Analysis on a 4-plex in Fresno, CA. Is the math correct?

24 Replies

Hi All,

I am in a contract of purchasing a 4-flex in Fresno, CA. I personally don't think this is a great deal but for a property in CA, I think it is an okay deal.

Fresno investor, is this cap rate and cash flow similar with your current MFs? 

I completed the analysis of the property prior signing a contract. I think I got of most of the expenses. Just want to see if I miss anything on the expense.

For property mgmt, it is a flat $50/unit/month. It is not % rent as I put in the spreadsheet.

Thanks in advance,

Phat

Hi Phat,

You are really doing your homework. I like the thoroughness. 

Just at first glance, I probably spend much more on my 80's era fourplex on maintenance and repairs than $1,000 per year. Much depends on the condition (is it new or 30 years old, etc) and how much you do yourself. 

Consider many elements, from roofs, to windows, and interior elements can be near the end of their useful life in older fourplexes (in my area many were build in 80's). 

Thus, it also makes sense to set aside reserves for capital improvements. To simplify. Let's say the inspector says your roof has ten years of life left. And suppose you know it is  $10,000 for new roof (just guesses to simplify). Then you want to set aside $1,000 per year for reserves for the larger capital items. In theory, the property should pay for itself and be able to renew the major systems and components...

So add for reserves and maybe up the repairs and you may zero in on realistic, overall expenses. I don't know enough about the market there to talk about the income side. Good luck!

@Michael Boyer Thanks so much for the quick response. 

We will need to do some roof repair and staircase repair which is approx 7k. So I put it in the upfront cost on improvement. My agent recommended me to purchase the home warranty ~$1300/year. This covers repair cost for all major appliances, so I put 1k for minor handyman repair. What is your maintenance/ repair for the 80s 4-flex? 

I like the idea of putting reserved money for larger capital items. I will add it to my spreadsheet. 

Thanks,

Phat

Great job on the numbers - as Micheal said - major repairs around the corner could put a fly in the ointment if the unit is too old, but sounds like you have accounted for that. I am in the Fresno area and depending on where this is located and the age of it - it seems like the numbers work so far - if it is anywhere near the canals - you'll be required to get flood insurance also.  Good luck on your investment! please keep us up to date on your progress.

@Jay Orlauski Thanks for your feedback. I checked the FEMA website and the property is maybe in the flood zone. Property is near Fresno Yosemite International Airport.

I will definitely do a monthly update on this property to see if there is any deviation from the real cash flow vs the estimated cash flow. I properly will create a blog for this property.  

Hi Phat,

I'd recommend doing your homework on the home warranty. I've had issues before as it they don't cover ALL issues. So it's not a cure all for saving out of pocket costs, else the rates would be a lot higher. 

Most warranties I've seen charge between $50-75 just to get a tech out to look at an issue. The 2 times I've called for problems, the issue wasn't covered and I ended up having to pay for the repairs directly. They are worth it though when something does break and it is covered.

Also, shop around as there are a few companies that offer the warranty, so you can take the recommendation by your agent, but verify and do your own homework. As an agent, there are only a couple that marketed directly to us, so you don't want to pick one based on who does the most direct marketing.

Best,
Allen

@Allen Maris I am glad that you mentioned about the calling charge. I didn't know that we need to pay for the technician to come and check the property. Definitely I will do more homework on this.

Thanks,

Phat

Hey I'm in Fresno. Good luck getting this closed. I like your numbers info. Are you using an excel template or is the spreadsheet something you put together. It looks very nice. I know that area well. I have a SFH I'm renting out in the McLane area. I'm currently keeping my eyes open for a another property, a MFH this time. How was your realtor experience? If you don't mind trading a few messages with me, I'd like to talk to you about your processes.

Thank you for your time.

@Kuang H. Hi Kuang, Thanks for backing me up on the number. At least I am not the only one thinking this is a good/okay deal :).  

The analysis spreadsheet was reverse-engineered when I read the post How to Analyze Deals by Jay Scott. So all the credit goes to him. 

I agree with you. I like the McLane area and I think I may invest in this area in the future also.

For my broker, let me shoot you an email. I don't want to get in trouble any advertisement here.

@Phat Vi  I wish you luck, and all the best. However, the numbers seem too tight for me. Is there any value add to this property? Can you increase rents? It may just be your market. I typically look for at least 1.5% ($2,775) income to purchase as a first glance indicator on a mutifamily. $100/door on a large multifamily may work nicely but at only 4 doors I would prefer a little better cash flow. Is this in an "A" neighborhood? Will this property appreciate? That could be an upside that would make the lower cash flow be easier to swallow.

