Help - looking at a 6 plex!

16 Replies

Hello!

I am interested in purchasing a multifamily 6 plex property in Dubuque Iowa. I am new to the real estate investing scene and figure this is the best way to go for cash generation. (See link below for house)

https://www.realtor.com/realestateandhomes-detail/...

The unit has $49,000 in rent / year and approx $18,000 in expenses according to the seller.

Net Profit = $32,000 a year (roughly)

Property Tax - $6700

Utilies - $6696

Insurance - $2670

Unit 1 - 800

Unit 2 - 1350

Unit 3 - 750

Unit 4 - 400

Unit 5 - 430

Unit 6 - 430

Random comment -but my net worth is close to ~$500K and I currently already own the house I live in so I'm thinking the bank should not give me too much of a difficult time?

1.) Any general comments regarding what to look at? What steps should I do next?

2.) Is this considered commercial? Are there any special steps to take next?

My next step is to talk to the bank to get preapproved then go look at the property itself. Any thing I should be wary about as a new investor?

Thanks for your help!! Jason

Hello Jason,

I've only been through Dubuque a couple of times, so I do not know the area at all, but based off of the pictures, it looks to be a pretty decent area. This property would classify as commercial, as it is more than four units (1-4 residential, 5+ commercial). The big benefit to commercial is that the property is valued based off of net income, so if the current landlord is paying for a utility, you could look to bill that directly to the tenants and increase your NOI, and therefore your value. The numbers seem pretty strong, a good thing to do is plan for contingencies. For example, when I run numbers, I allow 4% of the gross rent to be saved for vacancy, 5% for basic maintenance and repairs, 14% for long term capital expenses, and 10% for property management (I self manage at this point, but plan for the future). Make sure to request a copy of the leases in order to make sure the numbers line up as they are listed.

Welcome to the investing world, and I wish you all the best!

The operating expenses seem low, they want it to look like a 10% cap, it's very likely a 7.5~8.5% cap.

Hi Jason,

This is exciting!  

First, just as an FYI, if you plan to manage the Dubuque property yourself, if you haven't already done so, you will need to take a class, called "Successful Rental Property Management.  Even if you were not planning to manage it yourself, I would recommend the class.  They give some great information!  The next class is on March 15th.  

The bank will most likely consider this a commercial property because it has more than 4 units.  Therefore, your down payment may be higher, 25% possibly.

To analyze the deal, consider using the Bigger Pockets calculator. When I did a quick analysis I found that with the 299,900 purchase price at 25% down, 10% vacancy consideration, 12% Property Management Fee, 12% for cap ex and maintenance and the $6700 for utilities, the return on your investment (25% down) would be 6%. I am not sure what your goals are, I like to hold off for over 10% on ROI. However, once you get this paid off, it still would provide some good cash flow!

Regarding the utilities, how are they split up?  Does the owner pay for all of them? Or does the tenant pay for some.  $6700 a year seems low for six units if the owner is covering all utilities.  This would be  a big concern for me.  I would like to see the tenant pay for their electricity, heat and water/garbage.

Have you attended any of the meet-ups Dan Kelly hosts for the Dubuque area?  If not, consider joining a meeting!  They usually meet monthly and can offer some great insights.

Originally posted by @Sarah Ottesen :

Hi Jason,

This is exciting!  

First, just as an FYI, if you plan to manage the Dubuque property yourself, if you haven't already done so, you will need to take a class, called "Successful Rental Property Management.  Even if you were not planning to manage it yourself, I would recommend the class.  They give some great information!  The next class is on March 15th.  

The bank will most likely consider this a commercial property because it has more than 4 units.  Therefore, your down payment may be higher, 25% possibly.

To analyze the deal, consider using the Bigger Pockets calculator. When I did a quick analysis I found that with the 299,900 purchase price at 25% down, 10% vacancy consideration, 12% Property Management Fee, 12% for cap ex and maintenance and the $6700 for utilities, the return on your investment (25% down) would be 6%. I am not sure what your goals are, I like to hold off for over 10% on ROI. However, once you get this paid off, it still would provide some good cash flow!

Regarding the utilities, how are they split up?  Does the owner pay for all of them? Or does the tenant pay for some.  $6700 a year seems low for six units if the owner is covering all utilities.  This would be  a big concern for me.  I would like to see the tenant pay for their electricity, heat and water/garbage.

Have you attended any of the meet-ups Dan Kelly hosts for the Dubuque area?  If not, consider joining a meeting!  They usually meet monthly and can offer some great insights.

This is good news! I really appreciate you helping me here!! I have not attended any meetings - and yes I was aware of the next class on March 15th - and I do plan to attend.

