quad located in little Mexico in S. Jersey. $157,500. $3050/month rent, cash. Taxes, water, sewer, trash = $9000/year. Owner buys oil for heat, this year's cost ~ $4000. Seller financing. He wants $37,500 down. Finance $120,000 over 15 years @ 7%. Also new electric service on both sides(4 units). House needs some repairs ~ $2500. What do you think? Stay or walk?
If you verified rents at 3,050 X 12 = 36,600 a year.
Since utilities are paid by the landlord I would use 60% costs.
36,600 X .40 (60% costs) = 14,640 NOI
14,640 NOI / 157,500 sales price = 9 cap Depending on the area of town could be a bad cap, average cap, or good cap. If the repairs are immediate they would need to come off of the sales price so likely looking at an 8 cap at current purchase price.
When tenants do not pay utility they consume 30% more on average. Pay special attention to the taxes, water and sewer rates, and heating. If those are set to jump higher then they could outpace the annual rent growth which reduces current cash flow each year moving forward. This is really why I do not like properties where I pay utility.
The 15 years is good as long as no prepay penalty. The down payment I would try to get down from 25% down as with a quad you should be able to get in at 20% down at a much lower rate than a 7% probably in the mid to high 4's. If you can go 10% down and get them in the 4's to 5's fixed with a 25 to 30 year amort. then it's going to your advantage.
Personally it would be a no go for me.
@Joel Owens seller was firm on the 7%/15yr. No prepay penalty. I didn't mind the repairs but paying for heating oil is what's holding me back. I have a duplex that we lived in one side and rented the other. It was a one oil fired boiler when we moved out. The new tenants kept it like a tropical retreat. Went outside in the s ow with tank tops then came I. To get warm! I lost money. So we switched to two gas boilers and they pay for their own heat now.
Seller was asking $169k. Got him down to $157.5k but to me, at 7% and still have to pay either for oil or add two heaters and split plumbing, it's just not worth it.
Thinking to avoid all the hassles, thinking either stick to SFH or put up modular duplexes where everything is new. I'd rather make a little less every month and have brand new house and equipment.
What are your thoughts?
Yes I like no landlord paid utilities. Before you go that route make sure landlord does not cover utility for the whole area. If they do it will be harder to train tenants to cover utility bills.
I like quads over duplex because of breakeven occupancy with the mortgage. Duplex one goes vacant you have 50% occupancy versus 7% occupancy with a quad.
Are you in a situation where you have to have seller financing in order to do a deal? If so that makes this deal a lot more interesting. If not then you could go to the bank and get a better rate.
Sorry I typed too fast it should be 75% occupancy with the quad with 1 vacant.
@Brant Richardson my DTI is right at 35%. Lenders are not anxious to lend.
@Joel Owens most rentals in area are lessee paid utilities. Just seems like deal is a 'gotcha' buy. He's owned the place for 20 years, it's paid for, he nets approx $23k a year. Yes he's approaching 60 and wife wants him to sell a few properties(according to him) but you're gonna give up $23k?
Doug, this is a bad deal. When you factor in vacancy - 10%, maintenance - 5% and replacement reserves of 5%, you'll be LOSING MONEY. Also, that heating bill might go up instead of going down. And you're right: you will not be in control of the heating expense. If you can't submeter and charge the utilities to the tenants it's like giving them a blank check - they'll bleed you dry. Ask me how I know. In my podcast interview, I revealed how problematic my 36-unit apartment became. Below is the link to the podcast but before that...below is the screenshot of my analysis.
Here's the link to my podcast interview:
By the way, based on my spreadsheet, to make an 8% cash-on-cash return on this property, my maximum offer is $124,000, $37,500 downpayment with the balance financed at 7%, 15 years to pay.
Account Closed I like your chart Wendell! Very accurate. The only place I'd gain is managing the property myself but that's not enough to keep it. I figured about $800 per month profit before taxes and according to your chart if I take vacancy, reserves and management costs out of he equation, that is what I'd have. But I understand that you have to account for them. Thanks for the chart, I am new to actively pursuing income properties so any help in analyzing deals I will gladly accept. Last thing I want to do is lose money,it is too hard to come by.
Even when you are planning to manage a property yourself, you still calculate the cost in as an expense, that expense is just going back to you. If you ever decide to scale up and need to pay someone else to take over the managing, then you don't lose value in the house by adding new expenses.
Same thing when buying the house, even if the management was done by owner, the expense still exsists even if it isn't on paper.
@Michael Moikeha I just figured the expense would be income to me, so I looked at it as profit, but I see your point.
@Doug Scarano It is income for you, but when it comes to calculating numbers as the buyer, you want to account for every penny you would spend if this place was running at full efficiency without you being involved in it at all.
@Michael Moikeha so you can back away and it would be completely passive income. Gotcha!
4 kitchens, 4 (or more baths), etc. 1800 in annual repairs non-reserve seems light to me.
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