6 units 124k deal analysis

21 Replies

Greetings,

I am looking at deal as follows:

6 plex with total rents of $2300 per month.

4 two bedrooms and two efficiencies.

Owner willing to finance 15%.

The building is currently separately metered however owner pays water, trash and gas bill for hot water heaters. The total utilities owner pays per month is $170.

The payment on property would be right at $700 per month.

Insurance will be about $150 per month and taxes are $190 per month.

Does this seem like a good deal?

Please help me if you can. Thanks

Jordan

I see this as about an 8% cap property. To me, if your cost of money is 5% or less it is a deal.

Bill

I'm sorry, I'm new. Can you explain how you determined the 8%?
Thanks a lot.

Farshad

The so called cap rate is the net operating income divided by your cost of the property. The net operating income is your rents - your operating costs. I plugged in my numbers in some places so it might not agree with your numbers.

Bill

The rent/per unit is very low. Are you comfortable working in an area like that?

Have you allocated additional funds to accommodate the higher turnover and repairs that are common with low income housing?

Would really need to know the area to give the best feedback on whether or not it's a good deal.

Is there a lot of crime and drug activity?

Is it a bunch seniors on a fixed budget?

Low income but safe rural community?

Medium holton wise property group logo jpegJames Wise, The Holton Wise Property Group | [email protected] | 216‑661‑6633 | http://www.HoltonWisePropertyGroup.com | Podcast Guest on Show #127

Originally posted by @Bill Jacobsen:

I see this as about an 8% cap property. To me, if your cost of money is 5% or less it is a deal.

Bill

 But Bill,  if the market cap rate was 12% they would be overpaying!  How can you say this a deal?

Originally posted by @Bill Jacobsen:

I see this as about an 8% cap property. To me, if your cost of money is 5% or less it is a deal.

Bill

 But Bill,  if the market cap rate was 12% they would be overpaying!  How can you say this a deal?

Thanks for all of the great responses!


@James Wise

The rents are $400, $400, $400, $400, $350, $350.

It is in on the lower end. However a fourplex here in Kentucky usually rent for $500 per unit. This is a six.

What do most units rent for in your area that are in for?

It is a C property/area.

@Bob Bowling

What price would make this a deal?

Originally posted by @Jordan Vires:

Thanks for all of the great responses!


  

@Bob Bowling

What price would make this a deal?

@Jordan Vires There are three very important pieces of information missing.

1.  Historic rent growth.

2.  Historic appreciation.

3.  Your expectation of those staying the same. increas)ing or decreasing.

I would NEVER buy a property unless I KNEW 1 and 2 and could make a reasonable business estimate of 3.   

I would also look to what is market value. That could be determined by sales comps, (preferable even tho it is an income property) or income approach. You will probably have a hard time getting reliable cap rate comps so I would skip that. It would be much easier and more reliable to use GRM's. But all this is telling you is what market value is. Whether it is a deal or not depends on further analysis, COC ROI, ROE Yield cap etc and your financial plan and goals. I have no problem paying market but I am usually buying in the down part of the cycle so I am picking up premium properties at their lowest value.

Bob Bowling is correct. If you are buying property which will give you an 8% cap in a market of 12% properties that are otherwise comparable you are over paying.

I really meant that if my cost of money is 5% I am willing to buy property yielding 8%. I am sorry if I caused confusion or gave you the wrong advice.

Thanks, Bob, for pointing this out.

Bill

Originally posted by @Bill Jacobsen:

Thanks, Bob, for pointing this out.

Bill

Hey, that's what I'm here for, to learn, help out and the FREE beer. 

@Jordan Vires   you might try posting the price of the property, the amount financed through the bank and its interest rate and length of loan, also if the Seller is financing 15% what are the terms on that, a balloon?  If so we need the numbers.  It would be nice to have some historical information on the vacancy rates and yearly utility bills as they can vary from month to month here.  A lot also depends on the condition.  Does it need a new roof, or furnace, or foundation work?  What is the condition of the units?  Modern or untouched in 50 years?  Is it an old fuse box system or a breaker box?  How many tenants are paying promptly every month?  Any of them not paid for 6 months?  It sounds like a good deal but there are a lot of things that could make it a bad deal if you do not look closely at it.

How much deferred maintenance will you inherit? What I am trying to get at is make sure you have adequate reserves.

Also would you be hiring a PM now or in the future? Even if you aren't right now, life situations can change which is why I always account in my numbers for a PM.

Medium rzt hc 6483Michael Noto, SalCal Real Estate Connections | [email protected] | 860‑384‑7570 | https://www.zillow.com/profile/Mike-Noto/

@Jerry W.

