Hey there BP Community. I'm a relatively new member. Been mostly creeping the forums, devouring podcasts and running numbers on properties. Probably ran the numbers on 75-100 properties and this is the first to actually cash flow.
Here are the #s from the BP property estimator.
|Purchase Closing Costs||$3,500.00|
|Total Project Cost||$248,500.00|
|After Repair Value||$245,000.00|
|Amortized Over||30 years|
|Loan Interest Rate||4.375%|
|Total Cash Needed||$16,803.50|
$2,900.00 MONTHLY INCOME
$2,468.77 MONTHLY EXPENSES
$431.23 MONTHLY CASHFLOW
7.89% PRO FORMA CAP
$16,803.50 TOTAL CASH NEEDED
30.80% CASH ON CASH ROI
7.89% PURCHASE CAP RATE
I assumed I'll do an FHA loan at 3.5% (or maybe 5%) and would pay closing costs out of pocket. Rents are $800 and $600 for the 2Bd and 1 BD, respectively. No W/D hookups though. Water, sewer, trash was at $175 combined for all 4 units. There is an unfinished large shed out back with water and electric hook ups. Not sure about sewer but believe there is because the previous owner wanted to rent it out. The owner didn't develop this because it would have pushed the property into the commercial realm at 5+ units and he wanted the next owner to have the flexibility to decide this. I haven't included any potential cash flow from this 5th potential unit in my calcs. There is a school a block away and a Walmart, Ross, Harbor Freights, Dunken Donuts and Goodwill in the adjacent areas (all 0.5 miles away).
This property was stripped down to the studs and has been completely redone with granite counter tops, stainless steel appliances, new carpet, tile, heaters, HVAC system, water pipes and electric wire. I even spotted a brand new master electric control panel outside. There is a new wood fence that encloses the backyard, which is shared by all tenants. A brand new roof was installed 6 months ago, not just shingles but all the rafters too I believe. Because of the improvements, i assume no repairs were needed.
So here is the kicker. This place is really nice. All 4 units were updated (2 x 2BD/1BA + 2 x 1BD/1BA) and it is fully occupied. My main hesitation is that it is in a lower-income area. It is not crime-ridden but other properties are much less appealing. Rough Zillow estimates and previous purchase price histories show places going for > $200,000, which puts the asking price at ~ 25% of the area.
Because of the area, I assume that i'll have a property manager (costs included in my estimates at 10% of rent). Speaking with the current manager, he says there is demand for the units and when first renting out was getting 5 applications per day until filled, but that only 1 tenant in about 25-30 applicants was qualified. He states their screening process is rigorous and he seems nice, but know this is speculative. Is this a lot of applications or normal?
Rents in the adjacent 4-plex building (pending a deal at $225,000 but not updated) are $410 and $500 for the 1BD and 2BD units, respectively. Is it common to have such a high discrepancies in rent for an area? Are there any implications of this?
I am curious if others think this is a good deal and to jump on it or if it doesn't make sense (if so, what am I missing?). I like all the updates and cash flow but am worried about potential tenant headaches. I know this can be mitigated with a good management company but also realize these can be difficult to find.
Thanks in advance,
Are you planning to live in one of the units as a ‘house hack’ or it’s an investment property for you as this will greatly change your insurance rate as well as potentially your interest rate and standing on the FHA loan. It was a little hard to read the purchase price number. One thing I like to do in abq is if I’m purchasing multi units in rougher parts of town make sure I’m getting a good deal on purchase price (usually my numbers are around 1.3-1.5% on the ‘2% rule’ if you’re familiar with that so I make sure I’m getting solid cash flow. On better neighborhoods it will be closer to 1% or slightly lower on that metric but in those cases there is more hope for long-term appreciation. Let me know if that makes sense.
Yes I'd be living in the unit as a house hack because the FHA loan requires owner oxcupied for at least a year I believe. How much does this change rates? I think I assumed a 4.375%.
Sorry about the purchase price number. I had $245,000 I believe. That’s only about 1.18% following the above rule you stated, so the cash flow really isn’t there.
Thanks for the reply!
Rents are in the $400-$500 area for most of the units in the area. Some get into the $600-$700 range.
I learned today the current owners bought the building for $117,000 a year ago and it was not livable-all boarded up before. So unfortunately the current rents are what we have to go by.
I wouldn’t consider the area up and coming but I’m no Oracle! My guesstimate is based on the fact that there really isn’t anything to catalyze any growth there. The existing strip malls do fairly well and don’t see them going out of business any time soon so can’t really see anyone else moving into the local space. Bad news is that they’re not the most desirable businesses (Dunken and Walmart and Ross, etc.). Not Starbucks, Whole Foods and an Apple store.
SFHs in the area to for about $150K for a 3BD/2BA if that helps.
What other factors do you tend to consider?
Zach, 4-something is a great mortgage rate. Just make sure there are no pre-payment penalties. I would analyze the deal from an investment-side considering 4 renters and I normally factor in around 8% vacancies and maintenance cost really depend on the condition but around 10% would be a good starting point, more if it is rough or will have high turnover. Things like w/d might help keep renters staying longer. I run numbers based on 10% prop mgmt just in case I change to that in the future. Right now I self-manage 6 of my units and use property management for the others just because I’m stretched too thin w full time job and a family and i also do a flip or 2 per year. Not sure exact location but yeah, the numbers might be a little thin on that deal.
@Zachary Stoll , my guess is the Seller (read: Flipper) over-rehabbed it (for the area), but is still hoping to find an owner-occupier like yourself who'll overlook the fact that the sold comps / usual rents in the area do not support the asking price.
Over time, its value will tend to devolve to the lowest common denominator (ie. comps that have not had the same level of money spent on them).
Right now, the only thing I see going for it is that you'd get to live in a nice apartment (albeit in a sketchy neighborhood?), at minimal ongoing cost because of its added income (even though that'll likely decrease once you get tenant turnover, reverting to normal market rents).
But, that's not nothing. We can't decide for you. All the best...
You've analyzed 75-100 deals and this is the first one that comes close to cash flowing???? Wow sounds like you got a classic case of analysis paralysis! Run the numbers and make an offer based on cash flow...forget the asking price....just make the offer that makes sense to you. Imagine if you had made 75-100 offers based on your analysis...how many would you have bought???
If you are doing an FHA loan, will you be paying points? I don't think you typically pay points on FHA, so that might be some upfront cash savings.
Have you called other property managers to see what their opinions of the property and rents in the area are? Also, make sure to see a rent roll so you can double check that they really are renting for $600 and $800.
Thank you everyone for your help! Through all your collective responses I've decided not to make an offer on the property.
@Brent Coombs this was my gut feeling as well but glad to hear someone else say it.
@Rod Hanks, I've lightened up my calculations and have been seeing quite a few more deals (Funny how that works!).
@Billie Miller, I will have to dig more into points up front but would like to keep the interest rate as low as possible. Thanks for the advice about double checking rent rolls and calling property managers!
Free eBook from BiggerPockets!
Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!
- Actionable advice for getting started,
- Discover the 10 Most Lucrative Real Estate Niches,
- Learn how to get started with or without money,
- Explore Real-Life Strategies for Building Wealth,
- And a LOT more.
Sign up below to download the eBook for FREE today!
We hate spam just as much as you
Join the Largest Real Estate Investing Community
Basic membership is free, forever.