help running 4 plex numbers...

Commercial Real Estate Investing
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help running 4 plex numbers...

Craig Montesano
Investor · Northwest, PA · Member since 2013 · 107 posts · 24 votes

4 plex in a decent area. All units are 1 bedroom 1 bath. Brick building with a newer rubber roof and a carport in the rear that could use some work.

asking - $105000 (price has steadily been decreasing...thinking more in the range of 85K to 95K)
Each unit rents for $395/month

Thinking of a 15 year fixed mortgage at 3.5%
25% down
property taxes - $3500 / year
Insurance - $1000 / year
Management fee - 10% of total rents (monthly)

I ran numbers and am on the fence.

Any input is much appreaciated

Thanks

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Harry M.
Real Estate Investor · Dallas, TX · Member since 2010 · 449 posts · 173 votes
13y

Craig Montesano - what numbers are you coming up with? It looks like a pretty good deal to me.
Price - 105000

Down - 26250 (25%)
Closing, etc - 3000
Total cash invested: 29250

Gross rents - 1580
Expenses - 790
Debt service (30 yrs, 4.5%) - 399
Cash flow - 391
Cash on Cash return - 16.04%
Total ROI (includes mortgage paydown) - 20.38%

By the numbers, that's a really good deal. The only reservation I'd have is that at 395/month, you could be getting some pretty rough tenants.

-Harry

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  • Craig Montesano
    OP
    Investor · Northwest, PA · Member since 2013 · 107 posts · 24 votes
    13y

    few questions I have...how do you figure in vacancies? also not sure how to figure misc. expenses?

    With vacancies the 15 yr mortgage does not leave much cashflow...may have to look at 30 yr. at a little bit of a higher rate

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  • David Gellner
    Seattle, WA · Member since 2012 · 51 posts · 9 votes
    13y

    Hey Craig Montesano, check out this post http://www.biggerpockets.com/renewsblog/2010/06/30/introduction-to-real-estate-analysis-investing/

    Hopefully that helps you. A good rule-of-thumb is the 50% rule: Expenses (NOT including the P&I payment) will take up half the gross rent.

    Gross Rent: 395 x 4 = 1580
    50% Rule: 1580 / 2 = 790
    P&I: (You'll have to add this in)
    Cash Flow: Whatever is left after the P&I payment.

    Most investors aim for a minimum of 100$ a door/unit.

    I'd start there and then see what some more experience investors think.

    Good luck!

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  • Harry M.
    Real Estate Investor · Dallas, TX · Member since 2010 · 449 posts · 173 votes
    13y

    Craig Montesano - one question: are all the utilities paid by the tenants, or some by the landlord? That's a big factor, especially somewhere with cold winters like PA, if the heat were paid by the landlord. Also, the 50% rule that David mentions above assumes that the tenant pays all utilities. You have to add more to the expenses if the landlord pays utilities.
    -Harry

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  • Craig Montesano
    OP
    Investor · Northwest, PA · Member since 2013 · 107 posts · 24 votes
    13y

    yes, I forgot to add tenants pay utilities

    Great link David....lots of good info.

    using the 50% rule...looks like something I should walk away from

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  • Harry M.
    Real Estate Investor · Dallas, TX · Member since 2010 · 449 posts · 173 votes
    13y

    Craig Montesano - what numbers are you coming up with? It looks like a pretty good deal to me.
    Price - 105000

    Down - 26250 (25%)
    Closing, etc - 3000
    Total cash invested: 29250

    Gross rents - 1580
    Expenses - 790
    Debt service (30 yrs, 4.5%) - 399
    Cash flow - 391
    Cash on Cash return - 16.04%
    Total ROI (includes mortgage paydown) - 20.38%

    By the numbers, that's a really good deal. The only reservation I'd have is that at 395/month, you could be getting some pretty rough tenants.

    -Harry

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  • Craig Montesano
    OP
    Investor · Northwest, PA · Member since 2013 · 107 posts · 24 votes
    13y

    Thanks Harry....I was able to run my numbers fine on my single family homes, but this one is throwing me for a loop. At first I thought it was a good deal, then I didnt. confused???

