4-plex: Help and Insight Appreciated!

[Jimmy Park]

Hi all - wanted to get feedback on a particular deal, would really appreciate any input as I would be a first time purchaser. Details below, numbers are approximate:

+ Asking Price: > ~$400,000

+ Rental information (all 3 bdr 2 ba, 100% occupied currently): 2 units at $950/month, 2 units at $1,000/month >> Gross Rental Income = $3,900/month

+ Financing info: conventional, 25% down, 30 years >> $1,700/month

+ Property Tax: ~$760/month

+ Insurance: ~$440/month

+ Other operating expenses: seller shared that it's ~$350/month

So it looks like assuming a deal at $425k, I'd be looking at ~6.5% cap rate.

(1) Are the P&L items reasonable?

(2) What are the important questions to ask? (I know I need to ask for the historical schedule E's, schools are highly rated in the area, but unsure about what the most important details would be in making a purchase)

Thanks for your help in advance!

Jimmy

[Sharon Tzib]

I'm still picking my jaw off the floor on the $400K (or is it $425K, I'm confused) for a 4-plex - that's $100K/unit - yikes! And with $3900 gross income, doesn't even make the 1% rule. I know in Houston you can find nice 4-plexes with minimal repairs in respectable areas for around $200-250K. You may want to do some more submarket research and see if you can find a better deal than this.

Also, I can almost guarantee you the seller's numbers are low. Using the 50% rule, expenses are more than likely closer to $1950; if you have to pay any utilities, use a factor of 60% until you can verify all expenses. Make sure you include PITI, Vacancy (I'd use 10% to be safe), Repairs, Prop Mgmt, Cap Ex and Landscaping.

Get the last 12 months of utility bills from the utility company itself and verify those costs. Also, how old is this building and are repairs needed immediately or in the near future? You need to see copies of the rent roll, leases, security deposits on file, bank statements, credit card statements, operating statement, Schedule E's, etc. If there is a PM, call and talk to them about recent work orders or work that is on the to do list.

I'd call one or two other PM's and find out about the desirability of the area and how easy it is to rent, and verify if the rents seem reasonable to continue. Are they offering any concessions in the area or do things lease up quickly. Good luck!