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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  • Draven Stallings
    Member since 2019 · 8 posts · 3 votes
    7y

    Alright, I am pretty new at this and it looks like a good deal, as you'll be living for free. I was an electrician for some time and I agree you probably want to get that replaced as soon as you can. I've seen some of those older houses have all kinds of electrical problems like you walk in the bathroom one minute and the lights don't work but after jumping on the floor they do. Oftentimes you will have old loose connections with all your receptacles if you can I'd fix it, sooner than later.  But what does the county appraised value at 83000 mean? Just for my own curiosity? 

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

    @Draven Stallings Thank you for replying!  I was hoping only to do the bits that require bringing it up to code for safety purposes as the cost to do the electrical alone is going to be substantial without ripping into the plaster and lathe which is added expense.  A lot of electricians seem reluctant to fish wires into walls and I don't blame them as it can be time consuming and frustrating.

    The appraisal number means that the city / county came to the house and appraised the house for $83,000 last year.  Maybe someone else has different experience here, but it seems that in my city at least, these numbers are very rarely a reflection of a houses worth or market value.

    0Reply
  • Ryan Jopson
    Real Estate Investor · Hamden County, MA · Member since 2017 · 75 posts · 31 votes
    7y

    @Solomon Fulop

    Get in the game and do the deal

    1Reply
  • Draven Stallings
    Member since 2019 · 8 posts · 3 votes
    7y

    @Solomon Fulop Okay that makes since I thought thats what it ment, and your just paying like 4 times that. I would go for it though, just have that reserve, maybe get some tennents in and just renovate one at a time or something like that. I totally understand electricians not wanting to fish the whole house, it takes way longer and they don't want to deal with driling into pipes and such. Plus it is a whole lot cheaper to pay some guy $20 an hour to pach drywall, than $50-75 an hour to fish wires through a wall.

    Thanks for your response, go for your dream!

    1Reply
  • Will C.
    Rental Property Investor · Richmond, VA · Member since 2016 · 279 posts · 133 votes
    7y

    @Solomon Fulop

    Couple things:

    1. Why are you paying points down to lower interest rate when that is supposed to be paid by tenants? Take the the money your wasting buying down points and use it as a 5%down payment on conventional loan. Much better terms plus I wouldn't want to be locked in for life..

    2. County appraised at 86k? Usually I dont pay much attention to tax assessment but the spread between 86 and 318k purchase seems extreme and a red flag. Are you working with a realtor and is this listed on the MLS?

    Like @Thomas S. Said, your purchase price should reflect current rents, not hypothetical rents.

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

    @Will C.  First and foremost, thank you for your input!

    1. Because interest compounds and %5 interest on a large purchase vs 2% interest on a large purchase like this will save 10's of thousands of dollars in the long term even if you consider some of that is being paid up front. This particular property isn't a short play, this is something I plan to hold on to.  

    2.  I agree with you, it is extreme. Yes I am working with a realtor; her and her husband are also flippers in the surrounding suburban areas.  There are houses the next major road (5 short blocks away) up that are going for 400-600,000$ and those prices are moving in the direction of where this house is based on development going on around it which will hopefully make it great to rent because people want to live within walking distance to the local coffee shop (15-20 min walk), a farmers market (15-20 min walk), 2 grocery stores (15-25 mins in either direction) . Those houses are in better condition than this one is if I'm being honest, but they are equally as old if not older in some cases.  To be honest, I don't love the price but there are rehabbed (flips) houses in the area (newer kitchens and bathrooms) that are going for $330,000-360,000.  This particular property would take work to get to that point tbh, but it is unique in that it is large, has off street parking (rareish) in these neighborhoods, and has the units split across 2 structures (rare in this particular 10 block radius).  I don't know if the 2 structures is a gift or a curse given the ages of them.  This does make it tricky to comp, but I looked at the price for square foot and its somewhere in the middle if I take into account "like structures", that is to say, total BR / BA, square footage, within that particular neighborhood.

    I say all of this because I still don't know at this point due to lack of experience if the location is worth overpaying a bit combined with the opportunity to get the rents up and be able to handle the vacancies easier because its a 4-unit.

