Max Offer on Triplex

5 Replies

Debating whether I should make an offer on this triplex:

Unit A: 2BR/1BA - rents for $700/mo
Unit B: 1BR/1BA - rents for $600/mo
Unit C: 1BR/1BA - rents for $500/mo
Total Monthly Rental Income: $1,800/mo

Current Owner Pays: water (one meter), electric (separate meters), gas (separate meters).  I am in the process of finding out the averages for this.  These rents are higher than market, but b/c current owner pays utilities, people are willing to pay it.

Property Management (@10%): $180/mo
Taxes: $113/mo (based on higher, PVA assessed value)
Insurance (guess, in process of obtaining): $150/mo
Maintenance (@10%): $180/mo
Cap-Ex (@10%): $180/mo
Utilities (@$150/unit): $450/mo (this is a total guess)
Total Monthly Expenses: $1,253/mo

NOI: $547/mo

I would be financing with 25% down at an assumed 30-year fixed interest rate of 5.0%. You would then have to subtract debt service from the NOI to get the estimated cash flow.

What's your max offer on this property?

When I get the average utilities figures, I will update this thread.

@Mark S.  

Well, I don't see a vacancy factor, and I think your utilities are low, particular gas for the KY winters.

I'm probably maxing out around $140k. Those utilities take a big bite out of your monthly NOI.

@Hattie Dizmond , you're right. I thought I might be forgetting something. I would say 10% for vacancy loss, so another $180/mo.

$140K is much higher than I expected to hear, to be honest.

Also, I don't think I mentioned that the property is about 75 years old (so maybe my cap-ex numbers should be higher?).

This is a SFR that was converted to a triplex; not sure if that matters.

$140k would be my absolute max, but I wouldn't actually go that high!

I'd probably start around $110k and go up to $120k. 

Theoretically, using the 1% rule, you could support a price up to $180k.  However, I don't like the utility unknown and the fact you have no real control over the tenants behave and therefore how much those could be.

Like I said, I think your utility estimate is low, but even at that, it's almost 2/3 of what I would expect your monthly P&I to be at or near the target price.

If you want to have at least $100/mo cash flow, you will not be able to spend more than $60,000, including all your renovation expenses. If you have zero renovation cost, and put down $15000 cash and borrow $45000, you will have about $100/mo cash flow. 

I would first determine how much maintanance has been deferred to the next owner (ie, to you!), and figure out if you need to do any renovations, repairs, etc. Whatever that cost is, subtract it from $60,000, and you will have an offer price. 

Honestly, this one doesn't sound like a very good deal to me, unless the seller is motivated to sell. Otherwise, you will get yourself into a property with a negative cash flow. 

You could consider making the tenants responsible for their own electricity since it is metered. Figure out what the market rent would be if they paid the electric, and how that would effect your vacancy rate. You can also get records from the utility company on the average cost of electricity there and avg water, etc, and if it's reasonably predictable then you could keep utilities in your name.  Do your spreadsheet, and don't allow yourself to get into something without positive cash flow. For me, to deal with 3 tenants, for only $100/mo pos cash flow, that would be a stretch, but if your motivated, then that is up to you.  If there is no appreciation expected in your region, then all you can get from this deal is the cash flow. Besides, appreciation is gambling, and it is also long term, so it doesn't effect your current financial analysis.  

Your monthly Pymt will be amortized over 20 years, not 30, because a triplex is a commercial loan; they don't finance 30 years fixed, they usually do 10 year loans with a rate adjustment after 5 years, and they can usually amortize based on 20 years. If you borrow 45k @5% over 20 years your Pymt in first 5 years would be $263. In 5 years if your rate went up to 8% your payment would be $347, eating up most of your $100 cash flow. You also have to subtract closing costs from the $60,000 figure, I forgot about those but between the sale and the loan closing costs, appraisal inspection and survey fees, that's a few thousand dollars in expenses too.

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