Thinking of buying a analysis

18 Replies

Hi everyone!

I am considering buying a fourplex in Dallas area, asking price is 300k, all units are currently occupied in a good condition. Rents currently total 2900 a month but could reach 3600 by looking into the other comparable units around. If i use a HML with 7.5% and 2 points. He is willing to fund 75% of the deal the rest is on me. Please let me know your thoughts whether this sounds like a deal or not. Thank you!

@Linda Forrest   what are your investment goals? 

is this deal have any value add opportunity apart from increasing the rent?

do you need to spend any money to increase the rents from $2900 to $3600?

One thing is fore sure, it will not cash-flow... 

I personally wouldn't buy it... unless its worth at least 20% more then what you are paying for it.

what would be the price i would have to pay to make it a good deal? Each unit needs cosmetic work between 3-5k to reach the maximum rent. I bought SF home last year as my first investment and I have a decent cash flow on it. I am still very new to all this that is why I have so many questions. My goal is to keep expanding rental portfolio, have been looking to buy between 2-4 unit property this year.

Run the numbers through the BP calculator to give you an idea of the return and cash flow you'll get. I looked into a 4-plex for about 300k and couldn't find a way to make the numbers work. Also, how are you planning to get out of the hard money loan? 

I am confused on the numbers that others are running.....

Please tell me the numbers straight

selling price 300k

mortgage  225,000

insurance ???

taxes    ????

garbage ???
electric   ??? 

Heat ????

miscellaneous ????

length of the loan with hard money ???

Percentage rate 7.5  Correct?

I am not seeing this as a negative cash flow

It is a huge down payment 75k

It will cash flow if the loan is for 20 years or longer

You would not be able to use that 75 k anywhere else. so time value of money I would say is not great but it equity. 

Please tag me with your responses so I can redo these numbers and make sure I am correct. 

@Linda Forrest Here is the problem I see. A HML is a short term solution and even if he finances it, you will be making interest only payments which at 7.5% come out to about 1400/month. If you do 3k/unit in repairs plus all the closing costs you are looking at your cash needed for this deal to be close to 100k but have only 75k in equity. And that is if you can actually get 900/unit rents for 3k in repairs. It will take you at least 2 years to transition old tenants out/raise rents to those levels so vacancy will be higher than normal. And through all this time you will have no principal paydown. If you have 100k to put down, do a conventional loan but even then it is not a good deal. I attached a screenshot from my analysis spreadsheet so I hope you can see it. If its too small you will at least be able to see that most of the metrics are red or yellow. I put in expenses pretty conservatively (about 20k) and assumed you would do PM. My advice, don't buy it. 4-plex prices are super inflated in north texas right now. 

yeah theres a lot of missing info and numbers on this. 7.5% isn't a bad rate on an HML actually however if you really are already putting down 25% might as well get a legit commercial or conventional loan.

@Linda Forrest Make sure you calculate property taxes and insurance correctly. This doesn’t even meet the one percent rule and will likely be cash flow negative
@Linda Forrest .. I agree with all people saying. If you could calculate insurance, tax, maintance (5-10% rent), cap ex (10% rent), vacancy (5% rent) n other expances if any like (lawn, snow removal, trash, utility (if common)). You would not have positive cash-Flow for the property. And if any, it would be so low to spend this much money n risk on. Your money could drive more ROI in stock investment (which could be 8% a year on avg) than this specific deal if you calculate all of this number correctly.
@Linda Forrest Hey Linda, I would strongly consider what everyone is telling you. This property does not make any sense to buy. There is soooo many underlying expenses most people don’t realize when purchasing rentals. On top of what everyone is asking (taxes, insurance, PITI etc) you need to also hedge Incase potential hidden problems. Vacancy, management (unless you manage it), 8-10% for maintenance, 8-10% cap ex. Also, if you pay all utilities including water, sewer, trash lawn etc. I would strongly pass. Wait for a deal that covers all this and you still make positive cash flow of at least 12% cash on cash. This is in case the markets tumbles as in 2008. Then when you need to lower rents your mortgage will be covered and you can still have a little cashflow. Alot of people talk about theIr amazIng deals and never consIder any of these hIdden expenses. That’s how you get In trouble. Sorry :(...

Great input everyone and thank you ! The reason for using the HML is that the deal came from a wholesaler and they wanted cash only. We did use the BP calculator and I tried to post that info/link but couldn't get it to post for some reason. but, it seems as if at this point in time the advice is to pass and wait for another one. This conversation is very helpful ! Thank you !!!

@Linda Forrest if, you need help in your evaluations as you get started, please reach out.  I'm happy to help.  Unfortunately, every opportunity a Wholesaler brings, is not a deal, especially when it comes to multi-family.