    Your numbers helped alot.

    I think the problem is I was concentrating on a 15 year fixed at 3.5% and with Prin., int., taxes, ins. I was coming up with a $880 (roughly monthly payment)

    I need to look at a 30 year. Looks like a better deal going that route. Does your 399 mortgage inclue taxes and ins?

    ALso, could you recommend a good mortgage calculater.

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  • Craig Montesano
    OP
    Investor · Northwest, PA · Member since 2013 · 107 posts · 24 votes
    13y

    Think the sellers are looking for a quick sale....may be able to get for around $85K.

    Yeah, I know $395/month is pretty cheap and could attract some riff raff. 3 out of 4 of the units are currently rented. When tunover occurs I am think of bumping rent to $425ish. That seems like the going rate for 1 bedroom units in that area

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  • Troy Fisher
    Specialist · Kirkland, WA · Member since 2013 · 1k+ posts · 817 votes
    13y

    Are you managing yourself or using a pm? It might not be worth the effort if you need to deal with these types of people by yourself the first property out.

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  • Harry M.
    Real Estate Investor · Dallas, TX · Member since 2010 · 449 posts · 173 votes
    13y
    Originally posted by Craig Montesano:
    Thanks Harry....I was able to run my numbers fine on my single family homes, but this one is throwing me for a loop. At first I thought it was a good deal, then I didnt. confused???

    Your numbers helped alot.

    I think the problem is I was concentrating on a 15 year fixed at 3.5% and with Prin., int., taxes, ins. I was coming up with a $880 (roughly monthly payment)

    I need to look at a 30 year. Looks like a better deal going that route. Does your 399 mortgage inclue taxes and ins?

    ALso, could you recommend a good mortgage calculater.

    Hey Craig, the 399 mortgage payment I came up with doesn't include taxes and insurance. That went into the 790 I put for expenses.

    I just ran it with a 15 year loan and 3.5% interest, and the P&I part of the mortgage goes up to 563, cash flow down to 227, for 9.3% cash on cash, but 23.2% total ROI when you factor the mortgage pay-down.

    My opinion is that 15 year mortgages don't make a whole lot of sense for investing in RE. The difference in interest is usually only around 0.5%, but in return you're agreeing to make this extra principle payment for 15 years. That extra principal payment would make a much better return if it was used towards the down payment on the next property. And there's nothing stopping a person from reaching a point where they have enough properties, and then voluntarily paying down the principal on the mortgages. That just seems like a lot of flexibility (and potential return) to give up for about an 0.5% difference in interest rate.

    Regarding mortgage calculators. I'm not sure if we're supposed to post outside links here, but if you google "mortgage calculator" or "amortization calculator" or "amortization schedule" it will come up with a bunch of them.
    Do you have excel or open office? If so, you can you can use the PMT function to figure it out too.

    -Harry

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  • Tevis Verrett
    Lender · Woodland Hills, CA · Member since 2013 · 364 posts · 115 votes
    13y

    Hey Craig:

    Im a noob around these parts and if my .02 helps, I am tickled to bring it.

    A coupla things stick out:

    at some point, the deal becomes golden and the math makes sense. you toyed with 85K ish being a possibility. Understand Mike's 50% rule and discover what that buying opportunity number means.

    What about below market rents? If you can boost the rents over time to squeeze this puppy into the positive cashflow side, then this dog will hunt.

    What is the condition to the property, and why is the seller so eager to dump it, er sell it to you?

    Dig deeper brother dig deeper, I am interested in folllowing your journey.

    Blessings all in your walk,

    Tevis

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  • Craig Montesano
    OP
    Investor · Northwest, PA · Member since 2013 · 107 posts · 24 votes
    13y

    Even with 30 year mortgage at 4% (which I think is the rate my local bank would give me) it seems like a sour deal. I would escrow taxes and ins. which make the monthly payment about $730.

    Gross rents are 1580
    Property manager - $158 (10%)

    With half vacancy rents are only $790, which would barely cover the mortgage.

    Im I looking at this wrong???

    Thanks guys for all the help and insight...

