4 Unit Deal - Analysis and Advice

22 Replies

Hi Everyone,

This is my first post on BP! I need your advice regarding a Fourplex Deal that I am presently analyzing the numbers. The plan would be buy and hold.

Asking Price: $260,000

Down payment: $10,000

Cashflow: $3,300 per month (2 - 1 Bedroom Units; 2 - 3 Bedroom Units)

Now, let me run through the numbers on a monthly basis:

Principal + Interest: $1,157.79 ($250K @ 3.75%)

Taxes: $325.00

Insurance: $117.50

Electricity: $27.60

Water/Sewer: $322.00

Vacancy (10%): $330.00

Property Management: $100.00

Maintenance Allowance: $400.00

Net Income: $520.00

The property is located in an older industrial town in Western MA and the neighborhood is B-/C+. Presently 3 of 4 units are rented, with the 4th unit being renovated and will be rented for the new owner. No leases, just month to month.

Please review and do let me know your thoughts about this deal. What am I missing here?

I'll also post a formal introduction in the New Members Introduction forum as well.

MA Agent # 9​5​3​3​2​1​0

First let me start of by saying that I am still new at this and am also going through the process of my first deal.  Your estimates for electricity are fairly low, is this just the main hallways etc? Also, that interest rate is amazing are you going to live in one of the units? Who pays the trash fees? This seems like a great deal, why is the owner selling? $520 a month would be $6240 a year in net cash equating a 62.4% cash on cash return (am I right bigger p members?).  Seems like a great buy and congratulations.

Also, property management for $100.00 a month on 4 units seems low, typically I have seen $100.00 per door. Could just be my market.

Hi Gregory,

Thanks for the responses. A few clarifications:

- 3.75% Rate: Yes, I am planning on living in one of the units. I'd be a first time home buyer and I'd be living in the worst 1 Bd unit.

- Trash Fee: Good question, it prompted me to ask the RE agent. Apparently, the tenants have to buy these trash bags sold by the town in order for the trash to be collected.

- Electricity: Yes, electric fee is just for the hallways and common areas. 

- Property management: The sellers RE agent's company does property management and he gave me that $100 quote. I'll check with a few other property management companies to verify. 

Honestly, this deal seems like a slam dunk, so I am very skeptical -- if you see any other issues with the numbers or anything else that I need to consider, please me know. I'd rather get this deal put through the ringer and then make the offer, instead of buying something being stuck with a problem property.

I appreciate your analysis!

MA Agent # 9​5​3​3​2​1​0

What part of western MA is the property located? Maybe I can give you some insight on the area if it's near me.

Property management seems low.  I would add another $100 per month.

Maintenance seems low.  I would add $50 to $100 per month.

Water seems high.

The cost of money is great.

Almost 100% of properties that I buy for buy and hold need some initial rehab.

Hope these comments are helpful.

Good Luck.

Bill

Originally posted by @Cory E. :

What part of western MA is the property located? Maybe I can give you some insight on the area if it's near me.

 It's in Non-Springfield, Hampshire County :)

MA Agent # 9​5​3​3​2​1​0

Originally posted by @Bill Jacobsen :

Property management seems low.  I would add another $100 per month.

Maintenance seems low.  I would add $50 to $100 per month.

Water seems high.

The cost of money is great.

Almost 100% of properties that I buy for buy and hold need some initial rehab.

Hope these comments are helpful.

Good Luck.

Bill

Hi Bill,

Thanks for the comments. I'll address them individually:

Property Management: Is it worth taking over the property management myself? It is an OO deal, but I can always say that my uncle owns the building. I can divert the $100 to Maintenance and still keep my net income $520.00/month?

Maintenance: I can add another $100 per month.

Water: One of the 3 bed Unit has family living in them and the other unit (now vacant) use to have a family living there as well.

Initial Rehab: This is a B-/C+ area with tenants in place, I would defer any rehab until one of them leaves/asked to vacate. I'll probably keep a month to month arrangement with them.

Great insights!

MA Agent # 9​5​3​3​2​1​0

@Jahan Habib I'm in berkshire county, not to far from there. Good luck if you decide to move forward on this investment.

@Cory E.   Thanks Cory! We'll see if it's worth the investment.

MA Agent # 9​5​3​3​2​1​0

@Jahan Habib  

Property Management: Is it worth taking over the property management myself? It is an OO deal, but I can always say that my uncle owns the building. I can divert the $100 to Maintenance and still keep my net income $520.00/month?