It indicates the residents pay for electric - landlord pays for all other utilities.  This is unfortunate as the numbers are now indicating it is not good enough. I was told that if you can generate 10% of the house price in rent monthly, you are doing OK.

There was also a second property they had listed - 4 plex for $199,000 with four units (in another decent area of town)

Unit 1 - 1000

Unit 2 - 515

Unit 3  - 515

Unit 4  - 725

Property Tax - $4072 Insurance - none listed - estimate maybe $2000? Utilities - $6200

Any idea how that would stack up to the previous house listed above?

Great advice all.  Jason, I'd be happy to sit down with you if you would like to analyze the numbers closer.  I think Sarah did a good job and I would look at things similarly and echo everything she offered.  If you would like, I can refer you to a couple of lenders as well as even show you the property as I am licensed in Dubuque if you decide you're ready to take that next step and do not have an agent to help you access the property.  The listing you are looking at is in a good location for rental and I like the mix of units that make up the building.  I am happy to send you the buyer's disclosure as well if you would like to message me your info.    Most of the deals we have been looking at are under 10%, so that seems in line with the current make up of what's out there.  Hope the little bit of info I offered helps.  Best wishes with investing in Dubuque!

Hi @Jason Peterson ,

Regarding  the $299,900 house on Alta Vista, don't give up on it yet.  See if it may be possible to get the heat and water separated so that you can have those utilities go to the tenants.  Being able to do this will just reduce your risk. 

Also, the owners could come down in price. They bought it in 2010 for $252,000. Even with an offer price at $260,000, 25% down, you could make 10% on your ROI given the possible monthly expenses. I also should have mentioned, I was using a 4.5% interest rate.

On the $199,000 properties, the numbers do not work for me, either.  If you could get rid of the utilities, that would be significantly less risk.  With 20% down, I see a negative cash flow or just about even. Part of the reason is because of the way I figure cap ex and maintenance.  It doesn't stay at a percentage.  I take into consideration the number of units and square footage as they explained in a blog post Bigger Pockets published (https://www.biggerpockets.com/renewsblog/2015/03/03/why-you-cant-make-money-on-30000-houses/).  I made some assumptions here, so you may want to run your own analysis for Cap Ex and Maintenance & Repair.  For the $199,000 property the cap ex and Maintenance & Repairs came out to be about 15% of the monthly rent, or $412.00.

Originally posted by @Jared Althoff :

Great advice all.  Jason, I'd be happy to sit down with you if you would like to analyze the numbers closer.  I think Sarah did a good job and I would look at things similarly and echo everything she offered.  If you would like, I can refer you to a couple of lenders as well as even show you the property as I am licensed in Dubuque if you decide you're ready to take that next step and do not have an agent to help you access the property.  The listing you are looking at is in a good location for rental and I like the mix of units that make up the building.  I am happy to send you the buyer's disclosure as well if you would like to message me your info.    Most of the deals we have been looking at are under 10%, so that seems in line with the current make up of what's out there.  Hope the little bit of info I offered helps.  Best wishes with investing in Dubuque!

Jared,

Yes - if you have the time to help me out as well. I've already received information on the house buyers disclosure. I have an appt. tomorrow with the bank to get approved. Let me know what your schedule would work out for. I am free most evenings after 4.

Thanks,

Jason

@Jason Peterson , my suggestion would be: also have a look at some single family homes, available for less than @ $70k, and that's even without trying to negotiate (which, you should). eg. https://www.zillow.com/homedetails/575-Almond-St-D... [I'm not promoting it or any other].

I don't know the various areas, and/or any other reasons why you'd want to buy 6 x $50k doors in one building, rather than (say) 6 x $50k doors scattered around the suburb.

But I do reckon you owe it to yourself to at least check out other available options.

All the best. Welcome to BP...

Originally posted by @Brent Coombs :

@Jason Peterson, my suggestion would be: also have a look at some single family homes, available for less than @ $70k, and that's even without trying to negotiate (which, you should). eg. https://www.zillow.com/homedetails/575-Almond-St-D... [I'm not promoting it or any other].

I don't know the various areas, and/or any other reasons why you'd want to buy 6 x $50k doors in one building, rather than (say) 6 x $50k doors scattered around the suburb.

But I do reckon you owe it to yourself to at least check out other available options.

All the best. Welcome to BP...

Brent - good point - however the area in 575 Almond is not the great and will not attract quality tenants. My current home is not too far from there. My thought is to find a place near a college to attract higher quality tenants. My other thought is to keep it all under 1 roof for less maintenance expenses. Thanks, Jason

Originally posted by @Jason Peterson :
Originally posted by @Brent Coombs:

@Jason Peterson, my suggestion would be: also have a look at some single family homes, available for less than @ $70k, and that's even without trying to negotiate (which, you should). eg. https://www.zillow.com/homedetails/575-Almond-St-D... [I'm not promoting it or any other].

