Is this a good deal? 8 unit rental property @ 350k

15 Replies

I am looking to purchase an 8 unit apartment building in a good area. Purchase price is $350k, with 20% down puts me at $70k invested (before closing costs) and $280k financed for 15 years. Property gross income is $66k/yr, net income AFTER mortgage is about $30k/yr with room for repair, vacancies etc. I feel like this is a decent deal, getting about 45% cash on cash return per year and getting initial investment back in a little over 2 years while mortgage is being paid for by tenants etc. I feel like the numbers work but I am a little sticker shock on the purchase price. Thats a lot of money. Tax value is right at 350k, so it seems to be a fair price. Just a lot to bite off. I'm a little concerned if I purchase this one, that will keep me from purchasing more next year once I get a whopping 280k owed to the bank. I know many surpass that x10 but it just seems like a lot of money. After 2 years I get to put about 30k in my pocket and after 15 years I could have $450k net from this account plus 280k mortgage paid off. Price still worries me a bit as its a lot of debt to be stuck with for awhile. Thoughts on this deal? Thanks!!

@ThomasVisaggio all of the units are full, all long term tenants except for 2 of the 8 units. The 2 units are currently rented out to travelling nurses. Property is in great shape I would say

@Andrew Michaud . What is your goal for the property? That's really the first question you need to ask yourself. Are you investing for the cashflow? Are you investing to perform a value-add, then exit in 3-5 7 years? Why are you financing 15 years? 

 If you are worried about using your own money, do you know how to raise money? Of course using other people money is not free.

If your goal is to make as many acquisitions as possible, then you should spend as little of your own money as possible.

I'm missing something from the numbers. You provided the income ($66k). But what are the yearly expenses?

If you are managing the property at 50% of income (typical), then your NOI is $66k/2=$33k. I'm not sure how you net $30k after paying mortgage. Make sure to review those numbers.

Many of the tenants pay own utilities. What I would be paying in electricity, heat, property tax, insurance, snow/lawn, water/sewer, internet/cable for traveling nurse units, trash, and 3k considered for repairs is about $16,000 in total expenses. Mortgage will be about $20,000 per year. That is $36,000 in total expenses. 30k net income before tax time

@Andrew Michaud 44k/door and rents of  about 700/mo should do pretty good. Get a rent roll, financials and an inspection and see where that gets you. Traveling nurses are a great income source if you can keep the units full. Regional hospitals are getting hit hard and many have been shut down accross the country would not hurt to check into that too. The hospital will have a person in charge of getting accomodations for the nurses make sure you can get access to that individual and see what the forecast looks like. All the best!

I think you are way underestimating the expenses or I am misreading your numbers.     You say $60,000 gross rent / year.   A quick estimate with Taxes, vacancy, repairs etc is 50% expenses to rent.  So are you are at $30,000.00 gross.

Debt service on $280,000 for 15 years (likely around 5.5% rates right now) is $27,450. So positive cash flow is $2,550/year, 3.3% COC.

Is there any way you can get 30 yr financing. You do not want to be parking that much equity created with a 15 year.

You should be expecting your expenses long term to be at least in the range of 40%. Your estimate of expenses in the 24% range is not realistic. You have no cap expenses, no vacancies, evictions, legal etc.

you’re  using wishful thinking.  I have a similar property and the numbers are much thinner then you project.  You need a rent roll and actual balance sheet and a in depth inspection.  What you don’t know will destroy not only your cash flow, but you ability to get another property or the motivation to buy another one. 

Income

Unit 1 - 1250/mo - 15000/annual 

Unit 2 - 450/mo - 5400/annual

Unit 3 - 475/mo - 5700/annual 

Unit 4 - 625/mo - 7500/annual 

Unit 5 - 400/mo - 4800/annual

Unit 6 - 600/mo - 7200/annual

Unit 7 - 475/mo - 5700/annual

Unit 8 - 1250/mo - 15000/annual

Total Monthly - 5525

Total Annually - 66,300

Expenses 

Property Tax - 7,500

Insurance - 3,000

Water/Sewer/Trash - 1,700

Electric/Oil - 3,500

Cable/Internet - 1,800

Lawn/Snow - 1,000

Repairs/Vacancy - 3,000

Total Expenses - $23,200

Mortgage - $22,000

66300

Total - 45,200

Net Income - $21,100

I guess I had a couple of other things running through my head when calculating last night.. but these are the stats. We are now at 21,100. Lets call it 20k and put the rest towards vacancy/repairs. 

