I am interested in a 4-family property. The asking is $850k. Comps are between $890-1.1M. It's priced low because the units are rent controlled. I have been negotiating with the seller and we have come to this:
Sale price $840k
Closing contingent upon tenants in 3 of the units signing an affidavit that they will vacate in 60 days
buyer will contribute $10k to seller's closing costs
Once the vacated units have tenants paying market value, here is the math:
income=between $6950 and $7250 (parking space optional)/mo
expenses (all in)= $7565/mo
balance= -315/mo
This is cashflow negative by $315. Is this a good deal? I'm thinking wrt it's appreciation over time.
There is not nearly enough information to make a fully-informed decision. Based on what is in here, I wouldn't buy it.
1) Your forecast to get to fully-leased at market rents could take weeks or months. Can you float another $20K-$30K of negative cashflow?
2) I wouldn't buy in areas with rent control laws
3) Forced appreciation may require investing more in upgrades. I'd want to see cost / benefit of achieving that. If you are counting on natural market appreciation, that is something you can't count on. Nobody can accurately predict when or where appreciation will happen. In this very forum, about three years ago, I argued that same point in a discussion about Austin TX and most argued against me that Austin could only go up because of tech jobs. Guess what? Austin is experiencing one of the biggest declines in values right now.
This deal can make sense if you’re okay paying out of pocket for a while and you're confident about the upside.
Right now, you’d lose about 315 dollars each month once you get the units to market rent. That’s not terrible, but it does mean you'll be feeding the property from your own wallet, at least in the short term. For some investors, that’s worth it if the location is strong and the building's value is likely to rise.
The fact that you’re buying under market value is a plus comps at 890 to 1.1 million give you built-in equity if you can actually get those tenants out and the units re-rented fast. That’s your main leverage here.
Still, a few things to watch out for: getting rent-controlled tenants to vacate is never a guaranteed thing. Even with signed paperwork, delays or legal pushback can eat time and money. Also, your expenses might creep higher repairs, surprise maintenance, or longer vacancies can widen that 315 dollar gap.
In the bigger picture, this is a classic trade-off: small negative cash flow now for stronger appreciation and cash flow later. If you have savings to float the negative each month and a realistic plan to push rents or improve the building, it could pay off well over time.
If covering a loss every month stresses you out, you might want to run more conservative numbers or keep looking for a deal that pays for itself from day one.
If you want, share your planned mortgage rate, down payment, and any renovation costs. I can help you check if the numbers still hold up.
@Priyanka Verma, thanks for your input. You make a good point about making sure I buy with some built-in equity. Would you recommend putting something in the offer that allows me to back out if it does appraise above a certain amount?
To your point, I'm am thinking about how realistic it is that the tenants will leave. My realtor said the tenants will sign an affidavit saying they will leave, but I'm not sure how comfortable I am with that for the reasons you explained. Any thoughts on how I can structure the deal to protect myself if the tenants don't leave?
Thanks for your offer to look at the numbers more deeply:
Sale price: $840k
Downpayment: $210k
Mortgage balance: $630k, 7% interest rate
Reno costs: $10k (this is a guess as I haven't had the inspection yet, but the property looked in very good condition)
I welcome your thoughts.
@Greg Scott- Thanks for your input. Just to clarify, how did you calculate $20-30k negative cashflow? Over 5+ years?
If you have tenants move out, you will have vacancy. You said $7,000 per month rent for four tenants. If you kick three out, and it takes you a month to get a new tenant in, that right there is another $5,250 of negative cash flow. ($7k/4*3=$5250)
You are also going to have to turn those units. Paint and carpet alone is probably going to run you about $3K per unit, so about $9K. Now we are up to $14,250. I'll ignore turnover in future years, but you should have a contingency for that too.
If were OK keeping rates way below market, it is easier to keep it 100% full. If you are going to try to keep rents at or near market, you will have turnover. If you assume ONLY 5% vacancy every year, that is ($7k*12*.05=$4,200 per year) FWIW, I never said 5 years. Let's just look at 3 years and ignore the first year since we've already accounted for that. $4,200*2=$8,200 To be safe, you would really want to use a higher vacancy factor.
And, remember, you were already going to lose $315 per month at market rates, which is $3,780 per year or $11,340 total.
By my calculation the total negative cashflow in the first three years is closer to $5,250+$9,000+8,200+$11,340=$33,790. So, to hold this property, you had better have at least another $35K in the bank today an expect to feed it to the property over the next three years.
You did not say if you had accounted for any of this in your numbers so I assumed you had not. This is why I do not like this deal.
@L. Brown If you're confident about appreciation + can reposition later, it might be a strategic play. But cashflow neg upfront = risk. Can you raise rents or cut costs long-term?
@L. Brown If you're confident about appreciation + can reposition later, it might be a strategic play. But cashflow neg upfront = risk. Can you raise rents or cut costs long-term?
@Kate Sanchez- thanks for your perspective. Yes, the town permits at 4% rent increase per year.
I'm by no means an expert and am fairly new to the market...however any market that has rent control will in all likelihood become even more stricter in the near future. Personally I would not want to invest in a property/State where I am being told what I can and cannot do with my own property. That's just my 2 cents.
Good luck!
Based on what you've provided here, this is not a good deal.
You should be at least aiming to break even on a deal like this. Being in the red from day one is not a good start to a potential 30-year commitment. I also believe you may be underestimating the holding costs from the tenants vacating until you get new tenants. This can eat away your savings because you still have to pay the mortgage, real estate taxes, and insurance even if the building is vacant.