@Michael Noto

There would be a balloon. I was up front with realtor and explained to him that the owner financing portion would have to work out in terms of cash flow for banks underwriting as well. We would probably be looking at a balloon note in five years.

I look for the payment being anywhere from $645-$750 depending on what the interest rate comes back at that I am offered.

The units look to be in good shape. I have no knowledge yet of furnace or other utilities I have not viewed the property in person.

I would plan on hiring a property manager as well.

@James Wise brought up a good point about asking price being indicative of area.

It is in the Newport/Covington Area just outside Cincinnati.

Originally posted by @Jordan Vires:

  

It is in the Newport/Covington Area just outside Cincinnati.

@Jordan Vires

Too funny!  I attended Newport High School, Dixie Heights HS and Boone County HS, NKSC (NO Knowledge State College), NKU  And Salmon P. Chase Law School.  I was also a Realtor in NKY.  I was just back for the first time in about 20 years.  My buddy has a condo in the old Booth Hospital in Covington by the river.  The whole tri-state area has some fantastic housing stock.   I loved being able to walk across the bridge to Cincy, hit the Casino and walk back thru Newport and across the Licking  to Covington.  But, if you look at Newport look at all the parking lots where housing used to be.  More demand for parking lots than housing?  What is going to happen to the old Project property?  All that valuable land that will have FANTASTIC views of Cincy that has sat vacant for years since they scraped the land. The airport is a ghost of its former self.  Cincinnati used to be a major convention center,  NOW?   I lived in Dayton, Newport, Ft. Wright, Ft. Mitchell. Erlanger, Florence, Covington.   Still have some family there.  I checked my Moms appreciation rate a few years ago on her former house in Erlanger and it was 5.1% but seems to be declining but really haven't checked lately.  I would be concerned about appreciation, rent growth and expenses.  Not saying anything bad, just look at the numbers.  Can you share a more specific location?

Originally posted by @Jordan Vires:

Thanks for all of the great responses!


@James Wise

The rents are $400, $400, $400, $400, $350, $350.

It is in on the lower end. However a fourplex here in Kentucky usually rent for $500 per unit. This is a six.

What do most units rent for in your area that are in for?

It is a C property/area.

@Bob Bowling

What price would make this a deal?

FYI.  I rented a two bedroom in 1977 on Cook Book Lane in Ft Mitchell.  It was a cul de sac of about 6 12 unit three story buildings.  Pretty nice but nothing fancy. It would be interesting to see what they rent for today,

@Bob Bowling

It is on Scott Blvd

What about appreciation aside?

Just looking at is a cash flow property.

No real expectation or false hope put on future appreciation.

Originally posted by @Jordan Vires:

@Bob Bowling

It is on Scott Blvd

What about appreciation aside?

Just looking at is a cash flow property.

No real expectation or false hope put on future appreciation.

Yeah, cash flow until you lose your first tenant.  What then?  No appreciation, what about depreciation?  What happens when you NEED to unload this property 5 years fro now and mortgages are 11% and the market will only pay you $80,000.  Where's your cash flow then?

I'm assuming you are not that familiar with the area even though you are from KY.  You might want to google the Bradford building at 4th and Scott that is abandoned.  You should also be very aware of the Madison street corridor redevelopment project.  And while you're at it you might want to look at the Main Strasse project in Covington started decades ago and what effect it had.  I would also follow the Over the Rhine projects in Cincinnati.

Let's say Madison is a success.  Will your tenants move there to be in a better place?  All you can do is drop your rents but there goes your cash flow.  I don't see huge population growth so any new project will take from you.

Inflation, depreciation. rising costs and competition are all eating at your NOW cash flow and you have NOTHING to combat it with. 

This is something that ALL investors should be aware of if they think todays cash flow is their guaranteed profit.

I imagine the owner financing got you interested? I would not pay 15% for a deal like this; and I would not own such low rent property. You just deal with a lot of people who make bad financial decisions and are an unstable source of income. In addition, you will have trouble offloading it when it comes time to exit.

@ clay smith

No the owner financing was brought up later but you have a valid point.

What properties/areas do you recommend?

Kentucky is an interesting area. 80% of state in rural parts are either on drugs, welfare, or some form of government assistance/disability god bless em lol.

Then in areas like Louisville we got "The First 48" van rolling around town daily filming bodies in chalk for our tv viewing pleasure.

What areas or rent markets have you found successful in Kentucky?

Thanks
Jordan

^ I dunno...where are your normal, middle class* areas?

* people with actual jobs; no drugs and no gov subsidies.