First Multi Family - Phoenix - Help Analyzing Deal

14 Replies | Phoenix, Arizona

Hi everyone, I’m looking at a 4 plex in Phoenix (Sunnyslope area, C neighborhood) and wanted to know if you would make this deal:

$300k purchase price, 25% down. All 4 units completely remodeled, new roof, new plumbing, new electric, new windows. Three 2 bed/1 bath, one 1 bed/1bath. Rents $795, $750, $725, $550, plus or minus. Cap rate 7% and cash flow approx $620/month. 

Would you do that deal?

Thank you!

Very good question and many similar posts with answers. Acting on that deal depends on a number of factors for me.  Questions: Are the surrounding rents in the area similar? Can you obtain a rent roll?  Have you seen the lease agreements? What does the owner pay (expenses)? Was the remodel performed by a licensed and insured contractor? Is the roof and remodel warranted? When you say C neighborhood, what does that mean to you?  Have you driven by the property during day, evening and night? Do you plan on managing? Any pending litigation? 

Have you created a proforma, a spread sheet factoring the anticipated expenses?  such as vacancy etc

I’m buying the property vacant as they just completed the renovations. I’ve found a property manager and he has told me realistic rents for the area. Yes, remodel done by licensed contractor. Yes, visited property last weekend both day and night. It’s not a place I’d live, but that’s not really the question. My expenses:

P&I: 1260

Insurance: 150

Taxes: 58 (yes, it’s that low!)

Property manager: 10% rents

WST: 250

Maintenance: 200

= approx 2,200 monthly expenses.

Rents: 2,820

@Megan Alice

Determining whether or not a property is a "good deal" is extremely subjective, because the definition of a good deal is going to differ from one person to the next.

First and foremost, I would ask yourself what you're hoping to accomplish with this property purchase. Is there a certain metric or ROI you're hoping to achieve? If so, can this property help you achieve that? That's #1.

Secondly, what is the opportunity cost? What other opportunities would you be missing out on by committing your funds to this project instead? Would those other properties better help you reach your ROI / investment goal? If so, then you may want to consider those other properties instead.

Ultimately, it all comes down to money in vs. money out. And if these property looks like it's going to be able to get you the return you want, then I'd say it's worth it. It's recently remodeled, so no real capex or maintenance for awhile. It's nice, so you should be able to attract quality tenants and get maximum rents.

If you need someone to pull MLS data for you (like the listing) or other comps, etc. just let us know and we can help you get more information that may help you make a better decision.

I mean, here’s my short answer—If you’re new and want to jump in the game, if it was my situation— I’d make an offer below list price, make sure remodel is legit, and verify those suggested rents. 

Check Zillow rent, Craigslist, Rentometer, whatever just verify and comp out those rents. Are they real? And your pro forma expenses are too low, beef that up. 

Big concern is zero tenants, it’s not cash flowing. Is your lender aware? But you’re not going to find such a deal in LA, so maybe yes.

*No agency, no legal advice

@Greg Dorn - Hi Greg - what type of asset class are you looking into investing in Phoenix? I'm asking because we are looking for multifamilies in Phoenix and want to connect with other investors with similar goals. Thanks!

@Megan Alice Still looking. Connected with a wholesaller that has a good deal and looking for a hard or private money lender. Goal would be to BRRR but still waiting on numbers. @Simon Chan  Honestly we want something that is Ideally a B or C with room to improve and force appreciation. 

@Megan Alice I would def strive for at least a 10% Cap Rate in today's market, pointing out a few things:

1. We've been on an economic upswing for a while now. In the event of a slight downturn it would be safe to build additional vacancy losses or rent reductions into your pro-forma so that your property still cash flows well. 

2. Phoenix is a pretty volatile market- not as volatile as L.A. where you're living, but it crashed hard in 08 and swung back up pretty hard in the past 6 years. Which means you can assume that in the event of another downturn (not to sound negative, it probably wouldn't be as bad as the last). Your property might not be worth 300k in a couple of years, so why settle for a 7-cap now in an asset that doesn't have much short-term appreciation potential if you can get higher yield in another market?

I'm not sure exactly what your operating expenses are BTW, but let's assume it's 45% of monthly rents including insurance, taxes, utilities, vacancy and maintenance reserves, and property management- 1350/mo. Your mortgage based on 30 years, 25% down, and a 5.75 interest rate is $1313/mo. I've got your total monthly expenses at $2663 and your monthly cash flow at $337. Be careful with pro-forma estimates, 45% operating budget on a fourplex isn't unreasonable at all.

One thing I may suggest is starting to run deals like this by a commercial lender- residential lenders don't even look at the property's ability to cash flow if the buyer is strong. Commercial lenders will build some checks and balances into your purchase process so you don't get stuck with a low cash flow deal like this. Plus, commercial financing is 20% down right now. 

IMO here- stay away from rentals in the western states. I come across fourplexes with $3000/rents for just over half of this price in C neighborhoods all the time.

Good luck!

That price per unit is very low for a remodeled fourplex in Phoenix. That would give me some hesitation. In this market if a deal is too good to be true, it usually is. Sunnyslope area can rough and has a lot of bad pockets. The price is probably that low due to the neighborhood. Some people who invest there do well, but we always have stayed away.

The rents and expenses seem to be reasonable, but again it would really make me wonder about that price when Phoenix multi family is over 100k per unit these days for units that aren't fixed up. 

My advice is find what's wrong with the property and if you can live with that/ are willing to put up with it then go for it.