Nervous about 8 units for first deal. Does it make sense?

23 Replies

In a failed attempt to buy a smaller 4-unit multi-family property, I stumbled across an 8 unit deal in Pensacola. This was going to be my first deal, so I'm not really familiar with the larger multi-family dynamics and wanted to see if this deal made sense. Each unit is 2bd 2bath going for $600. Here's what my monthly estimates look like:

Insurance (includes flood) - $450

Maintenance and capex - $530

Mgmt - $480

Vacancy - $480

Water and lawn - $415

Taxes - $350

Mortgage - $1730

Total expenses - $4435

Income - $4800

Cash flow = $365

Does this make sense? I know CapeRate is supposed to be in there too, but haven't figured that out yet.

That is a pretty tight deal, under $50/door. Is there room for rent increase? Are you moving into one of the units?

@Sean Morrison $365/mo is a pretty slim margin. If you have 2 or 3 vacancies in the first month and each one takes $3k to turn are you prepared to deal with that? That's a very real scenario when stabilizing a property and over 2 years of profits gone right off the bat and assuming there are no other surprises during that time.

@Jim Kilian I think there is room to increase rents to at least $700, which would be a significant improvement, and maybe set up individual water units so that they pay it themselves. I'm not moving into any units. 

They're currently asking $330k, and I figured at least $20k for upgrades as tenants turn over. But I don't want to pay a price based on possible value adds that I would do - just what the property is currently worth.

This deal is really outside what my initial criteria were - which was 2-4 unit multi-families in B class neighborhoods. This is probably a C class larger multi. 

This is not acceptable cash flow unless you expect really high appreciation, but judging from the rents, that will not be the case. Must be asking around 450k? Your CoC would around 3.5% which is dismal. You should be clearing 600-800/mo cash flow at least.

Actually, why am I guessing the asking price...? You should give us the list price, ammortization schedule, downpayment, ect..

You are combining lawn and water which is confusing. You are combining capx and maint which is better to think about as separate.

EDIT: Okay saw your comment posted while I was typing. Still not good at all. 5% CoC is not good. You want 12% minimum unless it is an appreciation play.

Margin is to tight. To many possible value adds. It’s ok to look outside comfort zone but only if you are walking into a deal that makes financial sense. Raising rents a $100 per month to give you a buffer may not end so well if you can’t do it over time.

@Dillon Leider Thanks for jumping in. You're right - they're asking $330k plus I'd want $20k for upgrades and unforeseen repairs. I'd be looking at a 20yr at 5% with 25% down. Some expenses were combined simply to make it fit a screen easier.

So I should be basing an offer on $75-$100 cash floor per door in other words.

Are you sure you can't get a 30yr? That would make a world of difference. Do you think it will be worth 330k after 20k rehab? If so, 270k would be my max purchase price.

Have you obtained a professional structural inspection report / phase 1 report / loss run (flood?) These factors may help you to negotiate a lower price & assess risk.  

If you are already in contract, have you asked a local property management company to check out the deal?

me personally would never pay $300k to make $3000 in rent 

Nerves are usually knocked out by market awareness and understanding of the investment.  When there is a good bit of doubt or uncertainty, you need to ask yourself why .

One moderate repair blows that cash flow out each year....   Listing price is moot.  Offer what you can offer to safely make $... if they dont take it.... oh well.  Dont chase.

A 20 year loan gives you equity more quickly.  If you're ok with the current cash flow, and spending money to raise your monthly cash flow, and plan on 1031 exchanging this up to a better property, then it could be a good deal.  

If you are planning on holding it then I would do a 30 year mortgage just  to use the extra cash for expenses.  

Noooo there's no money here. $365 for 8 units. Runaway from all the pain and head aches

Thanks everyone for the help. It looks like if I move to a 30yr mortgage and keep my offer at around $285k, that would leave about $800 in cash flow each month. That plus some value-add opportunities may make it worth something.

@Ian Walsh and @Brandon Brown - the main reason I'm nervous is that I have no idea what I'm doing with this property. I went in looking for a small 4-duplex, and ended up finding an 8 unit in an unfamiliar area. Obviously, it raises issues I wasn't prepared for like finding a larger down payment, learning how to deal with more units, and how to work in a C class neighborhood.

Originally posted by @Sean Morrison :

@Jim Kilian I think there is room to increase rents to at least $700, which would be a significant improvement, and maybe set up individual water units so that they pay it themselves. I'm not moving into any units. 

They're currently asking $330k, and I figured at least $20k for upgrades as tenants turn over. But I don't want to pay a price based on possible value adds that I would do - just what the property is currently worth.

This deal is really outside what my initial criteria were - which was 2-4 unit multi-families in B class neighborhoods. This is probably a C class larger multi. 

 Not meters at that price, much too expensive. Individual shared billing, sure.

@Ronald Rohde Could you explain a bit about that? It would be too expensive to add meters based on the rent they're paying? And how would individual shared billing work?

Hey man, I Wouldn't spend any more that 260k and that is if it's structurally in solid shape and no more than 20k or so getting it up to livable conditions.

Also, don't allow the "need" for a first deal to cloud your judgement, be patient and move on unless you get a solid return. I look for a minimum of 12% after I've been extremely careful with the numbers, but a 8 unit property should be giving you a heck of a lot more than that in my opinion.

Good luck... don't let excitement take away your savings and your future, leave emotion out of it as much as you can.

Keep us updated.

Sean, as a follow up, have you looked into properties in Denham springs or around that area that were affected by the storms ? Might be some good deals there

Originally posted by @Sean Morrison :

@Ronald Rohde Could you explain a bit about that? It would be too expensive to add meters based on the rent they're paying? And how would individual shared billing work?

 adding meter is like $3-8k per meter, pro rata billing based on unit size

This sounds like a pass unless you can quickly increase the rents. If one AC goes out your cash flow will quickly turn negative.

It doesn’t seem worth it for less than $100 per week profit. I’d take a closer look and see if you can increase your margin. A little value add, maybe a unit that is below market value rent, or a modification made to the property that may offer a cost savings.

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