Not Sure How I feel about this Multi

11 Replies

Hello all, I want to thank you ahead of time for any input, I think best out loud and this is a good substitute. I recently purchased a package of 4 homes, I planned to sell 2 and keep 2 for rentals. I've sold one, the other is almost ready for sell, I'm thinking about no.3. No.3 is an 1800 s.f. ranch with a detached 2 bay garage with a 650s.f. 2/1 apartment above it. The home is conducive to splitting into a duplex, I've talked with the city already and though I've not filed any paperwork for a zoning switch they said it shouldn't be an issue. If I split the house I'll have 3 units plus 2 garage/storage bays (they are smaller bays so are better suited for turning them into storage units). Here are the #'s, I ran through the BP calculator.  I am not taking into account renting the garage bays because I know nothing about renting storage units and not sure if I could get the extra $25-$35/month for each bay.

Purchase: $70k*

Rehab: $100k

Gross Monthly Rent: $2075

Vacancy: 8.33%

CapEx: 5%

Maintenance 5%

Insurance: $100

Taxes: $125

Lawncare: $210 (big yard)

P&I: $649.28

Monthly Cash Flow of $610

CoC 21.54%

The numbers are alright but my issue is the property is located in a C area, not a bad or dangerous area, I own another property less than a mile away, it's just blue collar and there will not be much appreciation. I don't buy for appreciation but I worry about spending this much money in this community, I'm not sure if the property would even appraise for $170k, that's a very expensive property for the area. I look for "free" properties, meaning I want to buy, remodel, and then use the forced appreciation as my down payment instead of my own cash, since I'm trying to grow this will hamper me by taking $34k or more of my money. On the positive side, there could be extra revenue potential in the 2 garage bays and a small storage room off the garage apartment that I haven't accounted for. Also, the house is located in-between a brand-new, very nice apartment complex on one side, a just completed expansion of a nice assisted living facility on the other side and quality brick townhouses behind it. My other options would be to try and rezone it as commercial like the two properties next to it and sell or sell to another investor for $10-$20k profit.

Thoughts?

100k in rehab is a lot of cash. 

its a gut, add parking spaces, landscaping

landscaping as in its a very overgrown lot.  

I'm sorry but I just do not follow your cash flow. For now, let's just stick to the 50% rule. With gross rents at $2,075 and all expenses (including vacancy but excluding PM and mortgage) at 50%, you are looking at a monthly cash flow of $1,038.

If it is true that your mortgage payment is $649, then your NOI-before tax is $388 not including storage income. This meets the $100 per door/per month investment requirement.

With a wrap loan (purchase price plus renovation) with 20% down ($14,000), then you are looking at a cash on cash return of 26.4% which is very very nice.

It looks like a good investment though I bet you could pair down the renovation and landscaping. Do not over build. This looks like a transitional property to commercial and your big return will be the reversion value when you sell under a commercial use.

    that didn't include 10% for property mgmt costs.  Thats straight off BP rental calculator so shouldn't add-up though I didn't run it manually to verify. 

20% down would be $34k on the $170k loan, using 50% rule that'd be a 14% CoC (34000/4656). You mention commercial sale, tri is commercial so I'm not sure what you mean by that being my end game. $100k is it, the property is rough.

A tri-plex (not including the garages as storage units - which I would not mention to the lender) can be financed under a residential 2 - 4 family mortgage. This will give you a better loan rate. 

Before moving forward, I would do more research with hard numbers to see is the deal is viable. If from this point you think it is, then by all means get it under contract with a contingency that will let you out if you cannot get the actual numbers to work. 

@Christopher B.  

I see the property a bit differently than you do.  And I've got a few questions.

My view of your numbers:

Mortgage Rate 5.00% (as @Simon Campbell  mentioned, you can financing this as a 2-4 family.  Your down payment is going to be 25%, but your rate should be 5% or less)

Length of Mortgage in years 30

Monthly Mortgage payment $684.45

Taxes $125.00

Sewer and Water $- (How are you going to split this bill to the tenants?  Are separate meters included in your renovation budget?  If not, it is not a trivial expense, think 5k+)

Trash $-

Heat/Utilities $210.00 (This is actually your lawn number.  Do you plan on putting in separate HVAC systems for each unit?)

HOA $-

Cap Ex and Ops $300.00 (my minimum is $150/month/roof.  I don't think you budgeted enough with your 5%)

Insurance $100.00

Mgmt Fee $212.50

Vacancy $170.00

Total Expenses$1,801.95

Unit 1 $700.00

Unit 2 $700.00

Unit 3 $675.00

Unit 4 $25.00

Unit 5 $25.00

Total Revenue $2,125.00

Cashflow/month $323.05

Cash on Cash Return 8.08%

@Simon Campbell   I already own the property, I purchased it in a package of 4 total properties. The scale of the reno along with the location of the property made me reconsider if I should keep it or just resale it for an easy $10-$15k profit.

@Aaron Montague  I'll probably move into the smallest unit for 1yr to acquire a standard mortgage which should be lower than the 4%-5% we've been using. I will separate all electrical and plumbing, electrical will be individually metered and plumbing sub-metered. My budget does account for new hvac for each unit ($10k.. ouch).

I don't have them with me but I got more accurate #'s, evaluated my options, and decided to move forward with the project. I'll post more about it in the deals forum when I can. Thank you both for the insight and help

@Christopher B.  

Best of luck in all your projects around this house!!

I'd take a serious look at the cost of car storage in your area.  You might be able to do quite a bit better than $25/month in that garage.

I agree with @Aaron Montague  here. Depending on the location of the property and the demand for storage in the area, you could effectively rent those garage units out as "storage warehouses." Look into the rates in the area and see if that just might tip your profit and loss statement in your favor.

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