First time property analysis in Richland, WA

19 Replies

I’m looking for some help in evaluating a deal that I looked at this last weekend in my home town of Richland, WA. After running the numbers, I don’t think this would be a good deal at the current price, but I want to run the numbers by you guys to make sure that my analysis is correct...and to also see if you all agree with the price that I believe would make it a good deal. I’m still learning and I think this would be the best way to learn and ensure that my property analysis muscles are tip top...

Property & Condition

The property is a 4-plex with (2)- 3/1’s and (2)- 2/1’s with covered parking for 4 cars. The overall square footage for the building is 4,300...but I did not get the footage on each of the units (still learning, right?). I would guess that the 2 bedrooms are 850 sq. ft. and the 3 bedrooms are 1050 sq. ft., with the remainder going to storage and shared laundry space. It was built in 1972, has central HVAC with separate heat pumps for each unit. Two of the heat pumps are updated and two of them are original (need to be replaced within 3 years). Each unit is metered separately for electric, but water is paid by the owner. Overall the property is in great condition with 2 of the units having been remodeled, while the other 2 have newish carpet. This is a “turn-key” building that would not need remodeling, and could be updated as vacancies come up.

Rental History

The property currently is fully occupied on month-to-month rents with no contracts, with the history for the past several years showing very limited vacancy rates (sub 4%). That being said, there are 2 brand new apartment complexes built within the last 2 years in Richland (one within a mile, the other is across town). Because of the increase in available units, our vacancy rates are currently sitting at 8% as of August 2014. I do believe that rate will go down or normalize with Kennewick and Pasco (the other 2 cities that make up our Tri-City area), which are currently sitting at 6% and 4% vacancy rates respectively. Our entire area was at 2% vacancy about 3 years ago. The property is within walking distance (1-2 miles) from the major engineering hub of our area where approx. 3,500 people work, and is also 2 blocks off the highway that another approx. 8K people take to jobs on the Hanford Nuclear Reservation. I do believe, given these factors I can figure on a vacancy rate of 5% or lower.

3/1 Rents for 700, which is at least 200 under market value.

2/1 Rents for 675, which is at least 100 under market value.

The Numbers (Annual)

All numbers are verified unless noted as being pro forma. Also, I did not figure in property management as this would be self-managed:

Tax Assessed Value is 285,000

Purchase Price is 300,000

33,000 –Gross Rent

1,200 –Coin Laundry Revenue

(2,702) –Utilities

(970) –Garbage

(3,456) –Taxes

(1,200) –Insurance (pro forma number from my ins. Agent)

(1,500) –Maintenance (pro forma)

(200) –Advertising (pro forma)

24,172 –NOI

13,800 –Debt Service (Pro Forma -20% down, with 4% interest)

10,372 –Cash Flow

8% -Cap Rate

17.3% -COC Return

The Results

While the numbers don’t look horrible...cash flow at $200 per door per month, I do not think this is a good deal. I will have to bring on an investing partner for any deal I do, and this purchase price is topped out. At this price, I don’t believe the building will appreciate enough to make it worth it for an investing partner. We can add value by raising the rents, but 4-plexes in this area are not marketed like commercial. I’ve also been told (but I don’t know for sure) that 4-plexes in this area do not appreciate as much as SFRs.

My thoughts are that to make this worth it for me and an investing partner, I would need the purchase price to be at 275,000. That would leave more room for appreciation. At that price the numbers would be:

24,172 –NOI

12,600 –Debt Service (Pro Forma -20% down, with 4% interest)

11,571 –Cash Flow

8.8% -Cap Rate

21% -COC Return

Value Added Improvements

If I purchased this property there are a couple of things that I would do in order to provide more value to both myself, my (future) partner and the tenants:

  • Transfer all tenants onto 12-month leases with rents that are at market value. I would need to work through how to accomplish this...maybe through a lease with escalating rents over 12 months or just biting the bullet and shocking the tenants.
  • Sub-meter the water and transfer that cost to the tenant. Not sure how much value this would add, as the Utilities number does not break down between water and electric that the owner is currently paying. Sub-metering would cost me about $1,500 upfront.
  • Outfit all units with low-flow shower heads and aerators to reduce water usage. These are provided free of charge by the City of Richland.

