Going out to see a 4plex

13 Replies

hello BP in about two hours I'm going meet an agent to look at a 4plex right around the corner from where I live. I'm nervous and excited at the same time. The plex is listed for 200,000$ With three rented out for 1050 a month.. I haven't done the numbers yet because I'm not to familiar with it (newbie here). It did say it has a 21%. Cap rate. I am hoping I can get a fha loan to get the plex. My question to you all what are some good questions to ask the agent? I am in the New Orleans east area by the way :).

@Alesha Rayford  

 - Don't take anyone's word for anything.  Ask the agent for documentation to prove that 21% cap rate.  My first multi-family purchase has been a disaster, and I probably wouldn't have bought it at all had I verified everything that everyone was telling me.

thanx I will definitely ask her about that. How do I post the link of the plex on here? 

@Bryan L.  

@Alesha Rayford   Above the reply box, theres a symbol that looks like a link on the top right side. Click on it and it will open a box to paste the link into.

@alesha rayford. Good morning. Good luck on the meet in A few minutes, but may I ask what neighborhood is the 4-plex in new orleans east? And yes you can purchase this property with a fha loan. Duplexes,triplexes all fall under the same guidelines as a single family home.

Usually with the cap rates that agents list, it has ludicrously low expenses. As Bryan said, don't take anyone's word for it, look at the operating statement if they have one and use conservative numbers to do your analysis. Generally speaking, listed properties never have a cap rate of 21% (nor does much else). Good luck!

@Alesha Rayford  

Are the 3 apartments rented for $1050 each, or total?  If it is total, I wouldn't even go look.  

I would look at this deal past the 12 month mark of the FHA loan. Are you going to be able to sustain the property if you decide to move? At $350/month/apartment, the answer is "not without kicking in my own money."

I would find out exactly how much the following expense are going to cost you each month. "The tenant pays" is a good answer as well. Put those numbers up here and I'll tell you what I would pay for the place.

Taxes

Sewer and Water

Trash

Heat/Utilities

HOA

Cap Ex and Ops

Insurance

Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)

Vacancy- as a %. (8% represents 1 vacant month/unit/year)

Hello Alesha!

First of all 21% cap rate is a great but always do your own calculations to be safe since realtors tend to inflate cap rates to look more favorable. Keep in mind that if you can get at least 10% cap rate then the property is still worth looking into but factor everything in including estimated repairs. I am assuming that the building may achieve 21% cap rate at full capacity so consider hiring a real esate agent to find occumpants and factor those costs in as well.

to get an FHA loan you need at least 640 credit score in all 3 credit score agencies. FHA loans are generally 3.5% but you should also factor in 6-12 months rent in case you lose your tenants as well as any immediate repairs and 10% for future emergencies.

You can also get loans from other companies such as freddie mac and fannie mae for as low as 5-10% down but keep in mind that they will charge around 20% interest rate so make paying them off a priority.

I also highly recommend that you look around the real estate market if you haven't already to make sure you are getting the best property available to you.

Good luck Alesha and best of wishes in all that you hope to accomplish!

Walk the neighborhood at all hours of the day to get a better sense of the environment. If you can, strike up a casual conversation with the tenants and the neighbors. They may reveal some valuable information.

Be on the look out for deferred maintenance and outdated features. These can be factored in when making an offer.

I am pretty familiar. With the neighborhood as I grew. Up in this area and the 4 plex is around the corner from where I currently live. I will ask as many questions as possible, and yes each unit rents at 1050 each! I will update you all when I am finished viewing the plex  @Marcia Maynard  @Aaron Montague   @Cory Mickler  

Best of luck Alesha!

Please keep us all posted on your discoveries.

At 1050 per unit that is already 75% occupied, you are looking at a great potential property.

If your looking to ask LOTS of question here are a few questions I would would ask.

-Ask if you can speak to the current residents and ask them how long they plan to stay, if they are happy with the rental property, etc.

-Ask if the building is up to code and ask if there are any repairs that will need to be done immediately or in the near future. Buildings that are older then 20 years will usually require some maintenance such as plumbing, AC replacements, etc but the rent should easily cover those expenses.

-One of the biggest things you should ask is if the tenants pay 1050 a month and utilities or will you be responsible for payment of the utilities? Some tenants will keep lights on 24/7 and leave AC's running on high 24/7 resulting in high electric bills as well as frequent AC repairs so keep that in mind as that can hamper your income. tenents that pay their own utilities are usually more frugal with utilities and don't leave AC's on for long periods of time.

Good Luck! hope everything goes well!

Originally posted by @Alesha Rayford:

hello BP in about two hours I'm going meet an agent to look at a 4plex right around the corner from where I live. I'm nervous and excited at the same time. The plex is listed for 200,000$ With three rented out for 1050 a month.. I haven't done the numbers yet because I'm not to familiar with it (newbie here). It did say it has a 21%. Cap rate. I am hoping I can get a fha loan to get the plex. My question to you all what are some good questions to ask the agent? I am in the New Orleans east area by the way :).

21% cap rate!!!!   RUN!   This is probably the biggest piece of crap property and if you think the higher the cap the better the "deal" then a fool and her money will soon be parted.  A cap rate is ONLY a metric to tell you what the market is doing.  It is not an interest rate or a metric of profitability.

Let's say this property has NOI of $24,000. If the market cap rate IS 21% (VERY UNLIKELY) then the market is saying I'll give only $114,286 for this property because I think the chance of collecting the $24,000 is risky. In an area where the market cap rate is 10% the market is saying that the same $24,000 NOI is worth $240,000. Which one is better? There is no better! You need to know at what cap rates similar properties have sold at and stay in that range.

But better is to just use a GRM since you won't get very accurate cap rate comps on 4 plexes. Here if gross rents would be 4 X $350 = $1,400 X 12 = $16,800 Gross rents divided into $200,000 get a GRM of 11.9 . You'd want the realtor to show you sold comps and the GRM they sold at. Then you'd make the decision why this property should sell for higher or lower GRM.

Alesha,

Before you do anything, you need to go over the process of how to execute a commercial real estate transaction.  Part of that process, and something that should be built into the sales contract, is what's know as the "due diligence period."  This is a period when you can inspect the property and records, and if you don't like what you see, back out of the deal.

Before the sale, brokers and owners will make all sorts of representations as to the condition of the property, and it's financial situation.  These can be complete fiction.  You can ask for documentation.  But before a deal is made, they may or may not give you anything.   This is the tire kicking phase.  However once you've gone to contract, and given a deposit, they now know your serious, and if they don't give you the documentation you want, you'll back out, and they'll have to find another buyer.  

As soon as the contract is signed, you can give them a list of everything you want.  You'd include things like, Annual financial statements for the last two years, current up to date financials, copies of all the leases, copies of the last years bills, copies of the last years bank statements, copies of contracts in force on the property, and more.  You'll need a good accountant and lawyer in this process, they can give you a full list.  This is also the period where you'd have the property inspected by a professional inspector/engineer.  By the time your done, you should have a good idea of the true financial and physical state of the building.  You MUST get this done before the end of the due diligence period (usually thirty days.)

It' is somewhat likely what you find will not match the representations made prior to the execution of the contract.  Between the accountant, the inspector, maybe a contractor, and yourself, you can put a dollar amount on the discrepancies.  You can then go back to seller/broker, show what you've found, and demand either an adjustment to the price, a payment back at closing, or some combination of these, totaling the amount of the discrepancy.  If they do this, you proceed with the deal.  If they don't, you have to decide whether to cancel the contract and walk away, or not (at your option.)

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