Im looking at purchasing a quad that listed at 45k but needs total rehab. I know this price is too high. Im want to offer 20k owner is willing to finance. they are efficiency units 250 sqft. that will cost about 11k per door to rehab. I think i can get at least 275 to 320 a door. I asked a friend about it and he said it not a good deal. What factors am i not considering?
A quad still get's evaluated like a SFR. So, those numbers would put you at being into the property for about $64k, not including fixed costs & holding costs, prior to occupancy.
What is the ARV on the property? How confident are you in your rehab estimate? What would your terms be on the seller carry?
You're only going to get (mid-point) $1200/mo total for the place, and that assumes full occupancy.
For me, this property raises some red flags...
1. 250 sqft efficiency units are likely to be occupied by transient types, which would lead to high turnover and frequent periods of vacancy.
2. These types of units, typically, don't attract the highest quality of tenants, so you would likely have to have a higher reserve for damage.
3. I'm guessing this is also not in a prime neighborhood, so you have environmental issues and/or expenses to worry about. Additionally, is the neighborhood declining? Are you going to be able to get out of this property, if it becomes unsafe?
If you can account for all of the expenses & issues, and still feel confident you can cash flow this property over the course of the next several years, then go for it.
Here is a simple rental analysis: (4 units x $300/mo avg.) $1,200/mo - 50% expenses (taxes, ins., utilities, maint.) rule of thumb, but area specific. Crunch your numbers (more on that below). So you have $600 remaining which is your net operating income (NOI). I wouldn't do this unless you can make $100/unit after all expenses so in my scenario you would have $200 to service all debt.
As for number crunching check all taxes, get insurance quotes, maintenance will depend on condition, factor in vacancy, check utilities, decide appropriate amount for reserves which is replacement money, i.e. roof, furnace, etc.
Hope it helps!
What's the rental market like for efficiencies there? I would really only be interested in studios/efficiencies in either a high density, high demand area like a pricey downtown area of a city or perhaps in a university area. Otherwise, you are dealing with the most transient and financially unstable renters out there. So figure your vacancies and expenses with that in mind. Also, the lower the rent the higher the percentage your expenses will be, so the 50% that Marshall mentioned above may be optimistic.
So basically, you're looking at a very management intensive project that requires a lot of work and money up front, and the potential cash flow at the end of all that is not very big. I'd look around and do some comparison to see if you could do better on a different project.
That sound like a lot of work, how about a 4 plex that has tenants in place. What are you looking to do? How long will it take you to rent out the units and will they be marketable? It will take you a few years to get your return on investment unless you are going to refinance or do a hard money loan upfront. Look at the risk VS. reward, a lot of time and work.
My rehab estimate is 61k which is higher than actual it's really like 11k per door. I think the value would be 80k arv. Hard money I'm looking at 12% rate 20 down 65%ltv. I can refi to 4.5% Neighborhood is not declining I live in the neighborhood actually. I think it's on a slow up tick. I think it will take 6 months to rent the place out. Currently there is a quad right in front of it that is rented.
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