Analyze this deal on a 3 unit property

9 Replies

3 Unit Multi Family Property: (1) 1BR, (1) 2BR, and (1) 3BR

Total Sq Ft: 2,596

Built in 1920, fully renovated from top to bottom including new systems (according to the listing).

The area is an average middle class neighborhood with several single family homes and many multi unit properties. 

Listed Price: $294,000

Unit Rents according to seller (factoring heat/hot water paid by landlord):

1BR (3rd floor) - $750

2BR (1st floor) - $1,150

3BR (2nd floor) - $1,250

Total: $3,150

Annual taxes: $3,778

Annual insurance (estimated): $1,600

Annual utilities (estimated): $3,600

Annual maintenance: currently unknown

Estimated mortgage: 

(Assumed paying the listed price, with 0% down VA Loan)

$294,000 @ 4% 30 years, $1,404

This would be my first real estate purchase. I currently rent an inexpensive apartment and want to buy a multi unit property. I know I can get approved for something like this, based on my income and my DTI.

Concerns: I believe the stated rents are a little high. I actually live very near to this property and a friend of mine owns several properties in the same neighborhood (definitely bringing him into the process to help guide me) and for the sake of this deal analysis, lets assume that it's possible the rent total of $3,150 could be $300 over current market rents. It's possible that they aren't but consider this as a possibility for now.

I am a veteran and can utilize a VA loan with 0 down. I have top tier credit (score over 765). I currently don't have a lot of cash for a down payment (recently paid off a student loan).

What are your thoughts and analysis on this deal? My plan would be to live in the smallest unit of this building (the 1BR, so technically you could remove $750 from the total monthly rents to compensate for this).

Even with only counting the 2 larger units in the numbers, I figure I could break even after the mortgage, taxes, insurance and utilities are paid, which means all maintenance costs put the monthly cash flow in the red, unless I could buy it for less.

I'm not seeing how this breaks even.  I think you'd need to buy for less.  My quick back of the envelope shows you lose almost $2,000 per year.

36,000 (rents estimate)

- 1,800 (5% vacancy)

= $34,200 effective gross income

- $3,778 taxes

- $3,600 utilities

- $1,600 insurance

- $10,260 (conservative 30% of egi maintenance/upkeep expense) **this could be lowered if you mow the lawn, shovel the snow, etc but still need some number here

- $16,848 mortgage

= -$1,886

This assumes you put aside no money for reserves as well, which is not a good idea.

@Eric K. This this pretty much exactly what I was looking to do as well. We are in very similar circumstances (renting, looking to buy small multifamily, vets looking to use VA loan). Good luck on this and please do update this thread, I would be interested in emulating if you are successful. Take care! -Mark

By my estimate if you do set aside reserves and live in the one unit you will be feeding it about $385 per month.  that is cheap rent + the property is appreciation + you are paying down a mortgage.

Good Luck.

Bill

Originally posted by @Sean S.:

I'm not seeing how this breaks even.  I think you'd need to buy for less.  My quick back of the envelope shows you lose almost $2,000 per year.

36,000 (rents estimate)

- 1,800 (5% vacancy)

= $34,200 effective gross income

- $3,778 taxes

- $3,600 utilities

- $1,600 insurance

- $10,260 (conservative 30% of egi maintenance/upkeep expense) **this could be lowered if you mow the lawn, shovel the snow, etc but still need some number here

- $16,848 mortgage

= -$1,886

This assumes you put aside no money for reserves as well, which is not a good idea.

 As I said, I estimated I would break even without factoring maintenance. I know there will definitely be maintenance/upkeep, I just don't have a good estimate right now. I plan to do as much of the work as possible myself... I don't currently know much of it but I plan to learn to do as much as I can to minimize costs... 

Surely I would not just offer the asking price. I would probably start pretty low, something like $265k and ask the seller to pay the closing costs (wishful thinking) but ultimately I bet it could come down to $280 or $270k.

I also feel like with a building that's Just been fully renovated, the maintenance in the first few years Should be reasonably low... Certainly there's no guarantee in that but one should hope.

Lets assume for a moment the seller agreed to $280k AND paid the closing costs.... Would this be a wise deal? If not, what would you guys say is the highest one should pay for this property just based on what we know so far?

I know it's a bit of guess work here with unknown maintenance costs and utilities only being estimated... But I plan to go look at this next week and i'd definitely like to be armed with as much knowledge as possible.

Originally posted by @Bill Jacobsen:

By my estimate if you do set aside reserves and live in the one unit you will be feeding it about $385 per month.  that is cheap rent + the property is appreciation + you are paying down a mortgage.

Good Luck.

Bill

 I'm also trying to view it from this perspective as well... I know most people on here wouldn't recommend buying something without a positive cashflow, but the alternatives in this area are grim. They are: A) continue renting and making other landlords rich, B) buy a single family home for $220-$270k and Really struggle to get by or C) buy a rental property similar to what i've described in this thread and Possibly have to kick in a few hundred per month but in time I would build equity and the day I moved out of this unit, it would definitely have positive cash flow.

Eric,

Congratulations.  What your have described here is a great way to get started.  Before you know it you will have 100's of units all paid for and be financially independent.  

How many properties in this area have you analyzed? Are the returns similar? You really have to know your market and what similar properties are being sold at? Plus it's not a newer building so depending on the previous upkeep of the property, you could have higher maintenance costs.

Originally posted by @George Smith:

How many properties in this area have you analyzed? Are the returns similar? You really have to know your market and what similar properties are being sold at? Plus it's not a newer building so depending on the previous upkeep of the property, you could have higher maintenance costs.

 I've been eyeing the listings in the area for quite a while. Everything i've seen lists for higher than this. Of course I never know what things actually sell for, so I can only go off listed prices.

So i've done a little more homework on rents in the area and my friend (who owns several properties in this very neighborhood) said he gets about $950 for a 2BR (as opposed to the $1,150 that the seller of this property quoted me. Also a 3BR he said should go for around $1,200 (as opposed to $1,250 stated by the seller).

So all in all we're looking at $250 less in monthly rents then the stated by the seller... So what do you all see as a fair price for this property? My math with these new rents has me renting out the 2BR and 3BR for $950 and $1200 respectively, me living in the 1BR, and after mortgage/taxes/insurance/utilities I would break even if I bought this for $280k. Again, that factors 0 for maintenance.

I'm inclined to think that I should offer like $260k but I doubt they accept that. I feel like $280k is possible, $270k if they are desperate to sell, but most likely not much lower than that (just based on other listings in the area).

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.