Triplex, Possible First

13 Replies

FHA 203k O/O in a C+ revitalizing neighborhood. C property. Comps are going for 200k or more.

Price: 150,000

Repairs: ~20,000 rolled into the loan

Down: 3.5% 6000

Premium: 795/mo

Insurance: 33/mo

PMI: 175/mo

100 years old

GMI: 1900

Annual Taxes: 2200

Maintenance: 10% 188/mo

PM: 10% 188/mo

CAPEX: 10% 188/mo

Legal/Accounting: $50/mo

Vacancy: 5% 95/mo

Gas/Water/Elec: To be submetered

Sewage/Trash: 50(?)/mo

Cap rate: 6%

Cash on Cash: ?

50% rule: 147/mo

Is the price in the area just too high or am I just overestimating expenses? I've been looking for 4 months and this is the only thing I've seen that's even remotely hitting the 1% rule. It seems like going with the stock market is the wiser choice here, but this property seems undervalued compared to comps.

Hi Van,

I didn't see a reply. Did you get some help? gross rents = $1900/mo and the asking price was $150k. Therefore it was at 1.27%  Yippie!   Another great factor is the very low down payment of only 3.5% (of both the price of triplex and the repairs!) = $5950. Hooray!

The first Cash = $6k 

Your expenses you put down are worse case scenario, and I must say that I did the very same thing when I bought my 4-plex two years ago.   

If this a tax return onto itself, like a partnership llc, then yes you 'll probably have a $500 to $800 tax bill for it at end of year, depending on how good you keep track of records. You'll also have the state's business taxes each year. (Oregon has them at least.)

Here's my math for you: Except for: GMI / CAPEX / - to what are you referring?

  • Income: 22,800 (annual)
  • Occupancy (95%): $21,660
  • Maintenance - 2166.
  • Reserves - 2166
  • Accounting - 600
  • Sewer/trash - 600
  • Prop Tax - 2200
  • Insurance - $396

------------------------

  • NOI = $13,532.

Your Deal starts off with the best of all worlds and should have great cash flow. The Net Income is figured before the payment to the bank. You take the Net income and divide it by the sale price. That = the CAP Rate. $13,532 / $170,000 = 8% CAP Rate

Since you are paying a bigger chunk back to the bank this will affect Cash on Cash, 

You're paying less cash out in the beginning, but paying more out in the payments. However, if you are getting a low interest rate, that is all the more reason to take advantage. 

  • I did a calculation for a 30 year loan at 4.5% interest on $164,000 present value: Gives payments of $830.96 per month for 30 years (includes interest).
    • Payments = $830.96 x 12 = $9971.52 
  • 13,532 - 9971.52 = $3560.48 = Cash made first year. 
  • How long does it take to make your cash back? 
  • Cash down = $5950 / $3560 = 1.67 years!  Very good! After 1.67 years it's profit!!!

I have a form that I created for multi-plexes and mobile home parks that I could send you if you are interested.  

One of the common mistakes I see new investors make is combining monthly figures with annual figures, and another is counting the same expense twice, not knowing what the expense is referring to. 

The calculations only work if the information is good. The information is only as good as the due diligence. It takes a lot of interviews.  Again, I did not include the two expenses which didn't seem to belong to me. You may have to add them back in.

What happened to the deal? 

Best wishes in your investing! I'm heading to Tacoma on the weekend, I'll have to check out the area!

With a building that old, take a look to see if you're eligible for Dept of Energy credits for replacing windows, heater, etc. Might help offset that initial investment.

@Grace Widdicombe , thanks so much for your input! You're absolutely right, those calculations are worst cast scenario except for vacancy rate. It's a neighborhood growing out of it's rough history, so that's a factor. GMI=Gross Monthly Income. CAPEX = Capital Expenses. The roof has 10-15 years left, so I threw in a 10% monthly budget. The deal is pending inspections and contractor bids.

Thanks for the spreadsheet offer. I'm actually using this excellent one right now, but it's a bit difficult to check the math: http://www.biggerpockets.com/files/user/karkas/fil... It'd be good to check it off yours.

Finally, I guess I'm a bit nervous  because it doesn't follow the other "rules of thumb." A true purchase price of 170, and it's closer to 1% than 1.2%, which is good. It doesn't seem to cashflow $100 per door, which is bad, but no other places seem to. The cash on cash with worst case expenses starts to look like -13%! Terrible, and it doesn't turn around until year 10. I'm trying different financing to get rid of the mortgage insurance. In other words, not all the numbers work and that's scary.

I don't know if i'll be in town, but maybe we can get food and talk RE!

@Sam Albert  

Good idea, I'll have to make sure my contractors are tracking.

Thanks for your reply, Van.  Since I haven't looked at the BP spreadsheet I didn't know the vernacular. 

I find as a landlord that you can't do all the upgrades at once if the property is decent to begin with. So, you do what is most effective and makes the tenants happiest, or healthiest, or gets you the most leverage for the marketplace to meet your goals.

