1st Property - Do the #s Work? Quadplex in Northern NJ

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1st Property - Do the #s Work? Quadplex in Northern NJ

Sunny Burns
Rental Property Investor · Mine Hill, NJ · Member since 2014 · 229 posts · 396 votes

I am a first time home buyer as well as a newbie Buy and Hold REI, so trying to get as much feedback from experienced investors as I can before moving forward. My goal for my first property is to achieve $1000 cashflow a month.

Background on Property

It is a 4 family property North New Jersey built in 1970, 3 single bedrooms, and one 2 bedroom. A tree fell on it in 2013 and it was insured so the owners redid the roof and fixed everything up. So the exterior is all newly renovated. The whole house is electric, electric hot water heaters, baseboard heating, etc. All separately metered. 

The rooms are smaller but the layouts of the rooms are great and are in excellent condition. The appliances could use a little updating but look good and work, really needs nothing. It is on a nice quiet residential street; there is a shoprite only a block away and a train station two blocks away. It is fully occupied, with long term tenants. The shortest being there 3 years and the longest being there 15 years. 3 of the units have single person tenants and the 4th has a couple in it. Each unit has 2 parking spaces and there is a coin operated washer dryer in the bottom hall.


Price: $360,000

Income

  • Rent: $1050 + $1000 + $950 + $900 = $3900/month 
  • Coin Operated Laundry Dryer = $100/month

Total Income = $4000/month = $48000/year

w/ 5% Vacancy = $45600/yr


Expenses

Info From the Owner

  • Taxes: $10,000/yr
  • Water&sewage: $3,000/yr
  • House electricity bill: $50/month = $600/yr
  • 5 separate meters: all tenants pay own electricity & electric baseboard heat

Assumptions(This I would like help on)

  • Snow removal & lawn care: They had a family friend do it ... so no idea = $2000/yr??
  • Maintenance & Repair = $2500/yr??
  • Insurance - $2000/yr??

Total Expenses = $20,100/yr

Operating Income & Financing

Total Operating Income = $25,500/yr

My plan is to put 20% and go Conventional 30 year Mortgage. I've spoken with a 3.885% rate. I would be owner occupying but I am not calculating for that, since I don't plan to stay in the property too long, and am more looking at future cashflows.

So with $3000 in Closing costs & 20% down, it would require cash outlay of $75,000. 

Mortgage would be $1356/month, $16,272/yr.

Annual Cash Flow: $9,229

Cash ROI: 12.31%

Total ROI: 19.20%

How does it look?

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Andrew Davis
Investor · Asheville, NC · Member since 2011 · 833 posts · 499 votes
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Hey @Sunny Burns ,

A really simple way to calculate cash flow is using the 50% rule.  Simply stated: 50% of gross rental income will go towards expenses, not including debt service.  So, if your monthly rental income is $4,000, you can budget that $2,000 will go towards expenses: property taxes, insurance, maintenance, vacancies and management.  While you will be self-managing initially, you may (probably will) find that you don't want to manage the property long term.  

Since you'll be occupying one of the units, this assumes that you will be paying yourself rent.

So, from the $2,000 you subtract your debt service of $1356 a month and you get a monthly cash flow of around $650.  $7800 a year.

With $75,000 into it, that's a cash on cash return of 10.4%, not bad at all!

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  • Ahmad H.
    Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
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    I think $2500 for maintenance is a little low, its probably going to be closer to $4000 or $4800 (10% of gross rents). Snow removal and lawn care are reasonable at $2000 if its a regularly sized yard and driveway but insurance rates depend on claim history. Will you be renting to students? Insurance rates might be affected by past claims like fires or tree falling on the building. I would try to get an insurance quote for it before purchasing. 

    I see you put 5% vacancy. For my area I prefer to budget 10% for vacancy but your area might have higher demand so this is something for you to gauge. 

