Multi-unit house. Can you look at my numbers?

Question

I'm negotiating with a seller here in PA and I'm wondering if this makes sense to the guys with a little more experience in multi-units.

4 units in 2 separate houses on the same block.

Asking price: 90,000
Gross Income (all 4 are rented): 21,600

That's 1800/month grossExpenses per month: 1000 (about 55%) is what I'm figuring after vacancy, even though his numbers are lower.

First loan: 80,000 @ 6.5% Payment: around 500 /month

Second loan from seller: 10,000 @ 6%Payment around 100/month.NOI: 9,720Debt service: 7,200Cash flow: about $200/month. Considering I get the loans, does this make sense to you guys?  The tenants pay all utilities except trash, and taxes are pretty low for this area.Won't need roofs for 5 years. minimum. And my numbers above are fairly conservative.What are some things I should look out for? I know snow removal and landscaping are taken care of by one of the tenants.Should I look for lower interest rates? (I figured 6.5% because my credit is under 600 at the moment).What are some other options for getting this funded? Would you do the deal?Do you have any other questions for me? This is my first rental... Thanks

Account Closed · Answer

@Matt Hegedus

First check the age of the building (very good you checked the roof), find out when you will need new electrical, plumbing and cosmetics, calculate and add to expenses on monthly bases. Location of property; it is a cash cow where you will always have tenants or would you have to do a little more advertising (add cost and average vacancy time).

Are you managing the property yourself or hiring? (Think about time v cost/ experience)

Tenant landscaping expense included?

Tenant leases, check those dates and condition of lease and think about legal issues and fees involved

I try to at lease have 15% cash flow of gross rent after everything. Also, in PA you can usually negotiate price down.

I think interest rate is good for your credit score

Matt Hegedus · Answer

Hi everyone, thank you very much for your responses! I read and re-read all of them.I ended up not going through with this purchase because there were significant red flags by the seller. Including length of the leases. Turns out a 4-year tenant (as per our conversation with seller) was actually a 4 MONTH tenant once I saw the leases.

I also talked to a homeowner on the same street and he said this building has LOTS of turnover due to crime and drug activity. No thanks...

Michele Fischer · Answer

Matt,

We specialize in low income, and it is feasible to have quick turnovers, especially if rent is below market at move in and/or if you aren't as picky with tenant screening.  We have found that applicants are often couch surfing, so it is possible to move someone in as soon as the unit is move in ready, so we don't have many vacant days.

I would be questioning the length of tenancy more, that seems unrealistic.  We have one tenant who has been there for years, but most of them are fairly transient and don't stay long.  We rejoice whenever we hit one year with a tenant, and it is not unusual for their life to fall apart shortly after that and we are dealing with turnover again.  Best way to get at that is to ask the tenants during the inspection.

Before trying to structure your deal, you may want to think thorough whether you really want to be in the low income game.  It may be the best way to start, but go in with your eyes open wide.  If you self manage it will take more out of you, if you outsource you will have fewer interested PM's.  I wouldn't want to try to self manage from 25 minutes away, we make an average of 83 trips per property per year.  You may want to check out my BP blog and/or e-book.

Aaron Montague · Answer

@Matt Hegedus

Yup, pry right in there on the rents.  Cancelled checks, a receipt book, bank account statement and/or Schedule E's are all good.

http://www.irs.gov/pub/irs-pdf/f1040se.pdf <-- schedule E is broken down by property, so the totals will show up there.  But now that we are into June, you need to know about Jan - May of this year.

Are these houses on the same deed?  If not, you are probably going to have to close on them separately.  This just doubled your closing costs.

Matt Hegedus · Answer

He said MY trash payment will be around $123/yr. The tenant in the SF pays 123/yr as well. re: Are they paying rents...Is there a good way to do that other than asking him?I guess his Schedule E's would show that but this guy has properties all over and I don't know how they would classify that. Do they label them on the tax forms, other than "Property A"? Is this a standardl thing to ask for when buying a proprty?

Aaron Montague · Answer

@Matt Hegedus

Good to see the Cap Ex number.

How much is trash?  You mention that you need to pay it, but don't have it listed in your expenses.

Have you verified that the folks are actually paying their rents?

Matt Hegedus · Answer

@Aaron MontagueHere's my conservative expenses (just guesstimates so far, other than taxes):

Taxes: $200 total (2 bldgs ~$93 each)Insurance: $300 (I did not get a quote just playing it safe)Vacancy: $150 (1 month gross rent / 12)Cap Ex: $350 That's what I was using.

Aaron Montague · Answer

@Matt Hegedus

Could you expand on your $1000/month in expenses?

With 2 separate buildings I would put aside at least $300/month in Cap Ex.  Probably $350 for buildings this old.  Do they both need roofs in the near future?

Part of you acquisition costs is going to be 2 inspections.  Ask for at least $100 off the total as you're really going to make that inspector's day with 2 on the same block.

Matt Hegedus · Answer

@Ardie StephensAge of the one buidling is 100 yrs old+. 3 units were completely remodeled 5 years ago, and I'll verify by walking through. I asked about electric and he said it's definitely up to code but I will have to verify. Location is in a lower-income part of town but the rents are below market and he said he's never had a unit vacant for more than 2 days, which I find hard to believe. Although It's close to alot of commerce so maybe he's right.

I'll be managing the property myself and with the help of my dad who lives about 25 min away as well.I figured the tenant landscaping fee into my numbers

Leases are in the mail (to me) tomorrow. 1 tenant has been there for 4 years. 1 had been there for 2 yrs. And 2 have been there 1 yr or more. I'm planning on talking to the cops (whose station is 2 blocks away) about crime and drugs and whether they have any reports from this block. I'm pretty sure I saw a drug deal at the corner gas station when I drove by.

I will definitely be negotiating price down, and I've told him this several times. It's alot to consider but I'm not going to pull the trigger until I verify everything, have it inspected, and plan through all the "what ifs"Any input greatly appreciated. I'll update this thread as I learn more.Thanks for your help guys, it's extremely helpful.

Matt Hegedus · Answer

Thanks guys. I know $50 a door is rather low but I want to get in with the right property, for little money out of pocket. I talked to two PA landlords today and they said the price is good given the numbers but it will all come down to the terms with the seller. Both recommended me asking if he'd carry a bigger note. I'll do that. And apparently here in PA, 6% interest rate for non-owner occupied is unheard of. One guy said I wouldn't get that even with a perfect credit score, the other guy said "If the numbers make sense, and it seems like they do, you'll find it somewhere.". and recommended I shop credit unions and non traditional, small, out of state banksI'm going to ask to see the tenant leases, his Scheule E for the property (if possible), and ask about water/sewage liens and everything else tomorrow and see what I find out.And I'm going to have to think of a way to sel him on the $20,000 second mortgage. ANy ideas I'd love to hear them.