Quad-Plex: To Buy or Not To Buy

6 Replies

Hello All - 

I am looking at a QuadPlex in Iowa.  I have not posted a deal to analyze on here previously, but have done individual analysis on several properties on my own.  This one has me unsure if it is a hidden gem or a pass.  

Purchase Price:  $250k List, have negotiated a solid $230k potential purchase price.  Seller claims to have rejected a $220k offer.

Rent:  3 of the 4 units rent at $650.  The 4th rented out on a new lease 5 months ago for $700

Expenses:  Tenants pay all utilities

Shared Dumpster:  $35 per month

Property Taxes $4600 per year

Insurance:  ???? Estimating $2000 per year

Maintenance:  Estimating 5% of gross rent

Vacancy assumption:  5% of gross rent

Management:  Self Manage the property

Loan:  20% down with 15 year amortization and a 5.25% interest rate locked in for 5 years.  

Noteworthy Items:  Roof replaced 8-9 years ago.  Long term (4-6 year) tenants in 3 of the units which is why the seller hasn't increased rent to $700 per month.  Newer A/C units approx 10 years old.

Looking for advice, guidance, things to ask seller, things to look for in walk through, things I might be overlooking, etc.... If purchased, would you increase the other 3 units rent to $700 as well? 

@Josh Neuhaus

I've analyzed a ton of deals lately, so I'm comfortable with the tools, but keep in mind your requirements might be different and I'm not extremely experienced.

1.) You factored in closing costs of $4600. I ran your numbers with NO other expenses related to closing.

2.) Ran the numbers with 0% for Capex. Even with a relatively new roof, are you comfortable with 5% for maintenance and large fixes over the life of the property ownership?

3.) What is your goal? Maximize net worth or monthly cash flow? This could change things in your decision.

That said:

With a 15 year amortization, you have a monthly cash flow of about $325 for four doors and a ROI of 7.6%. If your goal is to have a paid off property, then 15 years is great. If you run the numbers a bit more conservatively, make vacancy 8%, Capex 5% and PM fees of 8%, then you come out with a -$102 a month cash flow and ROI of -2.4%.

If you extend it out to 30 year amortization (with a 5.5% rate), your monthly cash flow jumps to $330 for four doors and a ROI of 7.9% on the conservative numbers, and $750 for four doors and a ROI of about 18% with your numbers. This is obviously much better if you are going for a cash flow perspective. Using the conservative numbers, if you raised rents to $700 for each unit, you come out to $440 a month and 10.5% ROI. Using the more aggressive numbers, you have $890 a month and 21% ROI.

Analysis: 

Depends how aggressive you want to be with your numbers and if you are interested in net worth vs. cash flow. Also, this factors in NO costs other than the $4600 when you close and any deferred maintenance. Is this realistic?

Personally, I think it's a fairly good deal if you raise the rents (the more conservative numbers should cover any difference you might experience in vacancy) and extend it to a 30 year amortization. Not amazing, but I'd probably be willing to do it at this stage.

@Daniel Winsor

Daniel -  Thanks for the comments!  I am planning to manage the property myself so wouldn't need to factor in any management company fees at this time.  

As a general rule I would say my overall goal is Net Worth > Cash Flow (but I want both!) I didn't put anything in CapEx because I was figuring 5% gross rent as maintenance cost. I have access to contractors through my business and can get renovations completed at a reasonable price so I went with 5% gross rents figuring the Windows and Roof and Furnaces will likely be replaced over time as I hold the property. If they all go at once, that's a whole different situation.

Any questions I should be asking the seller or specific things I should be looking for in my walk through?  I have some costs for a shared dumpster, but am not sure on lawn care / snow removal so I have that written down to ask.  

@Josh Neuhaus Did you end up finalizing a deal on this 4 plex? Wondering why you were going with a 15 year amortization. And assuming  you were getting a full scale home inspection during due diligence phase. 

It's on hold for me at the moment.  Life event came up that needs to be taken care of.  I'll keep you updated if I move on it.  I generally like 15 amortization because I like equity and have other sources of cash flow at the moment.