Would you do this deal?

Multi-Family and Apartment Investing
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Would you do this deal?

Solomon Fulop
Buffalo, NY · Member since 2018 · 27 posts · 10 votes

Calculated Numbers (4-unit)

Helloooooooo bigger pockets multi-family investors! 

I am looking for a quick sanity check as I'm going to have to make a decision on this within the next 24ish hours.  This would be my first deal ever and I'm hoping it will lay the foundation for me to be able to start marketing more and acquiring more investment properties.

These numbers are extremely conservative in general and the ARV is without putting any money into kitchens and bathrooms which will probably need work down the line, but as rentals I don't see a need as they are in good enough shape. The rents are currently at 600, 600, and 550 which are severely below market. I've been quite conservative in running my numbers with a max rent of 800/800/500 (I would live in the 4th unit), but median rents are 1,100 where I live and this is in a really good walkable location.

The electrical is rough (knob and tube) and although I plan to bring it up to code I don't plan to rip into the walls until I have a few years of income to do some remodels.  The roof has about 5-7 years still left on it and is JUST showing signs of wear.  I have budgeted 30% of the rental income ($2100) to be put away in a separate account for these kinds of repairs. At the end of the day, I will keep 550/$600 in my pocket by putting $650 a month into a repair fund, and then freeing up about $550 to grow my business.  

Bigger pockets, would you do this deal?

Thank you all in advance for your responses!

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Marjeanne Fields
Real Estate Agent · Phoenix, AZ · Member since 2016 · 69 posts · 83 votes
7y

Make sure your insurance will cover you with the knob and tube. Get an estimate from them as I anticipate it might be higher than you think. 

How are you getting 100% loan with only 2% interest? That is a huge red flag to me. 

In your analysis over time you have not accounted for the roof. Nor does it look like you have accounted for the electrical. I think your expenses are just too low. 

Your Cash on Cash goes down in year 15. Why?

Overall- I would not buy this property based on your underwriting. I just think you need better underwriting here is all. 

Hope that helps though. Good luck!

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  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y

    @Solomon Fulop. Your link doesn’t work

    1Reply
  • Solomon Fulop
    OP
    Buffalo, NY · Member since 2018 · 27 posts · 10 votes
    7y

    @Caleb Heimsoth  Thank you for catching that! First time Ive posted a calculator, hopefully its working now.

    0Reply
  • Marjeanne Fields
    Real Estate Agent · Phoenix, AZ · Member since 2016 · 69 posts · 83 votes
    7y

    Make sure your insurance will cover you with the knob and tube. Get an estimate from them as I anticipate it might be higher than you think. 

    How are you getting 100% loan with only 2% interest? That is a huge red flag to me. 

    In your analysis over time you have not accounted for the roof. Nor does it look like you have accounted for the electrical. I think your expenses are just too low. 

    Your Cash on Cash goes down in year 15. Why?

    Overall- I would not buy this property based on your underwriting. I just think you need better underwriting here is all. 

    Hope that helps though. Good luck!

    4Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y

    @Solomon Fulop. Interest rate is way to low. Should be way higher at 5 percent minimum. I would not do this deal. Your rent to value ratio is to low

    1Reply
  • Solomon Fulop
    OP
    Buffalo, NY · Member since 2018 · 27 posts · 10 votes
    7y

    @Marjeanne Fields the reason for the low interest rate is because im going through a first time home buyers program (naca) that will allow me to buy down the interest rate. I am taking advantage of that as much as possible by using a bit of cash up front (10k) on my end and the rest is coming as a concession from the seller. Hopefully that clears things up a bit

    1Reply
  • Edward Liu
    Palo Alto, CA · Member since 2017 · 230 posts · 200 votes
    7y

    Although you live in 1 unit and will property manage, your numbers should assume you are not living there (unit is rented out) and some cost for property management.

    You have 0 down and 2% interest for this purchase.  Unless you have a rich uncle, such number is not possible.

    Likely you are over-estimating this property's appreciation potential over time based on your numbers.

    This property seems to be in Upstate NY. Based others who posted here previously, you should get higher than 1% rent and CAP that is closer or higher than 10. Your numbers don't reflect such (maybe it will change once you add in rent for the 4th unit). Not sure if this one is over priced. Run some real comp reports.

