Need Help by 11/9/2016: MultiFamily with exact numbers...Please

6 Replies

Hey BP Community.  Thanks you so much in advance for your help with this situation.  Its my first multi family....I've run the numbers, done the research, and this is my last step before making the plunge. See below all the numbers needed (I think) to make the decision to buy.

Property: FOURPLEX-8 bedroom, 4 bath.  This units has 4- Two (2) bedroom and One (1) bath per unit.

Neighborhood: Zipcode- 02171.  Absolute lowest 2 bedroom on the market in this neighborhood is $1600.  Please let me know if I'm wrong.

-Current tenant situation-  I will inherit these tenants and raise all rent to $1200/ea.  They have never been late on rent.  I'm told they will all stick around for at least a few years.  The condo needs a little work and could use updated bathrooms and kitchens.  The plan is to gradually raise rent to market value, when the tenants move out I will renovate each unit one by one.

Unit 1: Current $1,180 Will go to $1200 when I buy.- 4 year tenant

Unit 2: Current $1,130 Will go to $1200 when I buy.- 15 year tenant

Unit 3: Current $1,120 Will go to $1200 when I buy.- 6 year tenant

Unit 4: Current $1,130 Will go to $1200 when I buy.- 5 year tenant

-Utilities:  All tenants pay their own utilities (Gas, oil, heat...not water)

-Water Bill: $650/Quarterly- Paid by owner (me)

-Taxes: $1700/Quarterly 

-Home Insurance: $2150/year

-Flood insurance (needed): $1400/year

-New roof 2013

-New hot water heaters

-New electrical

-Mortgage info:  

-Purchase price: $780,000 ($260/sq ft)

-20% down: $156,000

-30 year fixed @ 3.708% (**Current level)

-Total mortgage payment (including taxes, ins, etc)= $3,955/Month

-Total income from rent= $4,800

-Cash flow: $805/month (@ $1200 rental per unit).  

-Full inspection and final offer scheduled for 11/9/2016

So that's what I got for now.  Any insight you guys could give would be incredibly appreciated.  Its my first deal and to be honest I'm scared.

Thanks so much!!! Looking forward to hearing your helpful replies.

Points to consider;

- I do not see any maintenance budget included; appliances, leaks, landscaping, pest, trash, snow, etc.

- Capital Reserve for roof, heating systems, AC(?), etc. This is often $200 to $250 per unit per year. The inspection will detail most of this but what do you see? What is the condition of these systems?

- When a tenant leaves, do you have the funds to renovate the unit or is that coming from accumulated cash flow? If a tenant leaves more quickly then you expect, do you have the funds to renovate the unit?

- If market rent is $1600, why only raise to $1200. I can understand staying a bit below market but 25% seems very passive. It suggests (no real idea) that after purchase, you are all in and if a tenant left immediately, it would cause a problem.

- Vacancy during renovation

- Closing costs, legals, accounting (bookkeeping and taxes preparation). Should also account for property management even if you are doing this yourself.

Even ignoring possible missing expense / budget items, if your cash flow (NOI) is 9.6K (800/M * 12) on an investment of $780K, that is a 1.2% return. Not much better then putting it in the bank but much riskier. Does this meet your expectation? Is this the market return in your area?

Good luck

Wow thank you so much Oren for the help.  This community is amazing.  I'd love to continue the discussion:

- Maintenance budget and Cap Reserve will be reserved at about $300 per unit per year.  The inspection will detail the longevity of the systems but I am assuming judging by first walk through that the units will not need any large immediate update for foreseeable future.

-When a tenant leaves, the funds to renovate the unit will be coming from the accumulated cash flow.  If the tenant leaves more quickly than I expect, I do have the funds to renovate the unit but I would most likely rent the unit as-is if needed.  Thinking I could probably get $1300-$1350 very quickly with the rental market in this neighborhood.

-I'd like to leave the rent at $1200/unit because I want to get the property cash flowing positive and get some reserves before I scare away the existing tenants.  They all pay on time and have been great tenants.  I'm told that can be a tough process to go through.  If a tenant does leave they could be replaced....but I'd like to have some cash flowing in to get my confidence up.

-The plan is to stagger the rents.  So the leases would all end about 3 months apart from another making only one unit empty at a time for renovations.  This would minimize the vacancy during reno...The reno is more like a facelift for the bathroom/kitchens...not a full reno.

-Will look into closing costs, legal, accounting, etc.  My wife is a CPA and I have another business which we have very qualified CPAs working on.  