I don't know the various areas, and/or any other reasons why you'd want to buy 6 x $50k doors in one building, rather than (say) 6 x $50k doors scattered around the suburb.

But I do reckon you owe it to yourself to at least check out other available options.

All the best. Welcome to BP...

Brent - good point - however the area in 575 Almond is not the great and will not attract quality tenants. My current home is not too far from there. My thought is to find a place near a college to attract higher quality tenants. My other thought is to keep it all under 1 roof for less maintenance expenses. Thanks, Jason

You just told us a lot more than we knew about your goals/strategy than we knew before. 

Which is why it's so hard to give generic one-size-fits-all answers to questions like yours!

Jason,

Definitely consider coming to our Dubuque REI group. As Sarah mentioned, we meet once a month and it would be great to have more people come. In a situation like this, you could even let us know ahead of time that you're looking at a property and we could all run numbers on it and bring our results to compare and discuss.

To give you a comparison of what's out there, I purchased a 6 plex downtown Dubuque last year at $108k. Keep in mind, however, that my rents are lower and my location is not as nice.

As for the utilities, they don't seem too far out of line to me depending on what the tenants pay. My tenants pay electricity only and my Utilities were around $5400 last year, however I had 2 units vacant that I was paying electricity on. So the water usage will certainly go up with full occupancy, but I wouldn't imagine it would be much more than the $6600 you have estimated. 

I ran the numbers on my spreadsheet and, at asking price, I came up with a 7.6% Cap and only $88.40/unit/month cash flow, which is below my minimum target of $100. In my opinion, it's not a great deal at current asking price, but we all have different ideas of what a good investment is. 

Jared is very knowledgeable as a Realtor and also as an investor in the area, so I'd definitely take him up on his offer to meet as he would be a very valuable resource to you in the Dubuque market. 

Let us know if you have any other questions!

Happy Investing,

Dan

Originally posted by @Dan Kelley :

Jason,

Definitely consider coming to our Dubuque REI group. As Sarah mentioned, we meet once a month and it would be great to have more people come. In a situation like this, you could even let us know ahead of time that you're looking at a property and we could all run numbers on it and bring our results to compare and discuss.

To give you a comparison of what's out there, I purchased a 6 plex downtown Dubuque last year at $108k. Keep in mind, however, that my rents are lower and my location is not as nice.

As for the utilities, they don't seem too far out of line to me depending on what the tenants pay. My tenants pay electricity only and my Utilities were around $5400 last year, however I had 2 units vacant that I was paying electricity on. So the water usage will certainly go up with full occupancy, but I wouldn't imagine it would be much more than the $6600 you have estimated. 

I ran the numbers on my spreadsheet and, at asking price, I came up with a 7.6% Cap and only $88.40/unit/month cash flow, which is below my minimum target of $100. In my opinion, it's not a great deal at current asking price, but we all have different ideas of what a good investment is. 

Jared is very knowledgeable as a Realtor and also as an investor in the area, so I'd definitely take him up on his offer to meet as he would be a very valuable resource to you in the Dubuque market. 

Let us know if you have any other questions and remember to search for Dubuque REI on Facebook and get hooked up with our REI group!

Happy Investing,

Dan

Thanks Dan! This is very helpful - I never knew a group like this existed in Dubuque. I will definitely come join the next meeting.

The owner of this property has a family who has lived there several years, a national guard vet who mows and does the snow removal in exchange for the garage and reduced rental. The other units are college kids who's parents usually cover the rent. The owner admits rent is possibly low (maybe a chance to increase it slightly at some point?). Never a problem getting renters with the location of the property.

I have a couple of questions.

1.) Is there a certain purchase price that does make this work? In my mind I was looking to target $285,000 for this property. Does that affect the numbers significantly? Not saying the owner would let it budge at this price, but I would be willing to walk away. How does $88.40 /mo fair on a deal though, is it an OK deal or terrible? What vacancy rate did you use? 10%? $6696 for utilities are the natural gas to run the boiler and the city of Dubuque - water,sewer, trash I assume. I am only going off the listing detail. I filled out a rental cash flow excel document that was fairly conservative and it says the return on investment (ROI) is 9.2%. I can share it with you via email if you want to take a quick look, I thought that was fairly decent. Maybe I had some of the values filled out incorrectly. insurance - $2670/yr. Total Rents bring in $50760 and expenses ($6696 utilities + $6746 taxes + $2670 insurance) + property management fee 10% , figure $200 mo , repairs/maint, $100 / mo accounting / legal. Purchase house for $285,000-$290,000 on a 20 year 4.5% loan

2.) When is the next meetup of the Dubuque REI group? I searched on Facebook "Dubuque Real Estate Investment" and did not find any groups.

