How do I evaluate this?

Question

Hi all,

This community is amazing, I hope you can help me!

The owners of the property next door are up and leaving. They have not listed the property yet but the asking price compared to the current (undermarket) rental income doesn't add up. It currently works for them because they bought the property 20 years ago for a small amount of money and put in their sweat equity. I'm not sure how to evaluate and then respectful make them an offer which is prudent for me and might work for them.

They are open to owner financing at 6% interest, that's attractive, but would also like 25-30% down and ~$7k per month income. The asking price is $1,349,000.

It's a 5 unit bringing in $9k a month. Expense info from the seller is $3500 a month for tax/insurance/utilities etc. Tenants pay their own utilities. I estimate that if all the units were at the market rate the income would be $12.8k, plus there are a couple unused spaces that could also be rented as storage/studio space for ~$1k.

I own one short term rental property that is currently being renovated before being put to use but it's value is ~$400k. I could swing a ~$100k downpayment without using that equity.

I don't know how to balance and evaluate all these factors! What scenarios should I run in the rental calculator? What strategies should I pursue?

Thank you in advance!

Vijay Friedman · Answer

@Caroline C.

For a 5-unit, I’d evaluate this more like a small commercial/multifamily deal than a residential rental. Start with current NOI, then run a separate stabilized NOI using market rents only if you have strong rent comps and a realistic timeline to increase rents.

The seller financing at 6% is attractive, but the price still needs to be supported by the income. I’d ask for the T12/P&L, rent roll, leases, taxes, insurance, utilities, repairs, CapEx history, and confirmation of any legal/use restrictions for the extra spaces.

I’d be careful using future rents to justify today’s price unless the path to stabilization is very clear.

Blake Hernandez · Answer

That is a tough one.  Even at a million your down payment is 200k.  Just look at it as one unit in stead of 5.   You are paying 269,800 for a unit that brings in about 2k a month.   Use that as a base line and look around your market and see if that is a good deal or if you can do better. Also you can use a mortgage calculator to see what you will be paying and how much goes to interest and principle.