I'm a Seattle based newbie. I am planning to buy my 2nd fourplex, but this time in South Hill Puyallup, WA. I am new to Puyallup area, don't have much idea about the upside potential of the location. Does anyone have any idea about it?
3 units are in good shape but have to do some renovation on the 4th unit. Building condition is average I think, roof is ~15 years old (composite roof). So, may also need exterior painting + roof replacement. Also, I wanted to get a second opinion on what you think about the numbers:
- PP : $650,000
- Rent (after repairs): $1275*4 = $5100
- Vacancy (6%) : $306
- Maintenance & Repairs (10%): $510
- CapEx (5%): $255
- Utilities (10%): $510
- Taxes: (10%): $510
- Insurance: $200
- Management: $0 - planning to manage myself for now but may hire PM down the line (1-2 years later)
- Total Expenses: $1975
- NOI: $3125
- Mortgage (PI) (@ 5.5%): $2514
- Cashflow: $539 / month = $6468 /year
- Down (25%) : $162500
- Closing costs: $13,000
- Repairs: $35000 (don't know what repairs are needed yet)
- Total OOP: $210500
- COC return: 3.07%
Do my estimations look fine for the location? Am I missing anything? Thanks!
Puyallup is a great area as long as you don't try to live there and work in Seattle or something. That traffic is a nightmare. But the town itself is pretty cute. Your numbers seem pretty reasonable for this area but I would suggest putting in a line item for property management. go get some quotes. Even if you're going to do it yourself, you should have monthly budget to pay yourself to do it. That way, when/if you burn out on it, you'll be able to afford it if you planned it out from the beginning.
Seems like the numbers might be tight for that as it sits.
The other thing I'd say is that you should buy it at a price that makes sense as is. What are the rents now? Does it cashflow as-is with no repairs or changes? That's the kind of deal I'd want to make. I don't want to pay for a future pie in the sky valuation. I'd want it to make sense out of the gate.
All that said, everyone has different plans and goals for their real estate investments. Everyone buys real estate for different reasons so what makes sense to one person might not make sense to someone else.
Insurance expense seems really high if it is a single building 4-Plex. I have a client who just got insurance on a Tacoma quad for around $100/month. If it’s two buildings it will generally need two policies and will be more expensive, but single building assets offer a distinct advantage when it comes to insurance.
Another friendly suggestion: CapEx and Repair expense estimates should be property specific as opposed to a blanket percentage. Contractors don't charge based on your gross potential rental income. They charge based on the scope of work. For example, a duplex with two 2BR/1BA Units in North Tacoma might rent for $1500 per side while a duplex with two 2BR/1BA in Parkland night rent for $1200 per side.
If you base CapEx and Repairs/Maintenance on a percentage, you're going to underwrite 25% more for the North Tacoma property than the Parkland property. But does that actually make sense? You can hire the same contractor who will shop at the same Home Depot to buy the same toilet or can of paint or sheet of drywall for either property. This is why it helps to work with someone who knows the area and owns rentals in the area.
Same with utilities underwrite the actual cost, not a percentage.
One last thought: Don't forget about the tax benefits with some of these larger properties. I am no CPA (so please do not take this as tax advice merely the personal pontifications of a fellow investor), but the new Trump tax laws and the reduction in pricing of cost segregation studies make owning investment real estate so much more valuable. If you are a high income earner and someone in your family can qualify as a real estate professional, you can take advantage of the accelerated depreciation benefit and pocket more of what you earn. To clarify, I’m not saying that anyone should buy investment real estate solely for the tax benefits, just that it is an advantage that often does not show up on the spreadsheet...at least not until April 15.
I have 2 duplexes in South Hill. In the four years that I've owned them, there has been a large response every time I have had a vacancy. I lived in the area for over 30 years and know it very well. It has always been a desirable area.
@Aaron Nelson Do you know what insurance company your client is using? Or possibly have a suggestion of your own? My rates for both duplexes went up approx. 25% this year and I'm looking for an alternative. Thanks!
@Geordy Rostad @Quito Keutla Thanks for the insight. That does make sense. And I also incorporated @Aaron Nelson 's advice. So, with PM included, it comes out to be about 1% COC return (with existing rents). And I can potentially get more by fixing the 4th unit and increasing rent.
@Curt McClements good to hear about the vacancy rate! Do you know if in that area is it possible for landlords bill back utilities (electric/W/S/G) to tenants or is it included in the rent?
@Kevindra Singh My tenants pay all of their own utilities.
Hi @Curt McClements , try Geico. If that doesn't work, shoot me a PM and I can send you the name of an insurance broker.
I agree with @Aaron Nelson . I use Geico Homesite for my current owner occupied 4plex. And the insurance is about $163 per month.
I tried to get a quote from Geico and was told that they don't offer landlord insurance in Washington State. Maybe owner occupied is different.