This is my first post on here, but I've been doing a lot of reading on BP. What an awesome resource!
Anyway, I have a potential deal for a 5 unit property. The numbers are as follows:
- Purchase Price: $155k
- Gross Monthly Rent: $2,300
- Taxes (annual): $5,270
- Insurance(annual): $1,500
- Water/Sewer/Trash (annual): $2,100
I'm also budgeting the following:
- 10% Monthly Rent for Property Mgmt
- 10% Monthly Rent for Maint.
- 10% Monthly Rent for Vacancy
A few questions if you would be so kind to weigh in. First, am I missing anything here? Secondly, do my budgetary numbers look right based on the experience of others?
Based on the numbers I'm using, it's not cash flowing the $100 per unit that I was shooting for, but I've tried to be conservative in my estimates (and at least in the beginning I'll be managing it myself). The property is fully occupied by "long-term" tenants, but obviously that can change. Three of the units have been fully renovated, but two will need some work when they're turned over next. I'm budgeting $3-5k for each, mostly cosmetic. I'll also be raising rents on those units once renovated, prob. $100 each raising the gross total rents to $2,500.
Any input would be appreciated!
This sounds like an okay deal to me given the info you've provided. Are taxes really going to be over $5K per year on a $150K property? Have you gotten quotes for insurance or just estimating?
I added up all of your expense estimates and you're at 62% of income. Most folks on here will tell you to use 50% as a starting point, so that does seem a bit high (i.e. conservative). If you're still making some money with 62% expenses, then you've probably got a pretty decent deal to start out with. What type of rental area is it?
Something to also keep in mind is that this property will require commercial financing. If you did your analysis with a fixed 30 year amortizing loan at 4.5%, then unfortunately it's not going to look nearly as good when you plug in 20 or 25 year amortization and 5 or 5.5% interest which is probably more in line with the terms you'll be able to find on a commercial loan.
Welcome to BiggerPockets @Jon Keeney !
One thing I don't see that you'll be responsible for is lawn care / snow removal. Also, it's hard to calculate your cash flow because I don't see anything about your financing. Are you paying cash? If not, what are the terms of the loan? How much down payment are you putting on the deal?
Stacking the deal up with the 2% rule of thumb, this is around 1.5%. Are you sure the market can support the raised rents if you do rehab the units? Are those 2 units that aren't rehabbed renting for less than the ones that are? You can do a quick check of your competition (quality of unit/building and price) to see.
@Michael Siekerka 50% rule usually implies that he's not responsible for water/sewer/trash. With this property he will be, along with lawn care/snow. I'd say 60-65% seems about right. It could even be a tad more.
Without knowing the neighborhood and rental market, it appears at first glance the rents are too low . $460/unit on average tells me it's either in a bullet proof vest neighborhood or the place has significant upside. This may be why the expenses seem so high relative to cash flow.
I'd research the market and find out the going rents by posing as a renter or asking other landlords in the area what they think. You could always check out rental sites as well to get a feel for potential rents.
If this is your first property, it's better to buy in a solid area than a sketchy area; especially if your first deal is a fiver!
Thanks for taking a look @Michael Seeker Unfortunately taxes are very high in this area, so that's accurate. I'm also just estimating insurance based on the numbers from the seller, but I will need to confirm.
It's a decent rental area, but not steller.
Also, great point on the need for commercial financing. I don't have much experience with that, so I'm going to be calling around tomorrow. I used 30yr fixed at 5% in my model, so I'll need to adjust that based on your input to a shorter loan term. Thanks!
Thanks @Mehran K. ! I did forget to add lawn/snow removal on this, good call. Based on the competition I've seen, there would be some room to move rents up $50-$100 per unit. This property has 3-1bd, 1-2bd, and 1,3bd. The one bedrooms have been updated, and two and three beds need work. That said, the two and three beds are renting for below the 1 beds at this point.
Thanks for the input @Cory Binsfield ! It's in a smaller town close to the one I currently live in. It's a lower income, blue collar area, but not a place I wouldn't feel safe by any means.
I think that the rents are too low, and even the renovated units could be bumped $25-50 based on what I'm seeing from competing properties, but great thought on posing as a renter to get additional intel. Because the tenants are fairly long term I was wanting to see if the property worked "as-is" without trying to raise the rents immediately.
The goal wasn't to buy a 5 unit right off the bat, but if the numbers work i'm trying to "be bold" and go for it. Thanks!
I would wait for a property with higher cash flow. Being your first deal, the numbers seem too low for a 5 unit. Great rule of thumb is 50% of gross rents for expenses and then see if it excites you after subtract out the mortgage pmt.
One other tip, it's better to immediately raise rents to market then wait. Just factor in a reserve for people moving out.
Thanks @Cory Binsfield . I'm going to meet with the seller tomorrow and see if there's any way we can sweeten this one (either by price, owner-financing, etc.). If not, I may pass.
Also, I appreciate the input on when to raise rents. I don't have experience in buying properties with existing tenants.
Good luck! Check out Ben Leybovich's posts and podcast for great stuff on structuring deals. He's a great resource.
Let me know if you do not do that deal. I'll pay a finders fee to you.
Thanks, @Robert M. Will do.
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