My point being that you have 3 line items for maintenance/repairs in your budget. AND you are financing $20,000 worth of repairs! - So, that's 4 line items in your budget (because you are also paying off that financing over time.)

  • Maintenance: 10% 188/mo = $2256.
  • PM: 10% 188/mo = $2256
  • CAPEX: 10% 188/mo = $2256
  • $20,000 = $20,000

Total Repairs / Maintenance first year: = $26,768.00

Do you really think it's possible? 

- Oh, ya, and my review sheet,- I don't use it as an automatic spread sheet.  I developed it to teach myself the math.

Grace

@Grace Widdicombe that's an excellent realty check (pun). I got wrapped up inthe numbers and didn't do the common sense check. That being said, I like to factor in PM, to pay myself and to allow for future PM. The first year maint should be much cheaper, i agree on that point. Ive seen CAPEX argued as part of, or separate from maint. Finally, the repairs I'm just counting as part of the purchase price. I guess this is where the 50% rule can give a quick reality check and that ends up about $145 cash flow, but the low cost of entry gives it some credibility.

As it stands this looks to be a mediocre deal that needs massaging to make it a worthwhile deal. That  can be done by negotiating the price, and finding a good loan product, lowering expenses and adding value. I apologize for the typos; I'm on my phone. 

Van,

I don't normally chime in on analysis since its been so long since I've purchased anything, but since you asked...

I would want to pay $15K less (or do less rehab) to make a go of this.

I do my own property management, accounting, and legal, so I have a lower hurdle than you do. We do CAPEX as we have low maintenance years rather than including it in our numbers. But, our properties are 50 years old, not 100.

Have you included yard maintenance in your maintenance numbers? My combined Mtc/Yard/CAPEX would be $3400.

Are rents at market?  Any opportunity to raise or charge for pets?

Let me know if you want a copy of the spreadsheet or any more info.

Are you doing worse case scenario or are your really going to hire out all the work? we operate in class a properties with professionals. I self-manage allowing me to keep vacancies at 0, no management fees and we haven't had high expenses. Our properties are also bought in areas where the rent and market appreciate higher than costs. We don't hit any of the rules 1%, 2% or 50% rule and have been succesfful. They are definitely great rules, to help you evaluate the deal but they don't work in all areas.

I plan on managing myself, but believe in having an attorney and CPA. I count a 10% PM because I will pay myself for my time and effort until such time as I decide to push it on to someone else and (this is key) still remain profitable. Rent is at market - I'd be more concerned about adding value to raise the quality of tenants. 

I don't doubt that I'll build up quite a reserve in the first year - but that's also budgeted to be spent. It's the year 2-6 and onward I'm worried about. Perhaps I can find a 5% down pre payed mortgage insurance that'll make the deal work. I agree, 15k makes it work.

I may be off base here in looking at the numbers the water/sewer may be a bit low at $600 for the year.  You may want to check if you can separate the water/sewer for each unit.  In my area of the country I am not sure it is possible. It is typically one reading for each building.  

Originally posted by @Van Doan:

FHA 203k O/O in a C+ revitalizing neighborhood. C property. Comps are going for 200k or more.

Price: 150,000

Repairs: ~20,000 rolled into the loan

Down: 3.5% 6000

Premium: 795/mo

Insurance: 33/mo

PMI: 175/mo

100 years old

GMI: 1900

Annual Taxes: 2200

Maintenance: 10% 188/mo

PM: 10% 188/mo

CAPEX: 10% 188/mo

Legal/Accounting: $50/mo

Vacancy: 5% 95/mo

Gas/Water/Elec: To be submetered

Sewage/Trash: 50(?)/mo

Cap rate: 6%

Cash on Cash: ?

50% rule: 147/mo

Is the price in the area just too high or am I just overestimating expenses? I've been looking for 4 months and this is the only thing I've seen that's even remotely hitting the 1% rule. It seems like going with the stock market is the wiser choice here, but this property seems undervalued compared to comps.

Hi Van,

$150,000 for a C class property is very expensive IMO.

We have been working the market here in the Midwest for a while now and $150,000 can easily buy A class properties.

If you were looking at buying C class, I believe your entry price should be much lower to minimize your risk. There are many unforeseen issues that arise with C class property.

Please see link of a blog I recently wrote for Bigger Pockets about the different asset classes - http://www.biggerpockets.com/renewsblog/2014/06/28/abcs-real-estate-asset-classes/

Thanks and have a great day.

@Engelo Rumora  ha, sounds like I should head out to Ohio. Washington state, especially around the sound, is a very different market. 

Originally posted by @Van Doan:

@Engelo Rumora ha, sounds like I should head out to Ohio. Washington state, especially around the sound, is a very different market. 

 Definitely look into the Midwest.

There is some amazing opportunity here ;)

Thanks

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