Is this 4 - Unit a good deal?

Question

Hey all,

I have been looking at this 4 unit.  The property is located on the space coast of Florida and in a growing beachside community.  The property consist of 2 efficiencies and 2 one bedroom/one baths.  Current rents are $550/month for efficiencies and $600/month & $650/month for one bedrooms (all utilities are paid by tenant).  This is an off market property, where the owner is wanting $300,000.  My thoughts are the property isn't worth more than $270,000.

All units are mostly undated inside with newer A/C, flooring, kitchens, and overall clean inside.  The exterior will need cleaning up, mowed, and painted.  A roof in the near possibility ($10,000 total).

Rents could be increased to $600 for efficiencies and $700-$725 for one bedrooms.

Current cap rate at $270,000 is 5.9%.  I would be financing 75% of value.  Would you pursue with the purchase?  Let me know if you need more info!

Thank you!

Tom Arnold · Answer

Thanks for all the replies!  As a newer investor, I am interested in long-term cash flow.  @Anthony Wick I agree with your theory on using current rental rates and utilities and not projecting on potential higher cash flows.  Also each unit has separate water & electric meters.  Garbage is included in taxes.

@Joe P. the major expenses are taxes, property insurance, capX, and ground maintenance.  These would also be self-maintained.

$270,000 with $67,000 downpayment and $9000 closing cost

•  Income: $2350 per month
• ExpensesMortgage: $202,500 @ 4.875% will be 1,071Taxes: $3218/year or 268.16 per monthInsurance: $166 per monthFlood insurance:  outside flood zoneProperty Management: self managedCapX: (10% of gross rent) at $235/ monthMaintenance: (10% of gross rent) at $235/monthVacancy: (5% of gross rent) $117.50Property doesn't have common amenities.
• Mortgage: $202,500 @ 4.875% will be 1,071
• Taxes: $3218/year or 268.16 per month
• Insurance: $166 per month
• Flood insurance:  outside flood zone
• Property Management: self managed
• CapX: (10% of gross rent) at $235/ month
• Maintenance: (10% of gross rent) at $235/month
• Vacancy: (5% of gross rent) $117.50
• Property doesn't have common amenities.

• Mortgage: $202,500 @ 4.875% will be 1,071
• Taxes: $3218/year or 268.16 per month
• Insurance: $166 per month
• Flood insurance:  outside flood zone
• Property Management: self managed
• CapX: (10% of gross rent) at $235/ month
• Maintenance: (10% of gross rent) at $235/month
• Vacancy: (5% of gross rent) $117.50
• Property doesn't have common amenities.

Other than the roof (not leaking, just 12 years old) everything is in good shape (A/C, appliances, updated electrical, etc.)  If rents were to be increased, painting the exterior was also included in the $10,000 exterior cost.

Simple cash flow is $257.34/month and 4.03% cash on cash return.  Just seems too little for the amount of cash outlay.  My thoughts are to let it pass, as the return isn't there.

Anthony Wick · Answer

@Tom Arnold

Tenants really pay ALL the utilities? 4 separate meters for water & sewage, gas, electric, and garbage? Have you run your numbers with reserves for vacancies (3%), capex (5%), maintenance (5%), and property management (7%, even if self managing)? And my numbers are less than what many hold out of rents.

And what are you using for your loan terms? I currently (closed on a duplex this morning) got 25 year amortized, 5.45%, with a 7 year balloon, at 20% down payment. I run all my properties at their current rental rate and current utilities. I don't play with the "the rents could be this on purchase" thing. If it doesn't cash flow on the day of close, I'm not buying. Now, I do look at potential higher cash flows with higher rents and improvements. But I'm not going negative on day 1.

And what are your property taxes and insurance like in a beachside community?

BTW: that $10k roof will be about 3 years of net income for you (off the top of my head).

Maybe the numbers do look good, but I'd like to see them put into an analysis spreadsheet. I'm a cash flow guy.

Joe P. · Answer

@Tom Arnold welcome, and good luck!

As someone who like @Brian H. is a newbie but loves crunching numbers, what have you factored in for all of the other expenses of this property?