If you're in the same state then I'd do the PM myself, especially living there. Today a 12 year old kid can find who owns what on the internet in about 5 minutes, why try to fool your Tenants. And it used to be you could lay some liability on your PM company, not anymore, a Judge will have you in handcuffs within that same 5 minutes if you do something egregious;-)

Initial Rehab: This is a B-/C+ area with tenants in place, I would defer any rehab until one of them leaves/asked to vacate. I'll probably keep a month to month arrangement with them.

Good.

Make sure you get a VERY (as in takes 3 hours) thorough home inspection incase you miss something and need to negotiate it.

I like it! Mike

@Mike Hurney

Property Management

Sounds like doing property management is a good idea. Besides the fact that I'll be living there, I like the landlord education that I will be receiving, all while saving a few $$s.

Home Inspection:

I had a very thorough inspection and the inspector identified a few issues. I am negotiating with the seller to get some credits. We'll see how it ends up.

Thanks for the review and I am glad that you like the deal!

Jahan

MA Agent # 9​5​3​3​2​1​0

I agree on the property management piece. I think a lot of newbies are afraid of managing their own units, but really it is not anything to fear. Especially if you are right there. I personally manage my own properties even those that are in other cities from where I live.

Set up ground rules regarding when it is/is not ok to knock on your door for maintenance issues.

Unfortunately this deal feel through due to intractable issues that came up during the inspection.

I am working on another deal that might not be a slam dunk like this one -- however it holds its own promise.

MA Agent # 9​5​3​3​2​1​0

A quick update on the progress.

Just closed on the first deal. Some relevant details:

  • Purchase price: 294,900
  • Rents: $2,400/month
  • This is a 3 unit multifamily deal with significant growth potential. I am expecting to break even on this deal, however will be cash flow positive by 2016 due to the rehab work/property enhancements that I have in mind.

I’ll be targeting deal #2 in the October, 2015 time frame.

MA Agent # 9​5​3​3​2​1​0

Congrats @Jahan Habib !! seems like you made a few sacrifices, how do the numbers add up here?

@Sunny Suh Thanks! Yes, there were many sacrifices along the way, however I have some excellent financing in place and I am an owner occupant:

Rents: $1,100 (Unit 1), $1,300 (Unit 2), $0 (Owner occupied Unit)

Mortgage: $1,683.00 (15 Year Fixed at 0.375%)

Taxes: $451.75

Insurance: $137.50

Water/Sewer: $75.00

Total: $2,347.25

Since I am living there, I'm spending the following out of pocket:

Vacancy (10%): $240.00

Snow removal/landscaping: $100.00

Property Management: $0.00 (I am on-site/stable tenants in place)

Maintenance Allowance: $400.00

The rents for the two units are undervalued and after my bathroom/kitchen updates, they will definitely increase by $100/unit per month (conservatively speaking). I'll spend the next few months getting the systems setup/repairs completed before starting on the next deal.

MA Agent # 9​5​3​3​2​1​0

@Jahan Habib

Congrats Jahan! Huge favoritism goes to owner occupants from banks/lenders. Doing rough estimates, anyone feel free to correct me if I'm wrong, but the CAP rate seems to hover aound 5.43%.

Glad to see you being a value-add investor and managing yourself, thrilled to hear of more stories and wish you the best!

How did you get a 3.75% rate????

Sounds like you are doing great. Got a place to live and ended up cash flowing positive. Good deal. Now all you have to do is wait out the time to get that mortgage paid down. 

@Sunny Suh

Thanks Sunny! Your Cap Rate Calculations are correct, however there are few factors that I wanted to highlight:

- 15 Year Mortgage: Building equity/retiring debt quicker.

- Owner Occupied: With the exception of Landscaping/Snow Removal, the monies that I am setting aside are reserves for vacancies/repairs. 

- Plan to upgrade the units: I'll be starting with my unit first :) Stainless Steel Appliances, Hardwood flooring, re-doing the bathroom. Eventually the other two units will also receive the same upgrades.

I think the cap rate and positive cash flow will increase after I am done. Of course, if I end up moving after few years, my unit will rented as well.

MA Agent # 9​5​3​3​2​1​0

@Darius Moody The interest is 0.375% It was due to result of buy down of a 15 year mortgage. I used a community development mortgage and aggressively reduced the mortgage rate by paying points upfront. 

The best part is that I am expecting a nice refund when I file my 2015 taxes. So the overall cost is mitigated by the tax savings.

MA Agent # 9​5​3​3​2​1​0

@Gilbert Dominguez

You have the exactly the right idea. This deal is a longer term play for me. I plan on holding onto it for the 15 year term. Quickly pay off the mortgage and watch my cash flow skyrocket. Also, unlike many speculators, I am building equity by paying off the mortgage loan + making value add improvements to the property.

MA Agent # 9​5​3​3​2​1​0