Good afternoon BP!
So there's a 4 plex rental property in my town that has been on the market for about 6 months now and I wanted to ask you all some questions on whether or not I should go ahead and take this deal. The property is located near a college, so that's what really sparked my interest.
Anyway, the property is currently on the market for $52,500, and according to the city assessor, it's assessed value is $55.200.
I've been talking to the agent assigned to this home and I asked if the seller would be interested in a "Subject To" contract. The agent said the seller would entertain contracts. I asked about typical vacancy rates and supposedly it's almost always 100% occupied. Which I figured it wouldn't take long to fill, since it's literally 1 block away from a college.
The agent said the property looks good on outside, has new metal roof, but needs work on inside and that the seller is willing to do some repairs on.
Now, currently I am located in California until I EAS out of the Marine Corps, so I haven't personally seen the property, but my family is located just 10 minutes away from this property, and I could have my father go in and inspect it in my absence. (I will be returning shortly). I'd have my father look at big ticket items like water heaters, furnaces, etc and how new they are.
One of the concerns I have is, in 2008, this area was flooded (a lot of the city was flooded, causing millions of dollars worth of damages) and this property was one of the ones that was hit by it. I am not sure if insurance usually covers things like that...
According to the seller, the average monthly gas for the past 2 years is $201. The Average monthly electric for past year is $131. Current rent per unit is as follows:
Unit #1- $300
Unit #2- $400
Unit #3- $325
Unit #4- $450
So in total, total rent collected per month is: $1475.00. Subtract the total cost in gas / electric, that totals to $1143.00 a month profit. Now, if I'd assume the current owners mortgage, that'd subtract about $394.00 a month (which includes insurance, and mortgage combined).
So after all expenses are taken out, I could potentially see an average monthly cash-flow of $749.00 or about $9,000 a year.
Current tenants are on a month to month lease, so buyer can get new tenants if desired. Which leads me to my next question...If I were to assume ownership of this property, could I charge water and gas to the new tenants, if I put it in the new lease agreement? Would it be as simple as just putting it in the lease contract that tenants pay water and gas and electric? Just a hypothetical question, not saying I would, but I would consider it if I were to assume ownership of this property.
I think that's all I have for now, I would definitely appreciate feedback concerning this! Hope you all are having a wonderful BP day!
@Nathan Samuelson so the owner pays all utilities? Also it is located in a flood plain and literally was sitting under water a few years ago?
I would avoid that like the plague.
Okay, i'm just gonna run this through a quick little NOI checklist thing from a book i'm rereading.
Gross scheduled income - 14220
Less vacancy allowance (I put in 5% just in case) - 711
Gross operating income - 13509
Less Operating expenses-
gas - 2412
electric - 1572
repairs - ?
water - ?
property maintenance - (12%) 1706
mortgage/insurance - 4728
Total Operating expenses - 8218
Net Operating income - 5291 (monthly this gives you about 110$ in CF per unit)
As you can see I added some expenses, however I think you'd really be doing yourself a disservice if you didn't include these things because if you don't buy safe, you are going to have a bad time. That being said, you need to do some due diligence of your own to determine what vacancy rate is good for your area, as well as property maintenance. It being a college town would likely affect both i imagine (vacancies during summer, PM being higher). Also I didn't include expenses that were on the checklist and weren't part of your initial post. The real key here is VERIFICATION. The seller is obviously motivated, and this is a good thing. However he/she may have fudged the numbers a little to make this deal more attractive and seem like less of a headache than it really is. Check leases, the property tax bill, utility bills, determine a detailed, conservative yearly budget for repairs (how old is the roof etc), contact local PMs about their rates and market rents for your area ..etc. This will give you a better idea of how the property actually cash flows and if its not giving you the returns you want, you can either go back to the seller, show them your numbers and then ask for a better deal, or just move on because there are plenty of fish. Another thing is that you can get the utilities billed separately and charge them to the tenant. One AMAZING strategy for you is buy near your base and rent to the young E-3 - E4 from base. That way you have a connection with them, their supervisor, and what they get for housing allowance. Anyway sorry, i'm just shopping for my first property too and this is how i've been doing it. Hopefully one of the more experienced guys can get on here and show us what i'm doing wrong lol.
I think having the ability to put sweat equity in to a property is underacted. I think if I were in your shoes I would find out how much room there was to go up on current rent as well as building in the split costs of those utility averages then rework my numbers. I would also think long and hard about how much of the work is cosmetic and how much of the work will require special licences when calculating how much you will need to put in it
Great, thank you all for the responses.
@Anthony Gayden - Yes, under the current lease contract, the owner pays all utilities. But I think this could be changed under a new lease contract, couldn't it?
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