Any flaws with this deal?!

3 Replies

A friend investor is unable to get financing for this property and he mentioned it to me, details as follows: 

Purchase Price: 405K (50 days in the market - current owner is retiring)

4 Units - 3 bedrooms each

All units rented @ 1023.00 (including heat) - $ 49,104

Assessment: $ 63,400.Land + $ 256,400. Building = $ 319,800

Expenses in 2014: 

Cleaning $ 911.35

Insurance $ 1,316.00

Taxes $ 6,226.00

Trash Removal $ 125.00

Property Maintenance $ 5,127.50

Contractor Services $ 1,200.00

Exterminators $ 1,255.00

Plumber $ 752.00

TOTAL $ 16,912.85 (Oil is not included and this property is in New England)

NOI - 49,104 - 16,912.85 = $ 32,191.50 (not accounting heating oil)

P.S. Property is close to a university and hypothetically tenants should not be difficult to come by...

Interested to hear your thoughts, opinions, suggestions, etc.

I would expect a better cap rate considering you can't force appreciation as on a true MF (5+ unit) property.

Correct @Chris Soignier  unlikely this will appreciate any time soon unless there are some unexpected events...

Any other opinions, comments!?


Here is the deal in my eyes -

Purchase price - $405,000

Mortgage $324,000 @ 5% = $2139/month

Taxes - $519/month

Insurance - $110/month (I think this is too low.  It's either wrong or not for full replacement value.  It's costing me $1100 to insure a single family home - in a corporate name which I would assume that you would create for the property)

Trash - $10/month (This seems very low.  If it is a dumpster, it may be $125/month not annually.)

Maintenance/Cleaning/Contractors - $770/month

Oil - $333/month ($1000/unit for the winter - this might be high, but better to be high then low)

Where is the water cost?

Water - $120/month

Total - $4001/month in expenses

Revenue - $4092/month

Net cash flow - $91/month

I think it is a high risk investment for $91 in profit.  You won't have enough money to replace the roof, heating system, windows, carpeting, etc. when they wear out.

I believe the insurance, maintenance, water and trash are too low in your figures. Maintenance needs to include some CapEx reserves which I believe the seller probably didn't have much of in the year he gave you these figures.

The only way this deal works is two things - the rents are below market so you can raise them up to market rents AND you get a better price on the purchase price.  Maybe it's typical that assessed value is so much lower than the sale price but it seems drastic.

I think if you have $81,000 to invest, you can find a better deal if you keep looking.  You would make a 1.3% cash on cash return.


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