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  • Craig Montesano
    OP
    Investor · Northwest, PA · Member since 2013 · 107 posts · 24 votes
    13y

    am i calculating mortgage right?

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    For rents around $500, there is a quick and dirty rule of thumb called the "2% rule" - rents should be 2% of acquisition costs. That would make total acquisition costs (including repairs and rehab) a max of $79K. Now for rents below $500, a higher percentage is more appropriate, since the $100 cash flow per door is a bigger chunk of rent. And those lower rent tenants can be more management intensive ...

    And you don't have to exactly follow any rule of thumb ...

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  • Ryan Halverson
    Multi-family Investor · Alpharetta, GA · Member since 2013 · 76 posts · 13 votes
    13y

    Here is my analysis, your tax rate seems... high

    a 30 year mortgage increases your door profits to 105.47/117.51

    I would not take it.

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  • Craig Montesano
    OP
    Investor · Northwest, PA · Member since 2013 · 107 posts · 24 votes
    13y

    Thanks Ryan...very cool spreadsheet. Where can I find that?

    As much as I dont want to, I think I will need to walk away from this one.

    There are a few duplexes in the area that might be more profitable.

    On the 15 year mortgage note...I did my 2 single family homes at 15 years which had a lower rate. I wish Id done the 30 year....Id have twice the cash flow. oh well I guess there has to be some kind of learning curve and in the long run I will save some dough

    Thanks guys for all your insight...this site is great.

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  • Ryan Halverson
    Multi-family Investor · Alpharetta, GA · Member since 2013 · 76 posts · 13 votes
    13y

    Craig Montesano
    That's the spreadsheet I put together for analyzing properties, you can find it in my fileplace
    http://www.biggerpockets.com/files/user/RHalverson/file/mf-rei-analyzer-v2

    Lots of Real Estate Investors will tell you it's about leveraging the money you have or get lent. Many people get hard money loans at 12-15%, rehab a house, and then either refi the house at a higher appraised value to pay off the hard money loan or sell it quickly to pay back the loan in full. If the difference between 15/30 year loans was 3.5% and 8% I can bet more might do a 15 year loan but a half percent is negligible when you can leverage that half percent elsewhere for way more ROI.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    Ryan Halverson - what "taxes" does that spreadsheet refer to? If those are supposed to be the property taxes, then your sheet wouldn't do the right thing in many areas. For example, in my area, taxes are based on the assessor's valuation of the property (and not on the actual sales price as might happen elsewhere), multiplied by a millage rate; essentially, the taxes are fixed except that they raise the millage :) Might be something for you to consider as you evolve that spreadsheet.

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  • Ryan Halverson
    Multi-family Investor · Alpharetta, GA · Member since 2013 · 76 posts · 13 votes
    13y

    Steve Babiak I did a little research before making it, nothing comprehensive. I understand it is generally 40% of assessors value multiplied by the millage rate? Either way 3500/year for a 95k property is pretty high. Maybe the assessor has your property appraised from a long time ago?

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    Ryan Halverson - the assessor's value is not necessarily "old"; they will increase for any improvements where a permit was pulled and that improvement changed their valuation. Just saying that any fixed percentage being calculated will likely be inaccurate when compared to the actuals from the assessor.

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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    I believe that was income taxes. The rate was approximately 28%.

    That said: That is why you appeal your property taxes.

    -Steven

    [email protected]224-381-2660
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  • Richard Sanderson
    Appraiser · Portland, OR · Member since 2012 · 44 posts · 13 votes
    13y

    One way to approach the real estate tax cost (as apposed to personal property tax on furniture & equipment) is to use the approach that assessors often use when they value income producing properties. Don't have a expense item for property taxes (that's what the assessor is estimating so he doesn't take property taxes as an operating expense. BUT add it to the capitalization (CAP) rate. For example, if investors are looking for a return of 10% and recent sales to the net operating income (NOI) for those same sales indicate them same cap rate (of course make sure the NOI does not include real estate taxes as an expense) and real estate taxes in the subject property's location represent 2% of market value the resulting capitalization rate for comparison purposes would be 12%. This also help when comparing competing properties for sale or as comps from various taxing districts, even region wide.

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