Hey BP! It's been almost a month since I've first joined the community and started to learn about the business. I've been researching multiple multi-family properties, typically triplexes, and one just came on the market that I just visited through an open house. I was wondering if you could help figure out where exactly I should land with an offer.
Asking Price: $410,000
FMV Rent: $1,455 per unit ($4,365 total)
Rent Used for Calculations: $1,164 per unit ($3,492 total) (Used 0.8 FMV to be safe, but I can definitely get the FMV which I will describe in more detail below).
Vacancy Loss: 8.33% ($291.00)
Gross Monthly Operating Income: $3,201.00
Repairs & Maintenance: $320.10 (10% of GMOI)
Real Estate Taxes: $440.00 (1.3% of Purchase Price)
Rental Property Insurance: $170.79 (0.5% of Purchase Price)
Replacement Reserve: $50
Monthly Operating Expenses: $984.85
Annual Net Operating Income: $26,593.80
Capitalization Rate: 6.49%
Cash on Cash Return: 32.53%
Days on Market : 3
Now what's interesting about this property is that it's completely gutted rehabbed (new EVERYTHING, but no stainless steel appliances, but the market doesn't call for it) and it's in a good location. The neighborhood that I'm in is separated by a river. The more condensed and urban area is north of the river and the about-to-be-gentrified area is south of the river (where this property is located). Literally I can drive from the property's location five minutes and be in an area where every many houses are $1 million and over for a single family.
Now I say that I can get FMV for rent because on the other side of the river where it is more urban and condensed (inner city), and they are being charged 80% of FMV. I've been to a couple of open houses on the other side of the river where their asking price is $360-375k, but the quality of the houses are extremely lower and the neighborhood is significantly worse (high crime rate).
I've looked at comps 1 mile radius around the address and the only 3-Unit Properties sold were at $375k and $380k, but they weren't gutted and rehabbed. Perhaps in just good condition. There are many 2-Unit Properties that sold for $330k though. Some things to keep in mind is that that I am going to purchase this through an FHA Loan (requires appraisal???) and that comparable houses that haven't been gutted/rehabbed are also on the market for $400-$425k, but they've been on the market for around a couple weeks to a couple months.
So my question to BP is first off, is it worth it? Secondly, what should I place an offer at? It's only been on the market for 3 days (today was the open house) and I'm afraid if I put a too low of an offer, it will just be ignored.
SO SORRY FOR THE LONG POST!
How are you getting 32% CoC?
If I take a down payment of 3.75% ($15,375.00) at 3.5% interest, I've estimated my annual debt service to be $21,264.51. Since my annual income is $26,593.80, I would be receiving $5,378.01 annual cash flow. Dividing $5,378.01 into my down payment of $15,375.00 would yield the CoC of 32.84%.
If I were to charge FMV rent across the board, my Annual Net Operating Income would be $36,245.52 and I would net $14,981.01 Annually. The CoC would be 91.49%. This seems way too good to be true.
Perhaps I'm missing something? Hidden fees/closing costs/maybe I'm being too optimistic with my Operating expenses?
Please let me know! I'm eager to learn!
@Christopher Hui , number one issue that I see is: you're either living there - or not!
Once you live there, YOU don't receive a Net Operating Income of $26,593.80.
And if you're only putting down 3.5% deposit, your CoC is completely skewed too.
eg. If you only had to put down 1%, look how much CoC you would make THEN! Nah...
Are there any 4-plexes nearby - where you WOULD get the income for 3x units?
Can't comment on the location or the aesthetics. Certainly, EVERYTHING being new helps.
When you wrote of the "more urban and condensed (inner city)" units: "and they are being charged 80% of FMV", I don't know how that helps you make the comment: "but I can definitely get the FMV which I will describe in more detail below". ie. Just because it's been freshly rehabbed, that doesn't mean that tenants will jump at the chance to pay higher rent*.
* Might they still prefer to live "north of the river"?
That's just a few thoughts so far. All the best...
@Brent Coombs , I used my own rent into the calculations because from an investor's point of view in my opinion, there's no such thing as living somewhere for free. Any occupied space that you own could be an opportunity for cash flow.
My current cashflow (as in money left over after all expenses from my corporate job, including rent, is around $2,000/month). If I imagined the above calculations without my own rent, my monthly cashflow (from non-real estate income) would be higher, and my real-estate cash flow would be lower. It's just easier for me to imagine the situation as me paying myself and once I leave the house, the Monthly Cash Flow will remain the same.
I don't really understand your comment about CoC being skewed. Could you elaborate? Is CoC not a measure of how fast your rate of return on original investment is? Or perhaps, you're speaking about how it is skewed compared to the CoC of a conventional 20% loan?
They do have quad's in my area, but they all consist of 2-BR Units. In addition, the rates of rent jump significantly when going to a 3-BR. 2-BR units are only $1,168 FMV.
That is definitely a possibility! However, crime rates are significantly higher north of the river, and as previously stated, this side of the river is being gentrified. I was hoping to appeal more to young professionals that work a couple miles south like several of my friends and I do (we currently pay $1600/month for a 1-BR in an semi-luxury apartment complex 0.5 miles away).
Thanks for the response! Greatly appreciate it!
@Christopher Hui , yes indeed, I was "speaking about how it is skewed compared to the CoC of a conventional 20% loan". My usual recommendation is: DON'T count your own "rent" outlay as if it was income. Rather, find out what the REAL cost to you would be per month. Unless you have reason to believe a property is already undervalued, I reckon you should look elsewhere if you can't get your own outlay to be SIGNIFICANTLY lower than if you were one of its tenants. Cheers...
I see three problems with your hypothesis. First, you cannot include your "rent payment" into the calculation because it is not income. You have already earned that money from your W-2 job. Secondly, you must include all costs associated with purchasing the property (Closing cost, inspections, fees, etc) in your total cash in. Lastly, you are missing a lot of Expenses in calculating NOI. Need to simplify your analysis approach. Hope that helps.
Hi @Christopher Hui - A $410K purchase price with $3200/month in rents is waaaay too expensive. Once you take these numbers off paper and into the real world.... you'll be wondering why you're not making any money.
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