Advice on Potential 5 Unit Deal - Does it make sense?

Question

I am looking at a 5 unit townhome building (each unit has been separated in condos, each unit pays their own utilities).   Each unit is 3 bed/2.5 bath and has a attached 2 car garage.  Building was built in 1999, and well maintaned.  100% occupied and good rental history last 3 years.

Gross per month is around $5200

I may be able to negotiate down to $500,000 for this property.  Using the 50% rule I calculated that this property would cashflow around $450 ($5200 / 2 = $2600 - $2147 (Principal & Interest @ 5% assuming $400,000 loan) = $453

One negative is that the property taxes seem to be high, running about $11,000 per year for the building.  There is also maintenance with snow plowing and lawn care since the building is on a 3/4 acre lot.

How does this deal seem?  Any opinions would be greatly appreciated.

George Paiva · Answer

Will you be collecting HOA?  That would pay the maintenance right?

Ken Kim · Answer

Seems you covered the bases.  Snow cleaning is annoying and really cut into monthly cash flows, but it is a lot cheaper than a lawsuit injury I guess.

I am not sure in your area, but I thought that anything above a 4 unit was considered commercial so different loans, rates, etc.  But I am guessing you already took that into consideration.

So if you are looking for $1,638 vs $100K down return then sounds like a go.

Maximus Decimus · Answer

Thierry, in the US, no you cannot offset property tax with the interest payments, however I believe there are some tax deductions you can have.

Does anyone else have any other advice on the property?

Thierry Van Roy · Answer

This may be a stupid question, but can't you offset property tax with your interest payments?

Maximus Decimus · Answer

The $453 cashflow was using the 50% rule.

In reality if I manage it myself here is the breakdown I am looking at

Purchase Price: $500,000

$100,000 (20%) down - Loan amount $400,000

$5200 gross revenue - 7% vacancy ($346) = $4854

$4854 - $2150 (P&I) = $2704 - $916 (Taxes) = $1788 - $150 (Insurance) = $1638 cashflow per month.  This is before any maintenance, etc.

They used granite countertops in the units.  The units are above average for the area.  Most other multi family properties are much much older (1980 or before).  One of the reasons we looked at this building was that it is newer and it is in a good area (very good school district, good location, etc).  It is located in a major city in Ohio.

Jay Orlauski · Answer

my math may be off on this - or perhaps I am missing something , but at $453 / month cash flow - that's $5436 a year assuming you manage the units yourself. If taxes are $11,000 a year - it seems like you would be paying $5500+ a year to hang on to the place. Are you looking for long term capital appreciation? Otherwise , it seems like you would be upside down on this for awhile - also - do your calculations account for a down payment of at least 20% ? It could make a difference in the numbers your quoting. Hope this helps you flesh it out a little

Maximus Decimus · Answer

Joel, sorry about the miscommunication, the owners did a condo conversion to separate out the units.  As the owner I would not have to pay any association fees or anything like that.  I think they did it just as an option if they wanted to sell the units individually.

I am going to check out the property to see the quality and condition of the finishes.  I will also check to see how the water heater/ac units look as well - I will bring my contractor with me.

The agent did say that the roof is 5 year old.  There was a very large storm that came through the area, a lot of properties roofs were damaged and insurance replaced the entire roof.

Joel Owens · Answer

1. Need to look at how high property taxes have been rising each year in relation to increases in annual rents.

2. Property is built in 1999. That is going on 15 years old. Sellers books will show minimum expenses probably. You on the other hand will run into water heaters, heater and a/c units, roofs etc. with a ton of big ticket items eating cash flow.

3. Are the kitchens and baths the cheap pressed board crap or real wood?? If the pressed board at that age they will start crapping out and will need replacing versus real wood you can sand down and repaint.

4. Let's say rents with concessions are 5,000 so 60,000 a year. At 500,000 that is only 1.2 rents to sales price which is not very good.

5. I do not like condos as you can get eaten alive by association fees and have not control over surrounding buildings.

Hope it helps. Me I would pass.