@Frank R. Hi Frank, 1 unit is 3 bed 1 bath. The other 3 units are 1 bed 1 bed.

@Ray Peslar Hi Ray, The number sure is a little bit tight. There are small value adds to this property, but it will be difficult to increase the rent as all 4 tenants are good and long term tenants. I think we are talking in a different market as this is in Fresno CA. It is rare (but not possible) to find an income of $2750 for a property that is less than $200k. When you find one, let me know :) I am definitely interested in that deal. Property is leaning toward the C class neighborhood. Property may not appreciate in the next few years but I am looking forward the future as the in the booming year 2004, property was sold for >$400k.

@Phat Vi Believe me, I hope you do well. Real Estate has been very good to me. I encourage everyone to get involved that wants to create true wealth in their life. Good luck to you, and I congratulate you for taking that first step! 

@Kathy Stewart Thanks, Kathy. I checked on the rents of the surrounding 4-flexs in the same block. Rent is right on the spot.

@Tommy Martinez Thanks Man. Good luck on obtaining your first deal.

@Jo-Ann LapinThanks Jo-Ann. after all the experience that you have with home warranty, will you buy the home warranty again for the next properties?

I would. My personal home came up last year most of the equipment I had replaced at that 10 year mark. I did purchase it but am real cautious as being in the business I have had many investors who used it let say for a plumbing issue and it ended up costing them a heck of a lot  more as the subs just were not of a high standard. What exactly are you planning on using  the warranty work for?

Originally posted by @Phat Vi :

@Michael Boyer Thanks so much for the quick response. 

We will need to do some roof repair and staircase repair which is approx 7k. So I put it in the upfront cost on improvement. My agent recommended me to purchase the home warranty ~$1300/year. This covers repair cost for all major appliances, so I put 1k for minor handyman repair. What is your maintenance/ repair for the 80s 4-flex? 

I like the idea of putting reserved money for larger capital items. I will add it to my spreadsheet. 

Thanks,

Phat

Great to hear about the roof. That is one major one out of the way. I was going to pull my all my Schedule E's to see what I put for maintenance the last few years, but did not get around to it. I do know it is actually around 5-10% of rents annually on average. It can come in dribbles (100 bucks and there) or big chunks (like a couple of new appliances). Some months none, others lots. So you average it out. The previous owner had also deferred some maintenance, too (upping my #'s) but I also do anything minor and all the painting, etc (bringing the number down). Another big factor will be how you handle turn arounds--doing them yourself or hiring it out (and quality of tenants).  A lot of "little things" come up in the turn around-- be a door knobs, closet doors, loose molding, window cranks, painting, etc. Alot of this would add up if you hire it out. Finally, luckily, I think you will have a far lower labor rate than me, but with an 80's fourplex, so many aspects are coming to the end of their useful life, that you really have to think up to 10% maintenance and repair (and maybe that much or more for capital reserves) as people have squeezed these lemons for all the juice.

Your DSCR looks off. It's more like 1.59 rounded. (Looks like you had 1.10)

DSCR = NOI / ADS

1.59 = $13,000 / $8,200

Other than that... looks pretty realistic.

Use rentrange.com if you haven't already done some rental comps. One of the best tools for rental comps out there.

@Phat Vi Are you able to get 4.3% on a non-owner occupied 4-plex? Is that with 0 points? I'm just curious as I'm seeing rates closer to 4.75% on out-of-state 4-plexes.

I also second the warnings about home warranties as those service fees can really eat into any potential value of the warranty. From my experience I don't trust warranty companies to actually back their warranty!

Good luck with the property. A lot will ride on the neighborhood, quality of tenants, and maintenance. Hopefully you get some nice appreciation during your holding period as that can make all the difference between a good and bad investment in CA. Keep us updated here on the results (or let us know if you blog on it).

@Christopher Covell Hi Chris, I am lucky to get %4.3 on a non-owner occupied. the closing cost is ~2.5k. Seem like I may not get the home warranty. I created a diary blog for this rental property. I think you can find the blog via my profile.

Expenses are seen in the NOI calculation. If the owner will not disclose, demand Schedule C for current and prior year's IRS filings. The guideline is Expenses < 30% of GSI, if more then there are problems not being disclosed.

@Phat Vi - Your spreadsheet looks complete with detailed analysis. can you please share the sheet if you have one ready. and,

i have few single family home in fresno, CA. and Looking for PM. can you please share the contact?