    1Reply
  • Solomon Fulop
    OP
    Buffalo, NY · Member since 2018 · 27 posts · 10 votes
    7y

    @Edward Liu. naca is a no money down

    program that allows you to “buy” points for every 1% of the loan you pay off upfront. I am betting less on appreciation and instead looking at this strictly from a cash flow perspective because those numbers are real and appreciation is pure speculation. If this is naive, please provide your opinion, but I am looking at this more as a freeing up capital play with the potential to control rents and make decisions to squeeze out the full rent and income potential of the units (this is why id prefer a 4-unit) understanding fully that that much property could also be a curse.

    thanks!

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    7y

    Your purchase price needs to be based on todays rental rates not future. When determining purchase offer never base value on future rates. Sellers need to be punished for not maintaining market rents. The rent to price is way out of line. Ideally you want rent to be a minimum 1% of property value. Maybe not realistic to achieve in this case but no way you should be paying anywhere near $318K plus repairs. 

    0Reply
  • Ilidio Cardoso
    Real Estate Broker · Boston, MA · Member since 2017 · 55 posts · 22 votes
    7y

    @Solomon Fulop

    I am familiar with NACA and they will allow you to buy down your interest rate. Your estimated repair cost is $30,000. How much will it cost you to buy down the points to 2%?? ( That would change the cash on cash roi) I would include that on your total cash needed. Maybe I'm just a little confused but is the $196.00 a monthly cash flow just for the 3 units ? Or is that an estimation for all 4 units?

    Not enough meat on the bone for me. 

    0Reply
  • Solomon Fulop
    OP
    Buffalo, NY · Member since 2018 · 27 posts · 10 votes
    7y

    While I think you make a valid point @Thomas S. it seems to me the rents being low allows for a potential upside.  I use "potential" loosely because its current rents are concrete and as you said future rents are not.  I do not disagree that the price is quite high and I am unfortunately in a very very hot sellers market ATM. It's in a very very good neighborhood, but I do agree the price is quite high which is why I am vacillating and posted it to bigger pockets for advice.

    Thank you for your response!

    0Reply
  • Solomon Fulop
    OP
    Buffalo, NY · Member since 2018 · 27 posts · 10 votes
    7y

    @Ilidio Cardoso I have gotten some quotes for the work that needs to be done.  30k is conservative when based on my numbers after talking to a few people and getting some estimates, I think the needed up front repairs necessary are more like 20k. This includes bring the electrical up to code by installing GFCI plugs where needed, replace the fuses with circuit breakers, remove ivy, remove a chimney thats coming apart and replace the less than 3 year old HWT (moving them to the back house basement) and install new direct vent units in the front house, remove a small amount of mold from the back house, replace some composite siding boards that are broken, a few grand for new gutters (very conservative), fix a bay window sill , install 1 set of inside railings, and secure 1 loose porch (owners unit) , but Ive padded this list to 30k just in case because it really is a fair amount.

    The cost to get the interest rate down to 2% is 8k out of my pocket and 20k seller concession rolled into the loan.  Ive also been a little conservative here and went with 2%. if I  put down 28k up front its more like 1.75%-1.85%.

    Thank you for the response!

    1Reply
  • Solomon Fulop
    OP
    Buffalo, NY · Member since 2018 · 27 posts · 10 votes
    7y

    @Ilidio Cardoso I forgot to answer your other question which is that the $196 is the total cashflow for the 3 units (total rents would be $2100 from tenants) with me living rent free in the 4th unit, but putting away at least 630/mo as a repair fund.

    Thanks again. 

    1Reply
  • Ilidio Cardoso
    Real Estate Broker · Boston, MA · Member since 2017 · 55 posts · 22 votes
    7y

    O.k. @Solomon Fulop

    I'm a big fan of OPM and it sounds like you did your homework.   I was a little confused.  Not a bad deal ! 

    Best of luck !!

    1Reply
  • Solomon Fulop
    OP
    Buffalo, NY · Member since 2018 · 27 posts · 10 votes
    7y

    @Ilidio Cardoso  Do you still feel the same way about not being enough meat on the bone after considering that Id be paying less than half of what Im likely to pay in rent living in the same general area if I'm putting 630/mo away for repairs?  If these this was purely for investment purposes I think the numbers are pretty terrible, but seeing as Ill be managing the property, as I'll be living in it and have to legally until its paid off, and it's in a great neighborhood it will cut down on my vacancy (although I've accounted for it) and should appreciate although I'm not betting on it.  

