How about this 4 plex?

Question

A single story 4 plex offered at $91600 with market value at 95000. Income is $1625 from the units and utilities run $556/ month according to seller. That does not include vacancy, management, or repairs.

With 25% down I've got a loan of $68625 at 4.5% over 30 years. Putting the numbers in the buy and hold calculator it shows a negative cash flowing property. Am I correct in all this?

And what I'm finding frustrating is the property passes the 50% rule giving a little over $100 per door and it does pass the 1% rule, but yet its negative cash flowing. Did I put information in wrong or is this common?

Brandon Turner · Answer

Hey Steven J.  - So, the net operating income is the money left to pay the mortgage. It's all the income minus all the expenses, except the mortgage. This is why it's positive. If you paid all cash, this is the profit you would make. However, because you'd be spending more than $2772 in mortgage payments, the property looks negative cash flow.

Also - on the photos, under the "expenses graph" it looks like it says "Other - $557"  - what's all included in that, do we know?

This is probably a good example of when the 50% rule doesn't work. The taxes are fairly high, the utilities (probably water, sewer, garbage,etc) and some of the other charges just add up really quickly. 
	
	So yeah, in my quick opinion, it doesn't seem like a good deal to me.  This is a really really good example and a good experience to run through these numbers. People hear about a 4-plex for under $100,000 and think "amazing" (which is what I thought at first glance) but then, when you look at the whole picture, you can see that this would probably turn out to be a bit of a dud, or  maybe just break even.

Thanks for posting this Steven! This is why we made the Rental Property Calculator.

Michael Seeker · Answer

Steven J.  in your first post, you mention $556/month in utilities.  In your last post, you mention $1505 for annual utilities (about $125/month).  This is a HUGE discrepancy and certainly makes the difference between positive and negative cashflow.

If the utilities are $556/month, I'd assume the units are not separately metered OR the owner pays electric on a lot of them.  If this is the case, you're basically adding an extra $400 of expenses each month (water should run around $100-$200/month for 4 units).  In either case, you need to really nail down these expenses.

What the owner provides you is only as good as the owner him/herself.  It sounds like the owner either doesn't keep records or does a horrible job of it.  So it's your job to figure out what the rents and expenses SHOULD be, not what he claims they are.

Steven J. · Answer

Thanks for the response. The 'other' $557 is the mystery account from the seller. In his pro forma most of the normal stuff is already included so the other really leaves me wondering where its going.

Thanks for explaining the NOI. That makes sense for me now. I didn't realize that was annual.

I ran the numbers if I bought it all cash and I get $226/month in cash flow. Doesn't seem like enough of a cushion to justify it at that price. If I can bump up rent $50 bucks on each unit then I'm making my $100 per door.

Steven J. · Answer

He had a sloppy way of calculating so I tried summing up the $556 thinking you guys didn't need all the details. What was said earlier was wrong, what is on the pdf is accurate. At least as accurate as I can make his numbers work. I highly doubt they are accurate. Tenants apparently pay heat and elec. so I'm not sure what the $125/month is about. And the $300 I mentioned earlier doesn't seem right either. Under his heading of 'maintenance' (the $300 annually) he's included repairs, snow removal, cleaning, and lawn service. I'm pretty sure all of that costs more than $25 a month. Hence, I'm concerned about his numbers.

I just don't see the numbers working on this property because the rent doesn't seem high enough to cover the basic costs when based off of the 'rules of thumb' employed on this site. Correct me where I'm wrong, please!

Steven J. · Answer

Here's the images after being run by the fancy new BP rental calculator. Thanks for that, much! The numbers a fixed a little better now. The seller has some interesting record keeping where estimation seems to be the favored method of tracking. Its quite unclear as to what goes where. Annually, seller pays $1505 on utilities, $300 on repairs (ha), taxes @ $3548 (assessor says it should be $2664 annualy), and $1320 on insurance. I made vacancy, management, and repairs (yes another) at 10% each bringing up that total.

As for rents being at market rent, I have no idea!

And @Brandon Turner , how come in the analysis my NOI is positive? Where is that $2772 coming from?

I'd love to get the feed back and I appreciate it! Thank you.

Trey Leigh · Answer

any estimates on taxes, insurance?

Brandon Turner · Answer

Hey Steven, 
	
	So utilities at 556/month seem high, but I'm not sure what's all included in there.

Can you post the PDF here? (you may have to convert from PDF to Jpeg to post) and I can take a look.