state right there.  Love threads like this.  I think that is what is making my number crunching so hard as well..  I grew up in the Midwest and recently moved here this year.  The numbers here are crazy!  Add in the fact that majority of the homes are .5 - 1 century old.  It amazes me to say the least.  There are deals out there to be had as far as I can see it is just scattered and handfuls.  Good luck if you decide to move forward with this one.  I don't think there was an answer if it will be owner occupy or not?  That will make a huge difference.  That is what is making things hard for me is I want to owner occupy.  Any advice whether 2 - 3 - or 4 is better for owner occupy in NH?

@Brett C. @Kevin Kovalsky @Richard C.

Thanks for the input everyone! In my eagerness to get moving on a multi family, I broke the cardinal rule of my other business "Don't Get Excited Until the Check Clears"

I cancelled the showing and appreciate the education I got on this thread. I'd love to buy any of you a drink and hear more about your experiences sometime.

@Matt Crow  I say go to the showing and if you like the property make an offer that makes sense within your numbers.  That process and experience will educate you further!  And the best part is, you will educate those sellers and seller agents of what prices actually make sense to investors!

@John McConnell my friend there should zero difference in owner occupied vs a strait investment property in my opinion.  By. That I mean you should apply the EXACT same criteria in terms of rate of return for a property that you would occupy, you just factor in market rate for the unit you will occupy and run the numbers.   I think folks get into trouble when they evaluate an owner occupied place.  What if you want to leave?  You want to be able to leave, rent the unit that you were occupying at market rate and still get the return you want.  That way you are not trapped there.  

It takes tremendous discipline to think like an investor when buying an owner occupant.  You may like the kitchen and stainless steel appliances in your unit but will it fetu the correct rent when you leave?

Originally posted by @Richard C. :

 Depends a lot on the location.  Some towns, with significant appreciation potential, it could be a decent deal.  In others, not so much.

$3500 a month for an investment of $365k (including closing costs) is not great, even for New Hampshire.  I'm not saying you're going to meet the infamous "2% rule", this isn't the Midwest.  But still, nothing about that says, "Too good to be true" to me.  

So bottom line, if it is in Manchester, Nashua or almost anywhere North of Manchester or West of Milford, I'd say it is not a good deal.  Rockingham County?  I'd consider it.

 Richard, assuming we're looking in Merrimack, Hillsborough counties and the 2% rule is out of the question, what parameters do you look at immediately to see if a deal is worth further investigation. Is there a "current gross rent vs. sale price"% that you look at or is it something else that says to you, "Look into this further"?

Thanks!

Matt Crow Great thread thanks for starting it! You didn't ask me but I'll chime in and say 1% is enough for me to take a deeper look. Just gotta account for property taxes around here as you know. Few hundreds bucks a door profit is what I look for. Like to stick in towns with good schools to make sure I can get good tenants.
Originally posted by @Brett C. :

@Matt Crow  I say go to the showing and if you like the property make an offer that makes sense within your numbers.  That process and experience will educate you further!  And the best part is, you will educate those sellers and seller agents of what prices actually make sense to investors!

@John McConnell my friend there should zero difference in owner occupied vs a strait investment property in my opinion.  By. That I mean you should apply the EXACT same criteria in terms of rate of return for a property that you would occupy, you just factor in market rate for the unit you will occupy and run the numbers.   I think folks get into trouble when they evaluate an owner occupied place.  What if you want to leave?  You want to be able to leave, rent the unit that you were occupying at market rate and still get the return you want.  That way you are not trapped there.  

It takes tremendous discipline to think like an investor when buying an owner occupant.  You may like the kitchen and stainless steel appliances in your unit but will it fetu the correct rent when you leave?

 Great reply @Brett C..  I am trying to calculate like the owner occupy unit doesn't exist in the equation.  So when I run my numbers for say a 4 unit I just run the numbers for the 3 units that are paying.  Are you saying that I should instead calculate with market on that owner unit and then also maybe just put that money out of pocket directly into my unit as well..  so say the owner occupy would normally cost me 650..  I should take the money that I would already be spending on an apartment and pay it in to myself (whether physically or logically)?  So just run the numbers as if it were a normal investment property and then adjust based off of my portion of the rent due?  Thanks for the insight!

Originally posted by @Will Stewart :
Matt Crow Great thread thanks for starting it! You didn't ask me but I'll chime in and say 1% is enough for me to take a deeper look. Just gotta account for property taxes around here as you know. Few hundreds bucks a door profit is what I look for. Like to stick in towns with good schools to make sure I can get good tenants.

 Will, that said, the property I reference at the beginning of this thread shows about 500/month cash flow. What purchase price would you look for this property to be to get your 300+ per door?

@Matt Crow

3500 less 8% vacancy for gross of 3220 a month.

I figure 10% of rents for repair and 10% for capex (so $700/mo here)

another 10% for property management. less the $2100 piti we're at $144/mo.

Now lets assume you'll do your own work so lets put maintenance at 5% and PM at 0%. that puts us at $640 a month, 7.6% coc, which isn't great.

if you offer $315k that's $800/mo if you self manage. 11% coc. that's a little more like it. but i'd still consider the property taxes, if you get re-assessed or they get up to exeter or windham levels, you're talking another hundred or two off the top every month.

of course $290k will get you to that $300/door number, but you also probably wouldn't get the house! hope that helps.

@John McConnell I don't think it matters if you pay yourself "rent" so much as it just matters that you know what market rent is for your unit and your numbers make sense based on what the owner occupied unit rents for.  A lot of people will look at what their share or the mortgage will be after crediting the other units rent toward the mortgage and say "oh cool, ill only have to x amount of the mortgage bc my tenants will pay y".  But whatever you are going to pay towards the mortgage doesn't matter at all, what matters is what your unit would rent for, add that number to the rest of the income the property generates and evaluate the numbers.  People mix emotions and personal preference into the equation when looking at the owner occupied and that's dangerous.  Who cares if you like the kitchen, you won't live there forever, and when you leave buddy you won't give a darn about the kitchen cabinets, only what cash flow that property generates.   Numbers are all that matter.  It's a math equation and a business decision FIRST, your residency preference is a distant second!

@Will Stewart

Great insight above Will thanks.

What do you think of this? I'm looking at a foreclosure multi in Manchester. 3 units of 3bed/1bath that average about 1200 sq/ft. I can expect probably around 1100/each once they're rented based on the neighborhood and talking to the neighbors on what they pay.

Here's where I'm hesitant. It appears that the rehab not structural and is not a full gut, but one of the kitchens needs full renovation and 2 of the bathrooms look like they could use full replacement of the shower, toilet and vanity. Some of the copper is gone on the first floor, but just easy stuff like the baseboard radiators, no walls were opened.

Understanding that there are variables that can't always be foreseen, what is a good way for me to estimate rehab costs. Do you have a price per bathroom or price per kitchen that is pretty accurate? Or price per sq foot that I should expect?

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