Good deal?

Question

Hi all. We're new to real estate investing and getting ready to look at a 4 unit locally. Great community, top schools, upscale area. They're asking 325k (price just dropped 15k). Stated gross income is $41k per year and net is 31k. We would probably put 20% down and go for a 15 year mortgage at a bit under 3%. I've read through a number of posts and was incredibly impressed with everyone's knowledge and willingness to help. What are your thoughts? We haven't walked through yet but will this week. It looks pretty clean and is stated to be fully occupied. Great curb appeal too. returned no results.

Uwe S. · Answer

Dale welcome to our BP world,

to speak out my only thought I had after I read your post: "If you want to lose money in this investment deal then buy it!"

For a decent investment the price of this propertie must be $210,000 thats a 10% CAP with our 50% rule (50% expenses of gross income). Any other speculate on this propertie like running numbers is a waste of time. I dont see any chance for you to drop this price to $210,000 so no deal for me and to answer your question it is an bad deal in my mind.

If you living in Cincinnati there will be more opportunities the only problem is to find it but I have no worry.

-Uwe

Uwe S. · Answer

Like I said Dale I don't see any ample scope at this propertie price.

-Uwe

Dale Tucker · Answer

WYO - haven't made it to FT yet.

Uwe S. · Answer

Dale,
which propertie, the first in WY or this in Finneytown?

-Uwe

Dale Tucker · Answer

We took a look at the property  in person - pretty good shape visually.  We also learned that a "low" offer was turned down.  We told the agent that ours would likely be low too because the numbers just don't add up (and I suppose it doesn't help that a broker is involved because that means there's a commission then too - no offense to brokers  :-)  ).  We are going to keep looking for now.

Ziv Magen · Answer

What an enlightening thread, thanks all! :)

Love how it actually comes down to 5%...this is exactly why we like to specify "net Pre-tax" after every yield calculation on our website. Make sure everybody's on the same page.

Jeremy Cyrier · Answer

You can do better than this deal.  The problem with these 4 unit investments, unless you're seeing a much healthier cash flow, is that it takes one capital expenditure to knock out your positive cash flow and destroy your returns.

Can you buy something larger that gives you a better benefit of scale?

Joel Owens · Answer

"We are thinking 15 years based on our current ages and when we would want the lump sum from a sale."

Get the 25 year amort. and just throw extra money at the payments.

You still pay it off at the same time but are not saddled with a much higher debt service payment with the 15 year amort. schedule with the lender.

Dale Tucker · Answer

Thanks Joel.  We are thinking 15 years based on our current ages and when we would want the lump sum from a sale.  We are not sure about purchasing something bigger than a 4 plex given it will be our first one.  I did get a break down of all repairs and upgrades over past few years as well as income statements.  I agree that this property was purchased at the top of the market too.  We are still going to take a look if anything for the experience of it all.  I did see another property online in nearby Finneytown that I'm going to investigate.  4 plex asking 144,900 with gross income at 31200.  Each unit rents at 650.  Don't have any more info at this time.  You all have been great...

Joel Owens · Answer

Dale,

Why are we talking about a 15 year mortgage??

The term of the mortgage and amort. (payment schedule will be different).

The payment is based off the amort. and the interest rate and then taxes and insurance etc.

I would take a 30 year  mortgage amort. even if the rate was 50 to 75 basis points higher if you are holding long term.You want to have the flexibility.

The owner is saying costs are running about 25%. This owner simply bought at the top and is unrealistic which is why it is sitting.The 15k reduction doesn't mean anything if it was already 100k or more overpriced.

The only way they are running costs in the 25% range is if they are deferring maintenance on the property.If you have a size able chunk of money like you are saying I would forget the 4 unit stuff.

I would buy a larger property where you control the look and feel of the development and will have more upside in equity down the road and also land for possible redevelopment.

If you own a little 4 unit among a bunch of other 4 unit properties you generally are limited in resale scope and also are at the mercy of what the other investors who own around you are doing.So if they drop the rents,do a short sale or foreclosure,do not make repairs,put shoddy tenants in to just fill it up then it will affect your property no matter how well you keep yours.

Just things to think about.Good Luck

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