Is this a good deal for buy and hold?

Question

Hi,

I am looking at purchasing 2 four-plexes (seller's stipulation that buyer must buy both at the same time). Each four-plex is going for $129K in Phoenix. Each building has four two-bedroom/one bath units that are 720sqft.

I did some rental analysis using the BiggerPockets SFH spreadsheet. We determined that each unit could rent for $500-$600/mth. Assumed $550/mth which turns out to be $52800/annual (8 * 550 * 12). I assumed a conservative 25% vacancy loss (1 unit out of the 4 vacant each month, could be a lot less). Gross income = 39600.

For expenses, I determined:

Property taxes: 1500/yr

Insurance: 3095/yr

Maintenance: 5760/yr (assuming $480/mth, 12%)

Water/Sewer: 3000/yr

Property Management: 3600/yr (assuming $300/mth)

Advertising: 150/yr

Total Expenses: 13410

NOI = 26190

The catch is that each building will require extensive rehab. I'm estimating 30-40K for each building.

I'm in contract at 129K per building. But, just got back the inspection reports with all the items that need to be fixed. I am getting quotes on the fixes. I'm thinking of asking the seller for a credit/price reduction to help offset some of the costs of the fixes. I'm not sure how to calculate how much should I ask for? Or when will the fixup costs make this investment not a good deal? The comps on other 4-plexes that have sold are at $159K on average but they appear more fixed up than this one. My agent says that this 4-plex will be much nicer after my fixes (I'm taking this with a grain of salt).

The seller said that they had multiple offers on the property so I am wondering how much to push back.

This is my first multi-unit purchase and appreciate any suggestions.

Thanks.

Jerry W. · Answer

I agree with @Trent Currie , your property management fee is about half of what I would expect. You will need a strong property management team before you buy if possible so that they can tell you if these properties meet their criteria of properties to manage. We also don't know the estimated cost of fix up to determine how reasonable it is. 10K each? 30K each? that is pretty critical information. What are the units actually renting for? If it is a lot less than $550 per month your costs will go up if you raise rents and have high turnover of tenants.

Account Closed · Answer

Dean,

When you're being too generous with your estimates and assumptions, don't be surprised if you don't get the deal. $129k each plus $40k in rehab = $169k for each building. At $2,200/month for each building, that's about 1.3% ratio. Not bad. But then again, real estate is very local. How's the price of your 4plex compared to others in the area?

Trent Currie · Answer

Guess I will jump in here. I have a few questions concerning some of the assumptions used in your analysis.

25% for vacancies? Is this Detroit or is the market seriously depressed? What/who are your sources for your vacancy numbers? 25% is extremely strong.

Maintenance is close to 10% which is used by a lot of people. What does the property consist of? Is there grass that needs to be mowed? Trees to be trimmed? My point being is that often with multifamily mowing and other tasks are overseen by management and the cost of maintenance or management(however you want to account for it is higher).

Your current management assumption is roughly 6.8% of gross. Finding good management at these rates in most markets we participate in is unheard of. You should get actual numbers for this. It shouldn't take more than a few phone calls to the larger management firms in the area.

Overall more due diligence is needed, since there are way too many unknowns.

Is this a good deal for buy and hold?

Is this a good deal for buy and hold?

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