What do you guys think? Do you agree with my assessment? Have I missed anything in my numbers? I didn't include closing costs, because those would be paid by the seller. I think that would only affect the COC Return number in the assessment, right?

@Sam McPeek  

looks like a good first run through on financial analysis.  You mentioned that $200 per door wasn't the number you would like to see for cash flow, what is your target per door?  I'm in Richland as well, if you ever want to run through what you are looking for PM me  

@Kyle Palmer  I think that $200 per door is good, and I don't think I should expect much higher than that. I might not have worded that correctly...what I was saying was that it seems the cash flow numbers were good, but that the purchase price did not leave room for appreciation over the long haul. That's mostly a feeling, as I don't know how to measure that or what the average appreciation for a fourplex is in our area. Does that make sense?

I'll PM you. Maybe we can get together and talk.

@Sam McPeek Got it. It is hard to put an appreciation number on 4 plexs in Richland, very few come on the market or change hands. I think I know the property that you are talking about and it was marketed a few moths ago in the MLS for 335K. sounds like as a FSBO the owner is getting closer to reality with his asking price.

@Kyle Palmer You are right on with the property. It was listed with Windermere in January, but the are now selling it FSBO. It didn't matter for the deal analysis, but there is actually 2 fouplexes there. Both are identical in the numbers I portrayed above. The other thing that makes it difficult to tell is that unless there are FSBOs I haven't seen, these are the only 2 fourplexes in Richland for sale. What do you think of the deal?

@Sam McPeek.  Analysis is very strong for your first go-around.  $200/door, or $800 total is a solid cash flow number...like you said, rents can be raised in the future, which wll bring your overall cashflow to over $1k in about 24 months.  However, you only factored in maintenance costs as 4.5% (1500/33000).  Typically, I see this number closer to 10%.  You also did not mention anything about property management.  Will you be managing this yourself?  That will eat up to 12% more of your cash if it is outsourced.  Finally, where is the percentage for vacancy within your numbers?  You should be subtracting at least 5% for this, as well.  These are just my thoughts by looking this over, but what are yours?

Also - you mentioned appreciation.  Are you looking to be a real estate investor who invests for purposes of appreciation, or are you looking to build an income stream (or both)?  These are 2 very different strategies.  Sometimes it's easier to focus on one instead of both - buying for appreciation can be deadly.  Thanks in advance!

@Kyle H.  Thanks, you have great points there. Here's what I think on each of your points:

  • Maintenance costs is interesting, as most of the threads I have read can't nail down a percentage number. So I chose the number somewhat arbitrarily. That being said, I think that planning for higher maintenance costs given the age of 2 of the heat pumps is smart and my 4.5% is probably low.
  • I would be managing this myself. It's within a 5 minute drive from my house, and I know the area very well. I also have very good contacts for maintenance issues, having been a contractor previously and currently being an Engineer. In our area, I see Property Management being aroung 8-10%...and it would make sense to add this into the numbers to ensure the deal is still good in the event that I need help in that area.
  • Ahhhh, vacancy...yeah, I'm not sure why I left out that little number especially since I wrote almost an entire paragraph on vacancy rates in our area. Good catch. Doesn't look like I can edit my original post. I'll rework the numbers post the edited numbers below.
  • My thoughts on appreciation pertain to making this a deal that is attractive to a investing partner. It seems that an investor would want to see both cash flow as well as appreciation over time. I don't think there is enough room at $300K to make it attractive to an investor. My focus would be on income stream...but I also want to make money when/if I sell as well.

Thanks for the comments, gives me something to think about.

@Kyle H. Here are the edited numbers with your points taken into account. Not sure I like what it does to the NOI, but it's good to know. Also, as I reran the numbers it cemented that I don't like the $300K price!

Adding in vacancy of 5%, Property Maintenance of 8% and elevating Maintenance to 10%, it brings the NOI down to 20,784

300K Price

NOI -20,784

Cash Flow -6,984

Cap Rate -6.9%

COC Return -11.6%

275K Price

NOI -20,784

Cash Flow -8,184

Cap Rate -7.5%

COC Return -14.9%

Originally posted by @Sam McPeek :

@Kyle H. Here are the edited numbers with your points taken into account. Not sure I like what it does to the NOI, but it's good to know. Also, as I reran the numbers it cemented that I don't like the $300K price!

Adding in vacancy of 5%, Property Maintenance of 8% and elevating Maintenance to 10%, it brings the NOI down to 20,784

300K Price

NOI -20,784

Cash Flow -6,984

Cap Rate -6.9%

COC Return -11.6%

275K Price

NOI -20,784

Cash Flow -8,184

Cap Rate -7.5%

COC Return -14.9%

 @Sam McPeek...this definitely made a difference.  Sometimes I like to entertain these deals, however, because you know the rents are under market value.  This lets you know that you obviously have room to raise the rents over the next fews years, and this will slowly increase your CAP Rate and your COC Return.  With those numbers, a positive cash flow, and a solid building, it is definitely worth a deeper look.  Meeting in the middle of those 2 prices could be your sweet spot.  I also think a 4% interest rate is a bit modest for an investment property...unless you are living in it for the first year.  Otherwise, I would expect that rate to be closer to 5.5-6% at this point in time.  With the size of your loan, this could hurt your cash flow pretty severely as well.  Are you planning on living there?

@Kyle H.  

I am not planning on living there. I currently live in a duplex that we have remodeled over the last couple of years. I'm not sure I could convince my wife to move again :)

I was under the impression that you didn't need to live there unless it was an FHA or similar type loan. Something else to look into, so thanks for that!

In reality, I would only be making an offer if I can find an investor to partner with. Our personal cash is tied up in finishing our duplex (we are converting to triplex) and getting it rented out.

 @Sam McPeek

Hi Sam, Im from Richland as well, and believe I know the property you are talking about. I looked at these several months ago and couldn't make them pencil out..although I admit I didn't spend much time on it. The turn off for me was location (near mobile home park?) and gut feel for lack of appreciation. Plus occupancy rates aren't what they were a couple years ago or even 6months ago. The new apartments and newly built duplex's with all the amenities are tough competition. I chose to purchase SFH and am having good success.

@Matt Kissler  My feeling from the beginning was that these properties at the price would not work. I used it more for an experiment in talking to owners and analyzing the property. The location is interesting, but the owners of La Verde apts. have really improved that property from where it was several years ago. Also, the mobile home park is made up of mostly newer homes. The positives of the location are that they are half a block away from a city park and there are available community garden beds next door. Sounds like you had the same thought I did on the appreciation.

Out of curiosity, where are the new duplexes? 

 @Sam McPeek
 A few have been built that I know of..Cant remember where exactly..maybe on Van Giesen or Williams st? Plus many of the older duplex's are getting remodeled. When I first started looking I focused hard on North Richland mainly because of the easy commute and rental potential with Hanford. I've since changed my mind and have focused more on SFH rentals in South Richland and parts of Kennewick.

@Kyle Palmer @Matt Kissler   I hear you on the older duplexes being remodeled...and since you mentioned them, I have to brag a little. My wife and I bought our "A" house 3 years ago. Gutted it and added a garage with a room above. Here's a picture of the before and after. We will finally have our rental side done this spring, and we are also building out the room above the garage into another 1/1 unit (entrance at the back of the garage).

@Sam McPeek  I've driven by your house multiple time, you have done an awesome job on it.  What are your thoughts on the A house rehab work, would you ever do another one?  I know of one on Jadwin that is for sale right now that they aren't asking an arm and a leg for, but it is on a busy section of the road.

@Kyle Palmer  Honestly, I would do a duplex rehab again but I'm not sure about the "A". Knowing what I know now, I paid too much for the one I'm in. I'm sure you've pulled the comps, but I think most of the "A" style homes sell for between 165K and 180K (if they are still a duplex) with rent prices ranging between 800-900 per month. If I ever sell mine, I will be lucky to find someone who pays what I have into it. It's at the top end of any "A" that is still a duplex in Richland. That being said there were 680 "A" style homes built originally, so there are lot's of options out there. Not sure on the "B" style, but I think it was around 500 of those built.

My next duplex will probably be a "B" style home where I can add a bedroom and bath in the basement. The 2nd story on the "A" adds a lot of cost...the biggest example of that is siding. Including my garage, that house has over 8K sq. ft. of siding! Here's some other things I would think and look for if I was to buy another one:

  • Windows -The "A" house has 34 total windows (plus basement windows), which is a lot of windows. If they aren't already replaced, replacing them could add up fast. If you look at the pics, none of my windows are in original locations...and they are bigger to meet eggress requirements, but I still have 29 windows including the garage.
  • Asbestos -If it hasn't already been taken out, it's everywhere. It's illegal to do this yourself on a duplex or any investment property. I got around that because my house only had one address when I bought it. Pipe insulation, duct wrap, underside of the kitchen tiles...it's even possibly in the taping compound used on the drywall.
  • Structure Damage -The main thing to look for here is in the basement. Most of the alphabet style homes were built with a half basement/half crawl, with a 2' tall CMU block wall separating the areas. The main structural beam for the house runs right down the center and is post braced off that CMU wall. If someone has dug out the crawl and extended the basement, make sure that the main beam is still sound. I learned the hard way on that, as the beams/posts were shot and the floor was sagging almost 2". I had to add new footing pads, and replace the beams and posts...pretty creepy being in the basement jacking up the house with bottle jacks to make everything level and listening to all the creeking, etc.
  • Oil tanks/boilers -I would make sure all of this is gone, and not still on the property. Some of the houses have converted HVAC, but they kept the boiler and use it as a distribution point. I looks like a huge mechanical octupus in the basement and takes up all the usable room, not worth it. Oil tank clean up is expensive.
  • Flooring -The "A" and "V" style both used Doug Fir T/G flooring. It was never meant to be anything more than a subfloor, but I have heard many people including myself thinking they can restore the hardwood floor. Doug Fir is just way too soft and will most likely be too damaged. I wasted lots of money trying to 'save' mine before I gave up and put carpet down. "B" and several of the other styles used Oak flooring and those would be more worth saving.
  • Chimney -Best to find one that has the Chimneys already gone. These were for the boiler exhaust. They are 3 stories high and go right through the middle of the house. If they are gone, it gives you much more options on kitchen remodel, and bathroom remodel upstairs.
  • Easements -The government originally developed that area of Richland with alleyways, but the current roads were developed later by the city. What that means is that the sewer doesn't always run under the street. On my lot, the sewer runs down one side of the lot, turns in the backyard and runs the whole length of the back yard. I've got 2 manholes in my backyard. That easement (14'-19' wide) affected what I could do with the lot.

If you're ever in the area, shoot me a text or just stop by. I'd love to show you around my place and I can walk you through all the things I learned about the property and the alphabet homes in general.

My and I have a SFH off Thayer. It's a great rental and never have any issues getting it rented. For the price I think it a better way to go then the duplex of 4 plex. Granted my wife bought this as her first house and was not planning on it being a rental.

We now live in Vancouver and just dream of the cheap houses in TC.

@Elliot Smith That's an interesting perspective. I always figured the multi-family would provide better cash flow. Can you share some of the numbers on your SFH house? The house pictured above is just one block off Thayer...

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