Am I being too conservative in my analyses?

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Am I being too conservative in my analyses?

Heather R.
Investor · Seattle, WA · Member since 2014 · 58 posts · 15 votes

Hello,

I am currently evaluating a few markets, Indianapolis and Tacoma WA to purchase a small multi-family in the next few months. I live in Seattle so Tacoma has been on my radar due to its proximity. Appreciation in the Tacoma market will likely outpace Indianapolis and the properties are much more expensive. In Tacoma, competition has skyrocketed and everything is going for asking price or above. 

I went to look at a fourplex yesterday in a good area, the building needs some work but nothing major I can see. I have been running the numbers and it just doesn't make any sense to buy based on them - am I missing something? Am I being too conservative? Or is this truly not a good deal?

Building - 4-plex

1-bedrooms, 750ft

Laundry in basement (not coin op)

Storage in basement

Parking

Asking price: $389950

25% down: $97487.50

Amount financed: $292,462.50

At 4.5% interest rate, mortgage payment would be: $1481/mo

Current rents: $650/unit

Based on market, could potentially move to $750-800/unit with some updating

Using $750 (to be optimistic) - $3000/mo in income

Property management @10%: $300

Leasing fees: 1 mos rent: $3000/yr or $250/mo (if all the units needed to be leased during a year @ 1 mos rent per)

Capex reserve @10%: $300/mo

Maintenance/repairs @5%: 150/mo

Vacancy @5%: $150/mo

Property taxes: $452.83/mo

Electricity (for basement, laundry): estimating $100/mo

WSG (currently landlords responsibility): $320/mo (estimated based on Tacoma's pricing)

Insurance: $70/mo

Total monthly expenses: $2092.83

$3000 (income) - $1481 (mortgage) - $2092.83 (expenses) = -572.83/mo

Am I being too conservative in my numbers? There are things that could be done to reduce some of the expenses/increase income, like putting coin-op in and implementing RUBS. But I am also not considering the updating that would need to be done to the building which would be thousands.... I don't think I am going to move forward on this place unless I am just really screwing up some portion of this analysis. 

Any feedback is appreciated! Thank you!

Heather

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Matt Lefebvre
Real Estate Broker · Manchester, NH · Member since 2014 · 630 posts · 420 votes
8y

@Heather R. Here's the very quick way that I use to analyze a deal without investing too much time budgeting expenses:

$650/mo x 4 units = $2600/mo = $31,200 (don't buy a property for a higher price based on future rent projections... always use the current numbers unless you're treating the deal as a flip).

$31,200 GAI x 50% operating expenses = $15,600 NOI (operating expenses usually run 50% with separate utilities, and I add on 5% if electric is included and 5% if heat is included)

$15,600 NOI / 8% Cap Rate = $195,000 purchase price (this is the number you should purchase the property for if you're looking to attain roughly an 8% ROI. An 8% return on your investment translates to approximately 12 years to pay yourself back for your initial investment in the property. I certainly wouldn't want it any less than that).

Now if the purchase price based on the quick formula I run is somewhat close to what the asking price is, I'd probably do a little bit more digging and run some more in-depth numbers.  But when I'm seeing a $195K purchase price versus a $390K asking price... that's a pretty big gap.

This is all based around cash flow and what you can do to maximize your dollars that you put in.  I never recommend people purchase based on projected future appreciation or projected rent growth.  If there is forced appreciation that can be made to increase the value of the property well over the purchase price and the cash flow can support it, then I might suggest a slightly higher price with the understanding that this needs to be treated less like a rental property and more like a flip.  

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  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    8y

    If the potential rent is just $750/1 br. Move on to a duplex larger unit in higher rental neighborhoods. 

    0Reply
  • Scott S.
    Tacoma, WA · Member since 2014 · 78 posts · 92 votes
    8y

    I agree with @Account Closed those $650 rents are way too low for that area.  $800-$850 rents are typical for a 1bed 700 sq ft in that neighborhood (it's technically Hilltop not North End).  With updated kitchens, carpet, etc., it could get $900-$950.

    Someone simply doing their own property management and raising the rents could make the numbers work.  Hence, the multiple offers within the first 24hrs.

    1Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    8y
    Heather R. I would bump up repairs to 10%. I have one rental in Indy and would say that 650-800 per unit rents are getting in that danger zone for bad tenants. Be careful.
    1Reply
  • Account Closed
    Rental Property Investor · Everett, WA · Member since 2013 · 389 posts · 222 votes
    8y

    @Heather R. congrats on such a popular post! You definitely hit a hot topic question here on the forums. To answer your questions: each fourplex we own ranges from $1500-$1800/mo for insurance. Then yes, 10% management fee would more than cover management + leasing fees.