70k initial investment, 20k annual income after all expenses and mortgage. Is this still a good deal? 

Originally posted by @Andrew Michaud :

Income

Unit 1 - 1250/mo - 15000/annual 

Unit 2 - 450/mo - 5400/annual

Unit 3 - 475/mo - 5700/annual 

Unit 4 - 625/mo - 7500/annual 

Unit 5 - 400/mo - 4800/annual

Unit 6 - 600/mo - 7200/annual

Unit 7 - 475/mo - 5700/annual

Unit 8 - 1250/mo - 15000/annual

Total Monthly - 5525

Total Annually - 66,300

Expenses 

Property Tax - 7,500

Insurance - 3,000

Water/Sewer/Trash - 1,700

Electric/Oil - 3,500

Cable/Internet - 1,800

Lawn/Snow - 1,000

Repairs/Vacancy - 3,000

Total Expenses - $23,200

Mortgage - $22,000

66300

Total - 45,200

Net Income - $21,100

I guess I had a couple of other things running through my head when calculating last night.. but these are the stats. We are now at 21,100. Lets call it 20k and put the rest towards vacancy/repairs. 

70k initial investment, 20k annual income after all expenses and mortgage. Is this still a good deal? 

So assuming the two units at 1,250 a month are you accounting for replacing furniture and items in the unit over time?

Things that bit me some.  The property tax is that based on your purchase price or the previous owners?

I don't see any capex expenses allocated. And your repairs are super low for 8 units.

How old is the building?  How old are the roof(s).  Two story or one?

What about property management?   You have to account for that for your figures or you are making it appear like a better deal then it is. 10% is pretty standard.  

Your numbers are thin at best and more then likely not remotely close to how it will actually perform.  If you want the deal go for it, but be honest with your numbers.  

Thanks for posting the exact numbers. I was also skeptical about the original assumptions. 

As mentioned by some property management and if you have traveling nurses there are additional costs for short term rentals such as cleaning... etc. 

You are not putting aside any funds for rainy days. You should really allocated 50% of income towards expenses. 

What are your prospects of increasing income at the property ? If I were in your shoes I would look into that seriously. 

I wouldn’t want to pay all those expenses for your tenants you need to find a way to bill them, for trash water sewer and cable.The property is not separately metered for water  gas and electric?

Expenses

Property Tax - 7,500 double check assessed value as this could go up significantly after you purchase

Insurance - 3,000

Water/Sewer/Trash - 1,700

Electric/Oil - 3,500

Cable/Internet - 1,800

Lawn/Snow - 1,000

Repairs/Vacancy - 3,000 - this is super low. 4.5% for BOTH repairs and vacancy combined? Also you have No Capex bucket. Generally you'll want to see 5% each for Repairs and Capex, then 6% for Vacancy (even 8% which is about a month). This is a rule of thumb as you'll have months/years that are higher and lower than those numbers. This puts you at

  Repairs: $3315

  Vacancy: $4000 (6%)

  Capex: $3315

  (Total = $10,600)

Property Management: 10% ($6630)

Total Expenses - $23,200 $35760

Mortgage - $22,000 - Not sure what your interest rate is but for a 15 year, $280k loan at 6% you're looking at $28,344 per year. 


New net: $2196 


However, this depends on your goals. If your goal is to have a paid off asset in 15 years, that will then be a cash flow monster with return on equity (not counting appreciation) at almost 11%? Then yeah I would say it COULD be good deal depending on a couple things below. If your goal is that you're expecting $20k per year cash flow right now then that seems wildly optimistic. Expenses will come up and they will be more than you have allocated in your numbers.

One thing: can you cut the cable and just get internet and Hulu? That seems like it would be cheaper than the $1800 per year.

One more thing: not sure where you're getting $1000 per year for snow removal and lawn care but that seems REALLY low. If there's a parking lot that you're having plowed I'd anticipate at least 10 or 15 times that amount...

As far as property management, you could self manage if you want, but factor it in to your numbers so if you decide you HATE property management, or you no longer can do it for some reason, you know where you're going to be at. 

Think of the possibilities though: could you allocate another 2 (or more?) units to travelling nurses to raise the gross income? You say there's long term tenants, are rents below market? Can you cut expenses anywhere (utilities would be the big one--the cable would help too).