-Now for the Biggest part of the response.  You mentioned on an investment of $780k I would return $9.6k (1.2%).  But I'm putting down $156,000 (20%) so wouldn't my return on that $156k be more like 6.1%?  And this 6.1% would be in addition to tenants paying down my mortgage and building equity in the property.  If I put that $156k in the bank and got a return of 1.2% the return would be around $1,900.

Thanks so much for the help guys.  I'm very appreciative!!!  I owe you.

Be sure to plan for your renovation costs as expenses in your overall return.  For example, if you have $10k in free cash flow after a period of time, then spend $10k remodeling, your return is $0 though you may have increased property value that will be realized later.

I don't think 6.1% is a great return on a real estate investment, but that is just me.  I strive for a minimum cash-on-cash return of 10%.  Typically, your all-in initial cash investment is used for calculating this return: Your 20% + financing/closing costs + any repairs you have to do or fees to pay upon purchasing the property (U&O, inspections & findings, etc).  It looks like you are only counting your initial 20% in your posting.  Your return might be a little lower.

$300 per unit for 4 units get you $1,200 per year. I own SFR townhomes and plan for about $1,500 per year each. Good years come in lower than that, but leaks, appliance repairs/replacements, falling trees (just 1 - didn't see that coming!), annual government inspection costs, vacancy/turnover costs and miscellaneous maintenance consumes it over multiple years. $1,200 may be OK for this property, but may be tight if there is a bunch of deferred maintenance that your tenants want addressed and they don't want to move (fix/replace my dishwasher please!).

Are you counting exterior maintenance: lawn/landscaping, snow/ice removal, etc?

When you renovate, is a dedicated water connection feasible for each unit?  You might want to consider that to eliminate your water bill.  I've read water consumption drops 30% when tenants have to pay for it themselves.  Tenant paid water would reduce your overhead costs and it seems like it would fit right into the overall cost profile for the tenants if their rent is so far under market.


@Nick Romano I understand not wanting to find new tenants in winter, but if $1600 is the very bottom of the market why are you only raising each of them to $1200. I know it may not be ideal, but that's a $1600 a month difference to you. 

Also, maybe more importantly, what will the probably be worth after you make some slight changes and get rents up to market? I don't see this as a huge cash flow property, but maybe an opportunity to build some nice equity.

Wow you guys are great thanks for the help.  The most obvious question is about the rents being $1200 when I could be getting closer to $1600.  

The reason for not jacking it up through he roof right away is because I'm nervous about losing the good paying, quiet, polite tenants currently in the building.  After having the property for a year or two I was planning on slowly raising the rent each year.  If they don't want to stay, I would do a small renovation then re-rent closer to the $1600/month.  

Do you think I should be weary of these long term tenants going up in arms when I raise the rents?  How about future rent hikes?  Do you think the tenants would become upset and not pay....not move out...??



A couple more comments;

There are different financial metrics that people use to evaluate returns. They include CAP Rate, Cash-on-Cash, Total Return and Internal Rate of Return among others. You can double check with your CPA contacts but the CAP rate return is the NOI / Total Cost of Investment BEFORE Financing. Basically as if you were an ALL CASH buyer.

From your numbers, you are expecting expenses to run ~13K ((1700+650)*4+2150+1400) before financing and expect an gross income with no vacancies of 57.6K. That works out to 23% expense ratio. This is way way to low. Typically it ranges between 45-55% of gross income and can be as high as 60% of income depending on the age and condition of the property.

Lets assume that your are correct and so your NOI willl be ~44K. You are buying for $780K, that works out to 5.6%. Once you factor in a more reasonable expenses, the NOI and hence the CAP rate will be much much lower.

The return you are quoting is 9.6K / 156K which is 6.1%. This is called the Cash on Cash return. Again - I do not believe you will see this as your expenses are way understated and you will NOT be left with 9.6K.

From your responses, it does NOT appear that your have any reserves in the event that a tenant moves out earlier then you expect or you get surprised by a major repair. Leaving aside what return your are willing to accept, this is one of the biggest issues new investors face. They get side swiped by a 20K or 30K problem before they  get their feet under them and now have to scramble to find the funds. Remember, anything that significant probably means that it needs to be done NOW and if not done, will likely lose tenants. A lose-lose situation. This may mean a high interest loan, selling other assets or even selling to get out if you can.

This is a 3/4 million dollar investment. Do NOT go into it underfunded. Any surprises will wipe out some / all your equity as you may be forced into a fire sale or keeping a Negative cash flow property. Lets put it this way, if you had to feed it 2 or 3K a month for the next year, could you? IF there were a surprise 25K repair, where would the funds come from.

Good Luck.


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