    This is a duplex with a carriage house, so it's somewhat unique in this particular neighborhood. The deal is making me somewhat schizophrenic as one day I think it's a good deal and then Im blasted with doubt, but I've been fervently running the numbers all different ways for the past week.

    1Reply
  • Solomon Fulop
    OP
    Buffalo, NY · Member since 2018 · 27 posts · 10 votes
    7y

    @Ilidio Cardoso thank you!

    1Reply
  • Ilidio Cardoso
    Real Estate Broker · Boston, MA · Member since 2017 · 55 posts · 22 votes
    7y

    @Solomonfulop

    Sounds like a pretty good deal. Has meat on the bone especially since you will be living on the property!  

    Go for it !

    0Reply
  • Ilidio Cardoso
    Real Estate Broker · Boston, MA · Member since 2017 · 55 posts · 22 votes
    7y

    @Solomon Fulop

    We can sit on the side lines and analyze deals for ever.  I know NACA makes you go through a lot of work to get approved to purchase a property.  It sounds like you have done all the heavy lifting and research.  It is challenging to evaluate deals just on paper and not really know the neighborhood.   Most people will not agree but I say go with your gut feeling.  It sounds like you can make this deal work!!   

    Have a great weekend!

    0Reply
  • Roni E.Pro Member
    Specialist · Earth 2.0 · Member since 2019 · 598 posts · 271 votes
    7y

    @Solomon Fulop my worry is you better get a very estimates as it seems you need a new roof, updated kitchen, and updated bathroom. I think you might realize that you need the unit 4th income. I would not wait 5 years to update I would try to up by Y3 and see if you can do a refinance by Y6.

    0Reply
  • Solomon Fulop
    OP
    Buffalo, NY · Member since 2018 · 27 posts · 10 votes
    7y

    @Roni E. Unfortunately refinance is not an option on this deal as NACA doesn't allow you to do that. Also, I have to live in the property for the life of the loan in this instance.

    @Ilidio Cardoso  Thank you so much for your input, I really appreciate it.  Have a great weekend!

    1Reply
  • Kyler Cook
    Rental Property Investor · Kalamazoo, MI · Member since 2018 · 117 posts · 235 votes
    7y

    @Solomon Fulop

    Anyone saying there’s not enough meat in this deal started investing 5+ years ago when there was a lot more risk (people didn’t believe in real estate as much) and a lot more properties. To cash flow at all and be able to essentially live paying your own rent into your business is a sweet deal. You’ll learn as you go, and you may have things you look back and wish you’d done differently but I don’t thing you’ll have regrets. How many people get to live for free paying themselves and their dreams?

    3Reply
  • Solomon Fulop
    OP
    Buffalo, NY · Member since 2018 · 27 posts · 10 votes
    7y

    @Kyler Cook  Thank you for your input.  I know the numbers are tight which is why I am trying to get outside opinions.  

    I cant help but wonder if the opportunity cost (more units means more opportunity for rents and protects from vacancy) is worth the offset cost of repairs on a 4-unit over time especially because there are more roofs and kitchens, etc.  This is probably my largest source of contention at the moment as to whether Id be better off going off with a cheaper duplex with less units, a bit less opportunity, but less repairs vs the alternative. 

    0Reply
  • Frank Dortilus
    Renter · Atlanta, GA · Member since 2014 · 30 posts · 6 votes
    7y

    @Solomon Fulop

    If I were you, I'll take care of the electrical work,

    Lives and investment is on the line here. After calculation if it cash flows roll with it. You'll be living for free and getting started with your journey.

    2Reply
  • Justin Kane
    Specialist · San Antonio, TX · Member since 2015 · 909 posts · 297 votes
    7y

    i wouldnt do knob and tube,, hell no, is it aluminum wiring as well,. calculate the deal with full remodel with everything brought up to todays standards and codes

    1Reply
  • Solomon Fulop
    OP
    Buffalo, NY · Member since 2018 · 27 posts · 10 votes
    7y

    @Justin Kane The knob and tube bits are using copper wires not aluminum wires. I just got the quote back from the electrician I had look at it and he quoted me 14K for the job which is likely going to require renegotiation in the price as I am not comfortable paying for such a major repair when the guy is trying to sell the property at full retail with good working mechanicals which is not the case.

    Thank you!

    1Reply
  • Justin Kane
    Specialist · San Antonio, TX · Member since 2015 · 909 posts · 297 votes
    7y

    yes this is part of the diligence process, but becareful not to become known as the guy that retrades

    1Reply
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