MF 8-Plex Snag or Pass?

Question

Hey everybody!  I'm new to BP and wanted your input on a property.

• Built in 1985
• 2, 2-story Buildings, 4 units in each building
• All units are approx. 615sqft 2-Bed/1-Bath
• All units have central air (not common for the area)
• Currently leasing at $400/mo
• 100% Occupied
• Landlord pays trash/water

Financials (Super rough repair estimates)

• List price of 235K
• Offer price of 209K
• 90K in deferred maintenance & updates. 
	
		2 New Roofs: 12K
		Reno of All Unit Interiors @ 5K/unit: 40K
		Parking Lot (Asphalt) Repair: 7K
		Exterior Wood Siding Repair & Paint: 20K
		Something Else that's Broken: 10K
• 2 New Roofs: 12K
• Reno of All Unit Interiors @ 5K/unit: 40K
• Parking Lot (Asphalt) Repair: 7K
• Exterior Wood Siding Repair & Paint: 20K
• Something Else that's Broken: 10K
• After improvements, market rents of $500-550/mo. (All #'s below are calculated at $500/mo)
• Gross Income : $44,928
• Total Expenses : $17,153
• NOI : $27,793
• Cap Rate : 9.3%

• 2 New Roofs: 12K
• Reno of All Unit Interiors @ 5K/unit: 40K
• Parking Lot (Asphalt) Repair: 7K
• Exterior Wood Siding Repair & Paint: 20K
• Something Else that's Broken: 10K

The surrounding area is primarily SF with a couple of Duplexes thrown in for fun.  It's about 10 mins out from downtown, and next to one of the most desirable areas of SA.  Note the next to.  It's literally just across the railroad tracks.  So there's a train too.  We'd probably occupy a unit and provide on-site management while the property is in transition.

It's a low C that could become a low-to-mid B.

Any feedback would be amazing.  What would you do?

Brandon Turner · Answer

Hey Account Closed  here are my thoughts:

Gross income of $45,000 using the 50% rule, we are left with $22,500 for a NOI, meaning that's how much you have to pay the mortgage.  A $300,000 loan at 5% for 25 years (does that sound about right, @Joel Owens ?) is $1750 a month, or $21,000 per year.  This means, following the 50% rule, you can reasonably estimate that you'll cash flow at $1500 a year, or $125 per month.  And that's with all 8 units rented (so if you lived in one, you'd have negative cash flow)

Now, you may not be getting a loan for $300,000 - which changes it, but I always figure the numbers as if I were getting a 100% loan, and won't buy anything under $100 per unit, per month assuming 100% Financing. 
	
	Again, this is based off the 50% rule, which I believe is important to consider. In reality, it may not be that much (or it may be more) depending on a lot of factors like "who pays utilities" and the vacancy rate and what repairs will be needed and what the tax rate looks like.
	
	On the other end of the spectrum, if you took out a loan for 80% of the purchase price, so roughly $160,000 and used your own cash for the $40,000 down payment and $90,000 in repairs (total of $130,000 invested) you would have a mortgage of about $1,000 per month, or $12,000 per year. This means you would have about $10,500 per year in cash flow - which works out to an 8% cash on cash return on investment. This isn't terrible compared to some things, and there still is the loan paydown, appreciation, and tax benefits of owning it.

Furthermore, I'd caution you about every paying for a property based on what it could be. I'd do ALL these numbers with the figures currently presented and that's what the property is probably worth. My opinion anyways!

So yeah, currently in my opinion - I don't think I'd pay that much. Again, I don't know all the numbers, but I think it's too tight as-is.  I think I'd look for something better.

Thoughts?
	
	
	Also - this video might help:

Account Closed · Answer

Thank you so much Joel and Brandon for your feedback.  It sounds we're going to pass on this one.

So what we took away was this:

The property would be a viable investment if it had either:

• higher rents
• less deferred maintenance.

It's the combination of the two that makes it a pass.  Does that sound about right?

Joel Owens · Answer

At the end of the day a possible investment you have to analyze how much RISK there is to your capital and how HARD you will have to work to get the anticipated return.

Here you have a massive amount of repairs and risk so the price  and higher returns have to be there to make it worthwhile. You just do not want to work your butt off and deal with tons of problems for marginal returns.

Everything might be worth the time invested for a certain price.

Joel Owens · Answer

1985 is a good year usually with less issues than other vintages.

Is access walk in to hallway to get to interior doors or you walk stairs from outside to get interior access for units??

I was going to ask brick or vinyl but I see you say wood. Wood is very expensive to replace. Hardiplank is cheaper and will stand up better. If wood is bad in  a few places just replace with hardi and repaint and seal and you will get some more years out of it on the cheap. If a majority of the wood Is bad on one exterior wall (say facing the street) and not the back or sides you could just replace the front with hardi and replace a few boards on the other sides.

This way over time you can keep doing more sides to save immediate costs. Of course if most of the wood is bad replace it with all hardi board.

The year of 1985 watch out for poly pipe plumbing for your buildings.

For the water check what the water and sewer rates are per gallon usage for the county or city you are in. Then call engineering department for water and see how much sq ft of room space is average consumption. The engineer for instance will tell you on average a 3 family in a 2 bed for that space uses XX number of gallons for  a bill average of XX for the area. Go into the sellers bills and see if the averages match up or are higher. See if it is customary for the area for the landlords to pay water included in rent. If it is you will not benefit from separating out the meters and making the tenant responsible.

If this building just has not been converted but most tenants pay utility in the area then definitely you would want to look into doing meters. Make sure there are no big increases to the water usage rates coming soon from the water department or special assessments.

Are they all vacant?? If not and you have bum tenants damage could increase along with lost rent versus a mortgage and holding costs while you get them out before being able to make repairs. Being across railroad tracts can make a massive difference in value by  a few hundred k sometimes. In urban areas values will vary wildly block by block.

615 sq ft 2 bed is a small layout. I usually like 750 to 800 sq ft or better.

If it's 100% occupied why are you renovating each unit at 5k apiece?? I would only buy based on current numbers and then own the property for a few months before doing anything to see how the property and tenants operate. This is best before making big capital injections.

400 X 8 = 3,200 X 12 = 38,400 gross expected annual

38,400 X .40 (60% costs) = 15,360 NOI

15,360 NOI at a 9 cap is 170,000 purchase price. I am doing 60% costs because landlord pays water. If not then I go total of 50%.

Now are these repairs you are talking about IMMEDIATE CAPEX for the property to function or is it improvements you want to make thinking you will get higher rent??

If it's immediate you deduct off the purchase price. So if 20,000 was repairs needed today and 70,000 was upgrades you wanted to do later then the price would be reduced 20,000 to 150,000 offer price.

NEVER pay on potential. If it never materializes or gets half way there your projections and returns will be way off. Instead go by the existing numbers for the meal  (as long as tenant history is good and  payments are stable) and then projected rent increases with improvements will be icing on the cake but not necessary to the success of the investment..