I'm looking to take my first step into rei. I have told everyone I know what I intend to do and today my dad told me that a coworker of his wants to sell his 4 unit. It is located in a nice area of Milwaukee. I did a little research and he paid 315k in 2005. He sent me an email stating the current assessed value at 234k and said make an offer. I am curious to here what some of you experienced investors have to say. Here are some of the numbers I know.
Brick 4 unit
2 bed 1 bath units
8 car off street parking
Newer water heaters and furnaces
$2700 gross monthly rent = 32400 per year
Minus 10% vacancy rate= 29160
Take 50% off for ballpark expenses = 14580
14580 @ 12% cap rate= $121500
Or 10% cap rate= $145800
I am figuring ballpark numbers to see if we would be in the same ballpark on price as to what I would be comfortable with. He is looking for a cash sale or willing to do some seller financing which is helpful. To me it seems that we would be off by quite a bit. He claims to cash flow $700/month. The only way I can figure that at the range I think he is looking to get is to not figure cap-ex, vacancy, property management, and normal maintenance. Any input would be very helpful. Thank you in advance.
If it's a nicer area it might not go for a 10 cap in that area. 4 unit's might trade at a 7 cap or something.
60% expenses is usually when landlord pays utility and water. If landlord does not then 50% including vacancy as a guideline.
So would be 162,000 at a 10 cap.
16,200 NOI / 234,000 = 7 cap sales price. So if no deferred problems this price might not be bad for the area.
How much money you put down determines your cash on cash return. Are you thinking of living in one unit and rent out the rest??
Depends on the area of Milwaukee , age of building and a few extra variables. If he paid 315k in 2005 for the sake of argument I am ruling out north and northwestern neighborhoods of Milwaukee. If you do a little research on recent solds you will see a number of the type of buildings changing hands at 190-230 k in solid working class neighborhoods. I would not get hung up on his cash flow numbers and do your own math. With Milwaukee property taxes it is hard to run a multifamily at less than 60 % expenses. So your math is right on , cap rate will depend on neighborhood and seller motivation. City assessed values are just that, if you believe otherwise I have a few buildings I am willing to let go for 20% less than assessments :)
Light hearted comments aside a lot of it will depend on condition of property etc. Since you are new highly recommend to go take a look at this one and go on the MLS , talk to brokerS and take a look at several similar properties and compare numbers to arrive at an offer you are comfortable with.
Best of luck !
Thanks for the quick reply Joel.
I would not be living in any of the units. I need to do some more research on values in the area but I figured out with a price of 234k at only 10% down with all operating expenses figured in, it would only cash flow a little over 100/month. That equates to 5.1% cash on cash, nothing too exciting there.
@Matt Lindstrom do you have any info on the estimated repairs? If this property is turn key then I would say that @Joel Owens and @Sam K. insight is spot on. The seller is most likely cashflowing $700 due to debt service which could play into what kind of price he's willing to sell at especially since he bought at $315K back in 2005. Do you plan on paying for this property in cash or mortgaging it?
What is his motivation for selling? What kind of turnover does he experience? What kind of financing do you need from him?
If the building is average or better, and you need very friendly financing terms, 7% cap seems very reasonable to me.
I plan on doing a good amount of research before making any offer. I do understand the assessed value can be way off, and thanks for offering me a "steal" on a few of your properties :)
Btw the building was built in 1951.
This is something that just came to my attention today, so I have not had any estimates yet. I would be mortgaging the property.
I need to find out more about his motivation and vacancy. The seller financing would be helpful to me since I am self-employed and don't show a lot of income.
Matt any update on this opportunity ?
I would totally agree : " The seller financing would be helpful to
me since I am self-employed and don't show a lot of income. "
I talked to the seller today and it sounds like a very nice property. Updated electrical, furnaces, water heaters, new water efficient toilets and new carpet. Seperate utilities paid by each tenant. The roof is 20 years old, so that will need attention sooner than later. He is willing split the cost of the roof. He said in the nearly 10 years of ownership he has only had 2 vacant months and that was mainly due to renovating a unit. It is on a busy road with cheap rent so it is possible. I understand that I need to confirm everything on my own. His reason for selling is retiring and spending more time with family. He has always self managed the property. Price he is looking for is 230k, 1 unit has been rented for 15 years, another for 5 years, another for 2 years, and the last for a couple months. No pets, month to month leases. I'm sure I'm missing something but that's my update.