3.) Are there property management groups in town you know of that are useful? I called Executive Management - there fees were 8% but they are full and not accepting new clients. Locators LTD is 10% and they charge half month rent each time the property is rented. My understanding is Executive Management did not charge this, so not sure how common it is. I am struggling to find someone who would provide the service. I am thinking of doing it myself as it sounds like one of the tenants does help out with some of the work.

4.) Regarding Dubuque Rental Rules - I plan to take the class this spring regarding rental regulations. Is there anything else I should know? I'm assuming there are yearly permit fees I need to factor in even if I don't manage it myself? 

I plan to take a look at the property tomorrow for further inspection. I have already been preapproved by Dupaco - anything else I am missing regarding my investigation? 

Thanks,

Jason

Hi Jason!  I feel like I'm a little late to the thread and most of your questions have been answered.  Congrats on getting out there and zeroing in on an actual property you want to take a stab at.  I have always been comforted by the idea, often said on BP, that every property has a price that will make it work for you.  You just have to find it.

Personally, once I set metrics on what I'm looking for in a particular investment, it becomes a lot easier to back into a target purchase price.  It sounds like you still have some uncertainty on what a good number for this property is.  We all run our expense projections a little differently, but generally unless a property has unique context, an owner should be able to convert somewhere from 40% - 60% of the gross rents into net income.

So let's say you're after cash flow primarily, and you want $100 / door in the end.  Here's how I would short-hand my numbers to get a pall-park purchase price.

Gross Rents are $49,000. I'll use a conservative expense percentage of 55% knowing I can likely do better. That puts NOI at $22,050. My more detailed Pro Forma, still conservative, is showing me projected NOI of $24,341.18. So I'm comfortable thinking I could at least get the $22,050 NOI. That equates to $1,835 income per month averaged over the long term.

You mentioned a 20 year note with 25% down.  A loan term of 25 years would make the cash flow goal easier to achieve, but using 20 years at 4.5% gives me an estimated cost of debt of $1,423 / month with a purchase price of $299K.  Cash Flow is $412 / month.  Fails to meet the $100 / door benchmark, so $299K is too high.  Playing with the numbers, it seems with a $100 / door cash flow goal and a 20 year note at 4.5%, you'd need to be around $260,000 purchase price for this to work.

Again, if $100 / door cash flow is the goal you might be able to hit that with a higher purchase price by modifying the financing terms to synergize better with that goal, such as a 25 year term. If you have an ROI goal that would change the focus of the calculations a little, but the general idea of finding what it takes to meet your personal goal remains the same. What do YOU want out of this deal? Some investors like banking bigger principal paydown and factor that into their numbers. It sounds like you haven't defined exactly what you're looking for yet, but once you do it should get easier to find a hard number to buy at that you can be comfortable with.

You've done excellent work so far digging into this deal!  Very excited to hear how everything works out!  There's been such a good discussion I'm wishing I was local so I could show up at the Dubuque RE meet myself!

Jason, unfortunately Dubuque has a huge hole when it comes to a solid property management company.  As you have found out, they are full and fairly costly.  The challenge is they are so far overextended and do not have enough staff in my opinion.  I would suggest trying to manage this on your own if you're up for the challenge.  It would be a good learning opportunity for you right away and can better help you when it comes to interviewing a property management company and addressing how hands on you want to be down the road.  Especially if the property in its current state needs to be stabilized (rehabbed, re-rented, new policies and procedures instituted, etc).  When you take on a new property, there is typically arbitrage or tenant vacancies mainly as a result of a different management style coming in.  This is not necessarily a bad thing as you want things ran the way you foresee that they should be ran and there is an upfront cost to that.  Just be sure to account for it or set $ aside for that as a vacancy expense line item.  I hope that helps.  If you need anything else, don't hesitate to reach out.

@Jason Peterson I use Pregler Properties for my management.  Mark Pregler is actually out of Waterloo, but grew up in Dubuque and I have been very satisfied with his knowledge on tenant and landlord laws.  We had to have an eviction right after we purchased the property and he did everything.  There was no headache for me.  But, as Jared mentioned, I didn't learn anything either! :) 

You can look him up online, his number is listed there.  

He does charge 10% rent, half month's rent to fill and 10% on all services, such as, a plumber needs to come out, the plumber charges pregler properties $50, Pregler Properties is going to charge you $55.  I don't mind the mark up.  He is also willing to let you go out and fix up the property and then, of course, there would not be a mark-up.

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