@Anthony Wick is a cash flow guy and I would agree. Depreciation, future equity, etc....those are nice to have but not my strategy. I want my asset to put cash in my pocket every month.

So I think you need to further find/extrapolate the following expenses, and dump it into a spreadsheet. The 1% rule is helpful, but only a guideline. If you hit the 1% rule and your mortgage, taxes, insurance, capex, maintenance, etc. is only $300 a year, then it's a slamdunk! But that never works out like that...so find out what these are and put pen to paper:

• Income - call it $2350 per month
• ExpensesMortgage? $202,500 @ 5.5 will be $1,150 per monthTaxes?Insurance?Flood insurance/hurricane insurance?Property management or self manage?CAPEX (I use 10% of gross rent)Maintenance (I use 8% of gross rent)Vacancy (I use 8% of gross rent)Any common electric, gas, sewer, or water account?Garbage / Fire / Police dues?License / inspections / business dues?
• Mortgage? $202,500 @ 5.5 will be $1,150 per month
• Taxes?
• Insurance?
• Flood insurance/hurricane insurance?
• Property management or self manage?
• CAPEX (I use 10% of gross rent)
• Maintenance (I use 8% of gross rent)
• Vacancy (I use 8% of gross rent)
• Any common electric, gas, sewer, or water account?
• Garbage / Fire / Police dues?
• License / inspections / business dues?

• Mortgage? $202,500 @ 5.5 will be $1,150 per month
• Taxes?
• Insurance?
• Flood insurance/hurricane insurance?
• Property management or self manage?
• CAPEX (I use 10% of gross rent)
• Maintenance (I use 8% of gross rent)
• Vacancy (I use 8% of gross rent)
• Any common electric, gas, sewer, or water account?
• Garbage / Fire / Police dues?
• License / inspections / business dues?

And if you don't think any of this applies...you're wrong or you need to confirm you're right. Get to the bottom of every red cent you need to spend. All check conditions of the big ticket items -- the roof is the biggest right now, but also check heating systems, appliances, plumbing, electrical, structure, etc.

Sam Shueh · Answer

The easiest way is contact seller/listing agent that you are interested and your highest is XXXX.

Joe P. · Answer

@Tom Arnold most people won't even sniff at a 4% COCR and the fact that these are just estimates, meaning it could be so much worse, tells me it's a NO.

The chances of you getting a multi-family mortgage at 4.875 are pretty low. I closed in August on a property and I got 5.625%. The current rates for a typical home buyer just don't apply for multifamily.

I'm glad your self managing but ultimately a lot of people here strive for true passive income -- that is to say you manage the PM and they manage this and a string of your eventual properties. At 4% cash flow with probably very little room to increase rents (more bedrooms means more exponential growth, efficiencies just don't provide it), you'll never be able to offload this property to a PM.

Now, that's not to say this property CAN'T be purchased. How long has it been on the market? Is the seller motivated to dump this? I might consider it at a steep discount, but it depends on how desperate the seller is.

If they are not, don't fret. It sounds like you're working with a realtor and they are working with a team of realtors. Ask him/her to work within their networks for the true deals. Properties that are maybe not yet on market, and might be cheaper to get before hitting the open market -- those are the ones you want. My NJ realtor texts me every once in awhile with something that is pre-market or just on that she knows is within my wheelhouse. And they're always from people in her network. Utilize those relationships and the deals will eventually come in. On MLS and full price is not a deal -- you need to make money on the deal at the onset and ongoing.

Kevin Dong · Answer

Absolutely no for me.  Not even meeting 1% rent to purchase ratio.  And the efficiency and 1 bed are so limit in future rent increase.   I won’t bother thoes unless it is killer deal.   And again.  I would pay 65% of FMV to make it work.  🤲👍👍

Brian H. · Answer

I'm all about cash flow as well.  I personally wouldn't have a great feeling about this property at this point. Just seems like the cash flow will be non-existent or very minimal out the gate. That stresses me out when I'm looking at potential deals.

Is this 4 - Unit a good deal?

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