    I expect you to cash-flow somewhere between 5500 and 8000/year from this which isn't bad for 4 units with only 5 people to deal with but from a COC point of view you would be getting 10% or less return which with is not great with self-management.

    If you decide to hire a PM, your cash-flow will be -100 to +100 /month

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  • Andrew Davis
    Investor · Asheville, NC · Member since 2011 · 833 posts · 499 votes
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    Hey @Sunny Burns ,

    A really simple way to calculate cash flow is using the 50% rule.  Simply stated: 50% of gross rental income will go towards expenses, not including debt service.  So, if your monthly rental income is $4,000, you can budget that $2,000 will go towards expenses: property taxes, insurance, maintenance, vacancies and management.  While you will be self-managing initially, you may (probably will) find that you don't want to manage the property long term.  

    Since you'll be occupying one of the units, this assumes that you will be paying yourself rent.

    So, from the $2,000 you subtract your debt service of $1356 a month and you get a monthly cash flow of around $650.  $7800 a year.

    With $75,000 into it, that's a cash on cash return of 10.4%, not bad at all!

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  • Ahmad H.
    Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
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    I personally would try to put 5% or 10% down and find a property that cash flows with the costs of a property management factored in. You have no exit strategy with this. You are buying it at market value and requiring yourself to manage to make any cash flow. What if you don't like managing tenants and want to hire a PM? What if you don't even like dealing with a PM and just want to get rid of the property? The way I see this deal is that you are going to pay $75000 to get yourself a job that pays $450 to $600/month with a $30,000 penalty if you decide to quit.

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  • Steve Wilcox
    Investor · Cranford, NJ · Member since 2012 · 303 posts · 153 votes
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    You need to input 10% or at least 1 month of vacancy. 

    You also need to have some idea of what it will cost ot manage, even if you self manage, pay yourself as the manager so that someday when you do not manage it there will be profit. 

    All in all for Northern NJ this is a buyable deal. Make sure to get some comps from your agent to verify the value of the property and find out what the market rents are for the area. 

    Some things to look into would be requirements for flood insurance, rent control, ect. 

    For north jersey your rents seem very low which also could give you some upside if you decided to renovate and move in new tenants (as long as your not rent controlled)

    Make sure the owner has been actually receiving the rents regularly, and ask for estople letters from each tenant. 

    @Ahmad H. I am curious who is financing properties for you at 5-10% down? 

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  • Ahmad H.
    Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
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    For first time home buyers its pretty easy to get 5% or 10% conventional loan. I got mine from a credit union for 10% down but that was a year and a half ago. Now the same credit union will do 5% down loan. For the 2nd property I had to put 20% down.

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  • Sunny Burns
    OP
    Rental Property Investor · Mine Hill, NJ · Member since 2014 · 229 posts · 396 votes
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    Hey guys thanks for all the feedback. So I guess most of you are thinking that this only an okay deal... it doesn't seem like it will quite reach my goal of $1000 a month, and it will require almost all my capital as a down payment, so I may move on. Thanks.

    @Ahmad H. yea I know I should of had higher Maintenance, but I figured with the new recent renovations, and everything looking so well maintained it would be less. But yes I should err on the side of caution. And regarding Financing, I contacted the NFCU which I am apart of as well, and they only allow 5% down for single families and 2 family properties - do you know if you could do the 3 or 4 family with your credit unions? The great thing about NFCU is that they also don't require PMI for a majority of there loans, including that 5% down conventional 30 year fixed loan - so I am tempted to just go with a 2 family.

    @Andrew Davis , I like your quick calcs, and they were pretty close with my educated guessing.

    @Steve Wilcox The reason I had a lower 5% vacancy is because a majority of the tenants are elderly and retired who have lived there 5+ years and it doesn't seem like they are going anywhere. Also from my basic research it looks like a single bedroom apartment in the area will go pretty quick... should I be more cautious?

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  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
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    @Sunny Burns  Make sure to do some research and see if the electric heat in the unit will be a problem for prospective renters in your area.  I am located in the northeast and outside of small 1 bedroom or studio units there is major push back on 2+ bedroom units with electric heat.

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  • Ahmad H.
    Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
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    @Sunny Burns TrustCo Bank lets you do 10% down for up to 4-family with no PMI. Michael Noto has a good point regarding the electric heat, a lot of people do not like it so the rents have to be lowered to compensate for the additional utility cost. Frankly I think you can do better than this deal and I encourage you to move on.

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  • Sunny Burns
    OP
    Rental Property Investor · Mine Hill, NJ · Member since 2014 · 229 posts · 396 votes
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    @Michael Noto , yea that was one of my main concerns about this property... I feel though that the apartments are small enough and well insulated enough for the bill to be reasonable. I should take a look at the electric bills though for the current tenants. I was thinking about possible upgrading to heat pumps in the future if neccessary... how do electric hot water heaters compare to Gas Water Heaters?

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  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
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    @Sunny Burns  Tenants don't get caught up in the hot water source.  Also a tenant isn't going to care about the insulation to be honest.  They hear electric heat and will automatically have pre-determined in their mind what they think.

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  • Sunny Burns
    OP
    Rental Property Investor · Mine Hill, NJ · Member since 2014 · 229 posts · 396 votes
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    I just called the electric company and they gave me a breakdown of the average monthly Electric Bill for the last 12 months:

    • A: $122/month
    • B: $96/month
    • C: $91/month
    • D: $89/month
    • Owner: $35/month

    I feel like those seem pretty reasonable, since that is all they will be paying. All Electric Heating.

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  • Troy Sheets
    Developer · Philadelphia, PA · Member since 2013 · 1k+ posts · 902 votes
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    Originally posted by @Sunny Burns:

    I just called the electric company and they gave me a breakdown of the average monthly Electric Bill for the last 12 months:

    • A: $122/month
    • B: $96/month
    • C: $91/month
    • D: $89/month
    • Owner: $35/month

    I feel like those seem pretty reasonable, since that is all they will be paying. All Electric Heating.

     You're not hearing what is being said. Tenants don't like electric heat. Doesn't matter what the bills are historically, tenants hear/see electric heat and, unless you're under market on your rents, it'll affect your bottom line. You can explain to them that the place is insulated, newer windows, etc., but you're still going to lose a portion of potential candidates because of the electric heat. Is this a deal breaker? Nope, just something to be aware of when you have to re-rent the units and your vacancy is longer than average or your rents are lower than average because of electric heat. 

    Overall, this isn't a great deal and those taxes are brutal. That said, I don't know your market. For your market, this could be a great deal. It's up to you to decide how this compares to other deals in your market and if it is the best you can do in your market, maybe change markets? 

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  • Ceril S.Pro Member
    Rental Property Investor · Ithaca, NY · Member since 2014 · 180 posts · 80 votes
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    @Sunny Burns for northern NJ, I think you're starting point is better than most that I've seen -  is this the price after negotiation?  Are taxes inflated, could they be appealed to be lowered?  Are rents below market? You seem to like the property and location sounds good- would you consider finding a price point that fits your numbers and offer that?

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  • Sunny Burns
    OP
    Rental Property Investor · Mine Hill, NJ · Member since 2014 · 229 posts · 396 votes
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    @Ceril S.  my Wife and I are looking to put in an offer this week. We are going to start with $320k, but our hardcap is $350k. Not sure about the taxes, seem to be pretty average for the area.Rents I would say are also pretty standard, although the 2 bedroom could definetly be increased. I think it's just low because the tenant has been there 15+ years.

    I found out more information about the sewer and waterbill this morning: The quarterly sewer fee for each unit is $125.00. The quarterly water fee for each unit is $64.50. The total for 4 units is $758.00. There are no installation fees for this property.

    Is the Sewer Fee just a standard fixed price? Anyway to get that lowered?

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