Am I making mistake with purchasing this 8-plex as my first prop?

23 Replies

This is my first Multi family purchase and I am very exited. As the result I maybe missing something obvious, so every suggestions would be very valuable. 

This is an off market property which owner is tired of managing himself (he is in mid 70). He owns it free and clear.

Purchase Price: $470K

Down: $230K (using my HELOC), and Seller finance on the remaining $230K.

Expenses (Monthly)

=================

Mortgage: $2,440 

Prop Tax: $1,333

Insurance: $335

Garbage: $100

Grass/Snow: $200

Water/Sewer: $605

Electric (common area): $50

Vacancy (5%): $350

PM & Repairs (10%): $700

TOTAL EXPENSES: $6,113

Income (Monthly)

==============

Monthly Rent: $7,200

no additional income

I am planning to refinance the property 1-2 year after the purchase and pay off the HELOC and Seller.

Property currently values around $650K

Let me know if I missed anything, or anything I need to pay attention to.

Thank you!

Updated 11 months ago

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Updated 11 months ago

Updated the report with BP Rental Property Calculator report. https://www.biggerpockets.com/calculators/shared/608853/579d6300-0d83-4b70-9ce0-f83980c420aa

Why does the owners want to sell it to you for so much less?  He does find getting 650K instead of 470K free of worries?

Not sure how that $650k value hunts in your geography but that implies s pretty low cap rate somewhere in the 6ish range. Wouldn’t fly in mine. 

Why put so much down??

@Oleg Shalumov - Certainly not a great deal to own, not sure why he is selling to you for $470K, if ARV is $650 then flip for profit.

Good Luck

Vivek

@Sam Shueh , I am not sure, I think he just want to sell it as it is his last property.


@Kurt Jones , I am purchasing for $470K, so my Cap Rate is around 9.


@Jack B. I wish I could put less down but seller is asking for 20% down, I think I may agree to putting $100 at the closing. 


@Vivek Khoche , why would you not want to own the deal?

I think you are low on PM and maintenance. Also where is your CapEx estimation?

1. 20% of $470K is $94K correct?

2. Comparing to the local market is there any room to raise rents with any value adds/improvements?

3. How long is the seller finance for and is there a percentage? In case the market changes and you can't refi for what you expect will you still be able cashflow or have any other exit strategies?

4. You have a lot of skin in the game.

Putting $230K down does not make any sense on a rental. With $230K down the opportunity value of that is costing you around 2K per month at 10%.

If you can not get 20% down you should be flipping as opposed to holding.

@Oleg Shalumov

You said you are putting $230,000 down.  Then as an explanation as to why you said the owner was asking/ insisting on 20% down.  With a sales price of of $470,000 your numbers are not adding up.  20% would be $94,000.  $230,000 is 48.9%.

Originally posted by @Oleg Shalumov :

@Jack B. I wish I could put less down but seller is asking for 20% down, I think I may agree to putting $100 at the closing. 


20% of 470K is 94K, not 230K. I don't think you should invest in real estate just yet. Learn the numbers better first....

Hi Oleg,

Read some of the replies. Seem like you are kind of committed no matter what. Let me go over a few aspects:

1. I know in BP there's a little hype of those 20-something kids buying 3 million dollar large apartment buildings as their first deal and similar larger than life success stories, but I personally don't know if I would buy an 8 unit as my first deal. There's something to be said about experience, resolve and knowledge.

2. The quality of your 8 unit really matters. If it's a true A / B type building with A / B type tenants, then you have less risk, but if you are looking at B- / C type building, the risk is much higher

3. Also the age and condition of the building really matters. What I found with old owners near retirement is that while you can get great deals from them, they "checked out" in many cases long time ago and there could be an ample amount of deferred maintenance. The deferred maintenance could kill you on expenses

4. The $7,200 in rent figure - is that factoring in vacancies? You need to factor in at least 5-10%. also, factor in what your property management will charge for procurement (first month) and lease renewals. That would affect your income. Also, is that number realistic for the area, building and economy? Is it based on pro forma only? Have you verified those rents?

5. When you factor in your mortgage cost, you include both your HELOC and your seller finance, right? I did a quick calculation and seems like you're at around 5% on both for 30 years. From what I know about HELOC, they need to be renewed every once in a while - you should look into that. About the seller finance, does that include a balloon? What if he wants his money in 5 years? Does he have the option to call the loan? Are any of your loans have looked rates or are they adjustable, and if so, by how much?

6. The income vs expenses ratio seems very tight to me. What if you have a series of expensive expenses? 

7. Did you factor in your taxes AFTER you bought the property? I have to say that the $1,333/mo seems a bit high

8. how well do you know the management company?

9. Have you seen the seller schedule Es and P&Ls for the last few years? Those numbers could be very telling

10. 30 years is considered to be a long time for commercial properties mortgages. Doesn't make it bad, but something you should know

And here is another equation for you - can you absorb having multiple months of losses and vacancies? 8 unit buildings could be expensive to manage. They are too small for you to hire your own rental agent or maintenance person

From my experience, real estate looks great on paper. The reality is not as pretty. There are always expenses, and in multifamily buildings there are typically more issues. I have a 12 unit building with a wider monthly NOI spread than yours (around $2,000/mo or so) and it's been losing money like crazy. I have another 4-unit with a similar monthly NOI spread to your 8-unit and it just got stabilized again. I have also lost on it thousands of dollars in the last few months. I can float this from cash flow from other properties I own for the most part, and even then it's getting very annoying at this point. If I had this going on my first property, I may have been out of real estate by now. Who knows.

