I'm at a crossroads about a 5-plex that's for sale. Hoping to get some opinions on whether my husband and I should move forward. Here's some background info:
5-plex. 4-1bdrm and 1- 2bdrm apartment. Definitely has some deferred maintenance issues and could use a cosmetic upgrade, badly! All units rented at a total of $2750 gross income each month. Property is listed for $225,000, and has been on the market for well over a year! At list, the mortgage, taxes and insurance would be around $1000-$1100 a month. The expense report I received had a lot of maintenance costs, which was apparently due to one of the units being remodeled. They didn't list mortgage on the expenses, but overall profit was around $17,000 for the year. I was concerned about a lack of the mortgage being listed, but if an offer is accepted I've asked for more detailed itemized expenses.
Since it's been sitting so long we thought we might be able to come in low. Sellers apparent bottom line is 220k. The numbers still make sense to be profitable at that price, but I'm concerned as to why it hasn't sold already then. It's not the greatest area, but they are starting to do some developing, and opened a big medical school there a few years ago. Comparables put the property value at around $192k. I feel like the potential here could be great! But it'll take some money and time.
5 plex turns into commercial property. Have you checked on actual commercial lending and insurance costs in your area? Some issues you might face are 25 year amortization and balloon payments.
@Rachel Payton Is it in Albany? Big medical school makes me think Lebanon? I got out of my Corvallis rentals after the bubble and haven't looked back. $16k in operating expenses without a mortgage seems like you would be cutting it real close if you financed, and none of those areas scream appreciation to me. Are you able to force equity with some rehab?
1) you would be buying it for 97.8% of list price (AKA: anyone can buy it at that so if it is available is it a good deal?) You will be paying market price for the place at best (which if that is your MO then that is fine but you need to consciously know you are buying it at market value).
2) Comparables are 192K means that you would be buying at 114.6% of market value. If that's true then you will have to put a lot down because why would a lender finance it?
So, your analysis says there is absolutely no reason to buy it unless there is information that you gave that is not the whole story or incorrect (did you mean 292K?)
I expect the operating expenses will be less. The current owner uses a management company. I will be managing the property myself. The high maintenance costs from last year were due to unexpected damage. I think a fire. So an entire unit had to be rehabbed. There is definitely room for forced appreciation. 4 units could use a renovation and all are currently rented slightly below market. Probably due to repairs/deferred maintenance. There's a large, unused space that's bare bones on the ground floor (as in looks like a basement, concrete floors and walls) that could be renovated into an extra 1 bedroom unit. It is in Lebanon, within about 2 miles of the school and hospital and close to down town. Yes, if we bought it, it would be above current market value. Yes, I'm aware it's commercial and have looked into financing, but will definitely need to do more research and make sure I understand the whole process before I make the leap. If the previous owner was making $17,000 a year without a mortgage, that amount would cover the mortgage I'm expecting to have, and I'm expecting costs to be less.
Sorry if I didn't provide enough info. This will be our first multi-plex purchase, if we go through with it.
I agree with what everyone has been saying. Lots of red flags. Seller had a $17,000 profit last year even with major rehab (fire)??? The fire Rehab should have been covered by insurance (or most of it) and not included in Operating Expense. That's what CapEx reserves are for. You need to break down your numbers better to get a more accurate analysis. Also, if they had a fire how many units were out of service and for how long? Rent was not collected for that time period. Therefore, they could not achieve a GSI of $33,000 ($2,750 monthly rent x 12).
You say Seller uses a Property Manager, but, you plan to self manage and will not include that expense. Whether or not you self manage or use a PM you should always include a PM fee (I.e. 10%) in your analysis.
You need to remember that you are buying a Multi-Family Rental property for one main purpose. Passive Income!!!! Not appreciation (that is just icing). If it doesn't Cash Flow (INCOME) when you purchase it or after Rehab, then, it's not a good deal.
Here's my simple and quick analysis of your numbers:
GSI = $2,750 x 12 = $33,000
Expenses (before Mortgage) 50% = $16,500
NOI = $16,500
Your Mortgage payment = $1,100
Cash Flow = ($16,500/12) $1,375 - $1,100 = $275 or $55 per month per unit
This is not my idea of good Cash Flow.
You also must consider the Rehab/Upgrade cost up front with your purchase price. Together they should not exceed your expected Comp Value.
This is getting too long and there are other things I would question or need additional information on. Hope this helps. :)
Yes, it does! Thank you :)
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