    You all have been a great help to me working that out, so thank you all for your responses.

    0Reply
  • Will C.
    Rental Property Investor · Richmond, VA · Member since 2016 · 279 posts · 133 votes
    7y

    @Solomon Fulop

    Are you already under contract? Im not familiar with NACA but I would assume they have their own inspection criteria similar to FHA. I would also have to assume knob and tube wiring would be a hard pass and jeprodize financing. If FHA has issues with things like peeling paint, I would believe K&T is also an issue.

    If your under contract hopefully you have an inspection contingency to fall on and financing contingency so you don't loose EMD.

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

    @Will C.

    That is one of the biggest reasons I am here asking as an attempt to make sure I don't lose an EMD at the seller is asking for a 2k EMD. The knob and tube will be mostly replaced although I haven't figured out whether to re-trade or meet them in the middle or what yet. NACA will care about that if it's in the inspection which some of it is. Anything related to that in the home inspection will have to be addressed. As you astutely mentioned previously based on the assessment the price seems high and although I don't want to be a re-trader, I'm also not going to eat the cost of 10k worth of electrical on a house that I'm paying that much for.

    Thank you!

    0Reply
  • Brian Zaug
    Lagrangeville, NY · Member since 2017 · 144 posts · 218 votes
    7y

    Solomon Fulop

    These numbers are a bit tight for my liking but you are putting very little money into it and you'll live for free so for you, I guess this works for you...looking at it strictly as an investment, no me gusto..

    3 concerns:

     1- Having to live there for the duration of the loan without being able to refi out..I'm not familiar with these loans so perhaps there are other ways to get out of this.  ex...pay it off with private money, refi and pay off private money.  That's going to cost you some dough and bump your interest rate up and put you in a possibly negative cashflow property..ouch

    2- County has the house assessed at 83K.  In my area, also upstate NY, that means the tax rate is assessed at 83K.  When you purchase it at 315K, there is a really good chance that county will reassess it at the higher value and your taxes will go through the roof!  The roof, the roof, the roof is on fire!  You better hope the roof catches fire, because you'll have no cashflow to pay for it.  The knob and tube just might do that so leave it in place and get great insurance...

    All kidding aside, the counties/towns assessors in NY are salivating light Saint Bernards at breakfast time when they see a house sell for way more than their current assessment...

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

    @Brian Zaug  The assessment and the market value are two completely different things, no?  So if I purchase a property at that price, it doesn't mean that the property will assess for that value, although, it may assess higher it wouldn't necessarily assess at the purchase price, correct?  This house was recently assessed in 2017, but I am not 100% sure, or where to find out, if that would trigger a reassessment.

    0Reply
  • Brian Zaug
    Lagrangeville, NY · Member since 2017 · 144 posts · 218 votes
    7y

    It will trigger a reassessment.  I think they get notice from the title company that a house has changed owners.  From the towns point of view, this is a great way to increase the towns tax revenue.  

    Last year, sister purchased a house from a flipper down here in duchess county.  The seller, who purchased the house at 110K said the taxes were 6200.  We checked with the town and he was correct, 6200 total taxes.  The seller (flipper) did a full gut renovation on this property and sold it to my sister for 297K.  My sister just received notice a few weeks ago that her total taxes are now 10,300.   She called the town and they told her that they re-assessed her house and that if she wanted to fight it, she'd have to go to the town on Tax Grievance day which is coming up in May I believe.   

    On a smaller scale, this just happened to me as well.  I purchased a multi in duplex that the previous owner paid 80K for.  Taxes were 3320.  Sweet!  A year later, taxes went up to 4200.  Almost a 1K increase just because they reassessed the value of the house....ugh...Sucks

    If I were you, I would certainly call your local town/tax assessor and have this conversation...



    Originally posted by @Solomon Fulop:

    @Brian Zaug  The assessment and the market value are two completely different things, no?  So if I purchase a property at that price, it doesn't mean that the property will assess for that value, although, it may assess higher it wouldn't necessarily assess at the purchase price, correct?  This house was recently assessed in 2017, but I am not 100% sure, or where to find out, if that would trigger a reassessment.

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