    2Reply
  • George SkidisPro Member
    Rental Property Investor · Belleville, IL · Member since 2017 · 875 posts · 529 votes
    8y

    Conservative is the key to success in real estate investing. Negative cash flow will sink you. You can never be too conservative when making a purchase. However, Before turning the deal down look at a few other things to be sure. 

    1. Can you raise the rents to cover the deficit.

    2. How much does the coin op laundry earn. Can you raise the laundry price to make it profitable.

    3. Are there other opportunities to be had? Renting storage lockers on premises to residents in addition to their lease? Air B&B? Is there anything else that can make up the deficit?

    4. Is the earned income of you and spouse if married less than $150,000 per year. If your earned income exceeds $150,000 you might not be able to write off any losses. If under 150 K would the tax breaks on the loss lower your personal income tax burden enough to justify it? Speak to the person who prepares your income tax return to find out. Maybe look for someone who is also an investor they may have a more"personal" knowledge of the benefits. 

    Multiple streams of income from one property may make sense. Could you rent space for a billboard or cell phone tower?

    You have done MOST of your due diligence. Time to finish the job.

    1Reply
  • Heather R.
    OP
    Investor · Seattle, WA · Member since 2014 · 58 posts · 15 votes
    8y

    @Matt Lefebvre Thanks for the motivation - I am concerned that I am missing out on 'deals' but you are right; mediocre deals would hinder my goals! And the reality is that everything in Tacoma and most of the Seattle area (on the MLS at least!) is going for over what would make it a great deal...

    0Reply
  • Heather R.
    OP
    Investor · Seattle, WA · Member since 2014 · 58 posts · 15 votes
    8y

    @Aaron Nelson I definitely need to develop a better understanding of how to estimate capex expenses for a home. You are definitely right; percentage is not the best way. And even during a first pass could throw off estimates of whether the deal is a good one or not...

    0Reply
  • Heather R.
    OP
    Investor · Seattle, WA · Member since 2014 · 58 posts · 15 votes
    8y

    @Oren K. Wow! This gives me a really good idea of how to estimate this. It looks like you take into consideration square footage which I hadn't really thought about... As a first pass, do you usually just estimate or take an average for that type of home? Or do you use a range? Do you usually assess the remaining life of an item during the due diligence period? Thank you for this detailed breakdown!

    0Reply
  • Heather R.
    OP
    Investor · Seattle, WA · Member since 2014 · 58 posts · 15 votes
    8y

    @Account Closed Thanks Grant! I hope you mean $1500-1800/yr on the fourplex... phew! (I am assuming you do...) 

    0Reply
  • Heather R.
    OP
    Investor · Seattle, WA · Member since 2014 · 58 posts · 15 votes
    8y

    @George Skidis Thanks George! I passed on this opportunity but this has provided me a huge learning opportunity thanks to all of you. Based on the answers here, I could definitely have raised rents considerably. I could have put in coin op. There were big lockers in the basement that were currently included in the rents; I suppose I could have rented those out for a bit extra as well. Not sure about AirBnB, although I am not opposed to trying it! I just purchased the book on tax strategies by BiggerPockets - I hope to understand a bit more about how I can maximize the tax portion of the equation by reading this. I personally would probably avoid billboards and cell phone towers for curb appeal for my tenants, but I get you larger point - find more income streams! Thank you for your thoughtful feedback!

    0Reply
  • James Lusk
    Rental Property Investor · Lake Forest Park, WA · Member since 2015 · 127 posts · 57 votes
    8y

    @Heather R. I agree with @Account Closed. I just sold a 4 plex in the Midland neighborhood of Tacoma which doesn’t demand the same rents as hilltop. Our 2/1 800sf units were going for $950 real fast. Our insurance was just under $100/mo. Also, at our 12 plex in the Tillicum neighborhood of Lakewood, our 1/1 500sf units are going for $800/mo (granted they are freshly remodeled). I highly recommend getting your advice, when it comes to numbers, from those who invest in your area of interest. Best of luck!

    2Reply
  • Heather R.
    OP
    Investor · Seattle, WA · Member since 2014 · 58 posts · 15 votes
    8y

    @James Lusk Thanks James - it is definitely valuable to know investors in your area!

    0Reply
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