I look at off market deals on occasion and not all of them are good. Off market does not automatically mean good, on deal on market does not always mean bad.

Last point, if you are looking to sell it for more eventually, and you've done your research and believe that the higher price you established can truly support it for a buyer down the line, then just know you are taking a gamble here. It may work out for you and that would be great. But you need to be prepared for if it fails.

All in all, this seems to be a transaction for someone who got some pockets to absorb short term and even mid term losses, as well as a case where you may be stuck with it for a while. Always protect your downside. 

Since you're in Teaneck, is this in the same general area (meaning reasonable commute to NYC)?  What is the configuration of the units and their condition?  Is it subject to any type of rent regulation?  <1000/unit in NNJ close to NYC is a ridiculously low rent roll.  I have a Triplex in Jersey City and get $2000/unit for 2/2s.  Without seeing the property and knowing more about it, I have to think there's serious upside to the rents   I'd be looking at what average rents for similar units are in the area.  I'd also look at how much you'd have to put into the units, and how much additional rent the renovated units would bring in.

@John Thedford , correct, I am missing the CapEx, and Updated the PM to 7% as I was told the PM in the area is 6-7%.

Updated the report with BP Rental Property Calculator report ( please see original post)

Thank you.

@Nick Jones

1. I am putting 50% (using my HELOC for that amount) down, which is $235K (not $230K) as was mentioned before.

Updated the numbers on the report with BP Rental Property Calculator report ( please see original post above)

2. Current rent is $930 a month, and I maybe able to increase is to $970/$980 but i will be looking to do it after I refinance the property.

3. The seller finance is for 10 years, and for 5%. I am expecting to refinance for the same rate but longer time period (20 years or higher). I have another partner who want to join me on this deal and bring the remaining $235K as alternative exit strategy if the refinance does not work. 

4. I agree.

If it’s really worth $650k as is, why not sell it immediately and make roughly $180k?

@Michael Badin , sorry for the confusion with the numbers ... I will be putting 50% down (not 10 as reported originally).

Updated the numbers on the report with BP Rental Property Calculator report ( please see original post above for the link)

@Guy Azta , thank you very much for your respond!

1. I owned and rented smaller apartments before but feel confident that I will be able to handle 8-plex

2. It is actually a B-/C+ area, and you are right the risk is higher.

3. The owner is (or was since he is retiring) in construction business himself, but I (and the inspector) will pay close attention during the inspections on the status of the property. 

4. Yes, the vacancies is calculated, so is Property Management fee (please see original post above for the added link to report). I also verified the rent and the current numbers and slightly lower then the current market rent. I will keep it as it is till I refinance the property to avoid the higher percentage on vacancies.

5. The loan is for 10 years without balloon payment, and he agree that seller will not be able to call it. HELOC rate is 2% (I have it for another 9 years). I will see if I can lower the monthly payment by increasing the length of the loan from 10 to 15 years.

6. I have an additional amount in reserve which i kept for emergencies. 

7. Correct, the taxes always increase after property is purchased. I checked with the city and their taxes is on the property value of $450K, so it may slightly increase. but in general this looks like a proper number.

8. That is a weak spot in this purchase as I am looking at the few PM companies and do not have one available yet. As I mentioned, the previous owner was in construction and had his own crew who was handling the maintenance.

9. I am waiting for those numbers as they are part of my due diligence check along with Rent Roll and expense/repair reports.

10. As far as I know it is very hard to get 30 years mortgage, so if I am not able to get 30 years, I am ready to refinance for 20 years as I will still cash flow on this property.

Agree with you that a person need to be ready for losses and vacancies (or any other problems). That is why I kept some additional amount in reserve. I think it is very risky to invest most of the money into the property and then getting burn and loose it if you have a few financially bad/terrible months.

I want to thank you very much for raising very important points and keeping me in check on those. Also thank you for sharing your experience.

@Michael Wolffs , Mike, I wish it was closer to Teaneck or anywhere to NYC, but the prices here are crazy and I would not be able to afford to get 8-plex even off market. This property is in Warren County, NJ.

@Darren Budahn , I could do it, but I want to invest for long term. To me it is the same question as why would some people Flip vs. Own&Rent: some people like to flip and some like to hold.

@OP " I owned and rented smaller apartments before but feel confident that I will be able to handle 8-plex"

Is there a language barrier here? Your post title says that this is your first property and your asking if an 8plex is too much to take on. 

I'm I reading this wrong?

@Oleg Shalumov

I reviewed your BP report. I have a few recommendations/changes: 

1) vacancies, capex, & repairs must be bumped up to 10% considering it is an older building and the area is not too prone to easily rent out the apartments. 

2) your loan calcs only account for the loan from the seller: $260K @5%. However you have to add the calcs for your HELOC loan as well!

3) your taxes will go up after the purchase. you have to get the rate from the county Tax Assessor site and multiple by the PP to get your new rate.

4) property management for such a small property in NJ will be 10% (not 7%). 

Once you account for all these recommendations, please feel free to share your results on this thread again.

Best!

@Oleg Shalumov , I have a three family in Jersey City in the Journal Square area.  Make sure the building is not rent controlled as many 4+ families are in JC.  What neighborhood are you looking in?  Be careful, people are getting excited about the rising property value, but I would only invest in The Heights or Journal Square area personally.  Regarding cap rates, it's hard for people out of the area to understand a 5-6% cap rate is pretty standard in the area as so many people are banking on continued appreciation in rents and value.   Hard to find value downtown at this point, but there appears to be room to run in The Heights and JSQR.  Bergen-Lafayette can go either way in my opinion.  Greenville is not for the landlords that are faint of heart....

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