It also has a coin operated washer and dryer in the basement that is about $70 per month income.
One bit of advice i could give you is to discuss with him what kind of terms would go with the deal. These can be just as important as the price, if not more so. Robert Kiyosaki once said "I will give you your price, if you will give me my terms" so if, for instance, you could convince him to owner-finance the property either no interest or a very low interest, you could lower your mortgage payment and save money in the long run; even if you spend more then you intended. Since Cashflow is the name of the game for landlords, this could prove to be invaluable. Hope i helped you out! Good luck!
I did talk a little about terms today. He mentioned a land contract with 40k down and a 10 year balloon. I know he still has a mortgage, not sure of the balance but I know the payment is around $1600/month. I need to find out if that includes taxes. I do remember that terms are almost more important then price for cash flow. I think that was in rich dad poor dad.
Originally posted by @Matt Lindstrom:
...I did a little research and he paid 315k in 2005.
The City of Milwaukee 4plex I'm closing on next Friday sold for...now sit down... $380k in 2008, the height of the insanity. 380 for a City of MKE 4? Couldn't imagine it.
This one is 3br's, individual central air and a 4+car garage.
As for what you're going to pay, I'm in the minority here, but a nice MKE 4 in a nice part of town is 225 on up all day. Nice part of town meaning south of Oklahoma. 225 meaning traditional, seen one, seen them all, center entrance 2 up, 2 down, all 2br's, no garage, no central air.
Actually from what I've read, this is the wrong forum/website for a nice buy and hold place in a nice part of town. Take some of the advice on price you get here carefully, a lot of it doesn't match my experiences.
Nice 4's in a nice part of MKE are about 60k/unit, give or take.
Arnie, you described the property to the T, as "traditional". The more I research the area I can see that the value would be in the low to mid 200s. Thanks for your input and good luck with your new property.
All I heard was $100 per month cash flow. Totally not worth the trouble unless the units are renting far below market and need to be adjusted up. This would change your numbers and NOI. Buy it based on the current NOI, then run it using updated NOI with raised rents, etc. If rents are at market rate and cash flow is $100, you are paying too much in any part of town for my taste.
First off, take whatever the city of Milwaukee assessed value is, write it down on a piece of paper and then burn that piece of paper-the city's assessments are a JOKE! Since it is a 4 fam, my usual line about people getting WAY too wrapped up in ratios, %'s, etc doesn't apply as much here as it would with a duplex, I think those "rules" become more valuable as the # of units goes up, but again, don't forget about the intangibles, such as WHAT part of Milwaukee it is in, as there are some parts that I at least see an OK future for and other parts that seem to get a bit worse on a weekly basis!
Just understand Matt the seller in a land contract is not giving you title. Tons of risk there on many levels.
I do not like land contracts from the buyers perspective.
Also he is wanting close to 20% down which you can get an investor loan from a regular bank at that level.
Also the person saying get at zero interest or below market interest rates if the seller agrees then of course the buyer benefits. One little thing many do not know about is Imputed Tax Interest .
This does not affect you the buyer but the seller so if they are tax savvy they will not agree to a below market interest rate on owner finance.
The seller is probably wanting to do a land contract so that title doesn't change hands. This way he is not having to wrap the underlying mortgage. Also his insurance policy won't try to not renew his policy because ownership has changed hands. The downside for you the buyer on a land contract is you can make all these improvements and you do not even own the property with title. The seller also wants to do this because if you default at any time and break the land contract then they still own the property so do not need to foreclose to get title back etc.
At the end of the day you have to look at what the seller wants, what you want, and if the property is worth putting all of that together and moving forward.
No legal advice.
I totally agree
" First off, take whatever the city of Milwaukee assessed value is,
write it down on a piece of paper and then burn that piece of
paper-the city's assessments are a JOKE! "
Ramon, do you mean the city's assessed value is usually over estimated?
I agree with Robert Taylor above comments.
I understand that the assessed value is almost useless when pricing rental property, or any property really.
The seller has a mortgage on the property, I don't know what the balance is. I do know that a lot of people talk about the risk involved with the due on sale clause. Is there a better way to structure seller financing with an existing mortgage involved, or even a better way that might protect the buyer more than a land contract?
The 40k down payment is always negotiable, even to the point of zero down if you can show the upside to be much more beneficial in the long run.
This post has been removed.
Did you purchase the 4-family?
No, unfortunately the numbers didn't work out in the end.
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing