4 Unit Analysis

3 Replies

I am looking at purchasing my second property.

I am a buy and hold investor. I buy with as little down as possible and try to pay off in 15 years, and I don't collect a dime until the property is paid off. I'm 29 years old, time is on my side.

The 2% rule doesn't apply in my area.

I currently have a 4 unit building in Southern NH. This second property is less than a mile away from the first, it is also 4 units.

I went to see it for the first time yesterday, it has some challenges which I have little experience with.

Asking price is 315k,
rents are 3,250/mo.

It was built in 1970 and has not been updated since. I would purchase it, I am making an offer today at 270k, @ 5% down payment (FHA). I'll put about 20k of work into it. (New windows, some new doors, new flooring, refurbish kitchens, paint paint paint, update some bathrooms, landscaping, update parking lot.)

After the work, I will increase rents. Two units are two story townhouses, I should be able to get 1000 (maybe 1100). One unit is a nice little one bedroom I should be able to get 900 for. The last unit is an odd two bedroom that has a strange design, I could get 800, maybe 900. I am getting these numbers from my current building where I have nice units.

If I got financing for 300k and used that to do the renovations (purchasing for 280k) my monthly PITI would be $2,403. Here's the link to the mortgage calculator.

http://www.mlcalc.com/#mortgage-300000-5-30-5.0-7500-1500-0.52-4-2014-month

After expenses, at current rents, I would make about 6k/yr.
After raising rents, I'll be around 14k/yr.

I am concerned this will not pan out as I am planning. The last building I bought only needed one of the units to be flipped, this building needs everything flipped and would necessitate a contractor.

Thank you for your thoughts.

Yes, I tend to agree with you here. I think this project will be a money pit. Here is why:

At a renovation cost of $20k, that is only $5k per unit. You cannot even touch remodeling a kitchen for that much. You could easily have that in appliances alone. A full renovation of each unit could easily cost $20k each.

Let's just assume you can do it for $5k a door. In order to wrap your renovation costs into the loan and go through FHA you will need a 203(k) loan which I believe is only available to owner occupants and not to investors. (I could be wrong.) You must also incorporate their permanent mortgage insurance payment into the cost of the mortgage which is 1.35% of the mortgage amount annually, divided into twelve monthly payments for the life of the loan (an additional $320 per month).

Using a total purchase price (including $20k renovation), your projected low range rent rates, 5% interest for the loan (probably higher), and 50% rule for expenses, you are looking at a property that breaks even - exactly. Not one dollar left over.

My advice...keep looking.

It HAS to be a deal going in so do not make it meet your parameters only if you get increased rents.

I see that rarely happen and more than not it doesn't pan out that way. Unless in a highly desirable area with a shortage of rentals tenants push back a lot with any rental increase because it is one of their largest payments.

3,250 a month X 12 = 39,000 gross income

Take away .50 for (management, expenses, vacancy) go 60% (.40) costs if you cover the water or other utilities.

So 39,000 X.50 = 19,500 at a 10 cap is 195,000 sales price. All in 300k with your repairs included is a 7 cap.

At 60% annual costs this is a 5 cap.

Pre-1970 you will have EPA contractor lead based paint issues that cost more to fix.

These numbers do not excite me but might be what returns are where you live. If I am getting that kind of return I will just buy triple net leased property and stay hands off. The return at least to me always relates to the headache to get the return.

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

We invest in multi-family properties as well. I think you run the risk of losing money when you start making too many assumptions about your revenue and expenses. I always try to do my analysis based on what the current rents are. We have used traditional bank financing for 5 multi-family properties and I have not ever had an option to do less than a 25% down payment. We are actually now at 30% required down payment since we are over 4 mortgages. Just out of curiosity why the rush to pay off the debt if you are making positive cash flow? Moving out to a 30 yr. mortgage gives you a lower payment and more cash flow. You can always pay down the debt when you want to.