First Multi Unit Purchase

[Ben Hosseinzadeh]

Hi everyone,

I am new here and this is my first post.  Love all the content and discussions in the forums.  I’m looking at purchasing my first multi unit and wanted get your thoughts on the deal. The property is in Cathedral City, CA. The details are below:

5 units all 2 bedroom 1 bath

3,897 sq ft

List Price: $749,900

Income: $5780/month

Prop Tax $9336 a year

Water $1800 a year

Insurance $1875 a year

All tenants have a 1 year lease.

After running the numbers, It looks like I can cash flow about $650/month. The units have not been updated since the property was purchased in 2004.

Look forward to hearing your thoughts!

Thanks!

[Randall Alan]

I have to extrapolate a few things... but can I assume that you anticipate putting zero money down? (Financing $750,000)? If yes, it doesn't work that way... the bank will look for 20-25% down payment to make a $600,000 loan. Making $650 net / month on a $750,000 deal (again assuming some things) is a horrible deal. Your ROI is about 5% BEFORE you account for vacancy and repair expenses. Ask yourself this: $650/ month gives you $7800 per year net after (PITI - principal, interest, taxes and insurance). Say just 1 A/C unit fails that year at a cost of $5,000, and you have one $200 maintenance call per unit in a year, and you have one month of vacancy between all your units due to turnover ($1,000). Your $7,800 just dropped to $800 per year. Also, who is going to mow the lawn at your unit? That's probably another $100/month. You are now upside down by $400 per year on your investment. It's that easy to lose in the real estate game if you aren't careful. We try and look for around $300/unit/month after taking into account a maintenance reserve of around $75-125/unit per month. So on a 5 plex I would like to see at least $1,500/month after PITI and Maintenance reserve. Also - keep in mind you can't buy a 5-plex with a residential loan - only 1-4 units. So you are looking at a commercial loan which comes with a higher interest rate, and a shorter amoritization period - typically 20-25 years instead of 30 for residential. If you do put $150,000 down your numbers look better - but not great... around $300/unit before a maintenance reserve. That's at least better. I would still want more - but in California that might be considered good. Wish you all the best! Randy