Am I analyzing my Sacramento Multifamily Deal correctly?

Question

Hello BP Community,

New investor here, under contract for a first investment property. Hoping my numbers are feasible as I acknowledge this isn't the most ideal deal.

Property is a duplex in a B/C neighborhood in Sacramento County, listed for 425k, under contract for 400k. Each side is 1200 sqft, 2bd/1.5bth, 2 car garage and driveway. Current tenant rents one side for 1500 and I will occupy the other side paying myself rent of 1500. My situation: I’m 27, have a decent job and have saved 60k in order to invest in something. I don’t have the best credit, so I went FHA so I could go 3.5% down at a 3.3% rate with 0 pts. PITI is 2450. After inspections, the property will need 20k in rehab and renovations. Also I will need to replace the roof in a couple years (15k, but I’m attributing that expense to CapEx and will pay myself back with that). DP with closing costs is 20k. I am keeping 15% for CapEx, Vacancy and Maintenance (is this not conservative enough?) I will be managing the property while there and when I leave. Current tenant doesn't pay water, sewage, garbage which I will have to eat until I change the lease.

Projected Rent Revenue - 3000

PITI - 2450

15% Reserves - 450

Cash Flow = 100

Yearly CF - 1200

Total Investment - 40000

ROI - 3%

I acknowledge that 3% isn't great. Pro Forma makes it nicer with the possibility to raise rent to 1550 or maybe eventually 1600/side. Also, I'm not sure if investors take IRR into consideration with the principal paydown from the tenants, but that makes it nicer too. Though, I understand that money isn't realized until you sell or refinance. The other thing is refinancing from FHA to conventional (takes 8-9 yrs to reach 20% equity w/o app or depreciation) would take away the PMI and bring down the PITI to 2100 with 4.5% financing which would make the cash flow better, but would start over the 30 year term (not sure if that's good or bad to do). I'm considering that with my FHA financing, I'll be on the losing end of bidding wars with some of these cash/conv buyers. I got this into contract because I was the first offer and quickly got it under contract. The seller later got much better and higher offers and would really like to back out. Does this seem like an okay deal for me to do seeing how the market in Sac is? Thank you in advance!

Kristel Daugherty · Answer

@Alester Thomas - There are certainly better deals out there, and that doesn't mean you have a bad deal. Knowing there are other offers higher than yours tells you that the demand is there.

California markets differ than other parts of the country. Many people here are looking for cashflow properties, and that's a rare thing in CA. More often CA properties are purchased for appreciation, and if the numbers break even that's generally considered good. Personally, my first real estate purchase was in California because I bet on appreciation. It worked. :)

I think you've made the case for a reasonable investment here, with the potential for higher rents and lower expenses over time. You'll have tax advantages, and the ability to grow your portfolio over time with this first investment. The only reason I would steer you away from this deal is if you weren't planning to hold for less than 5 years. The longer you hold this, the better your numbers will get.

Nathan Gesner · Answer

Margins are way too thin. What happens if the tenant trashes your place, fails to pay rent for a month or two, has to be evicted, and then it takes another month to renovate and place a new tenant? One bad tenant could cost you $10,000 without much effort.

Be patient and buy smart. Watch the BiggerPockets webinars to learn how to evaluate property then use the BiggerPockets calculator to evaluate the deal and set yourself up for success.

Am I analyzing my Sacramento Multifamily Deal correctly?

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