I've been watching a 4-Unit for some time now.
4 Units: 2br/2ba (770 Sq Ft Ea)
Price: $250,000 (MLS)
Current Rents: $700 Each
Property is 21 Years Old (Original Owner)
Been on market ~450 days, started at $315k, and hung at $300k for a year. It started dropping price about 45 days back.
Location: Just outside college town - on college golf course - primarily surrounded by other quads. Right next to local airport (small planes mostly - not loud). Town has been expanding in this general direction strongly for the last few years, but this is still a fairly disconnected location, but quiet.
Owner advertises willingness to sell on contract (20%down).
I realize there are many details missing, and I since I haven't built rapport with the seller yet, we're making a lot of assumptions. For learning purposes, can someone help me (from a top level) figure out how much farther down I'd have to take this property to make this a deal worth vetting out further?
I have had myself on hold for awhile thinking I didn't have enough money, but I'm really preparing for a push on owner financing.
Well, you're going to want to look at their P&L & rent rolls if they have it - you want to see what their repair & maintenance costs are. You also want to know what the utilities are, and average rents for the neighborhood. Sounds like you know the neighborhood, so the last thing if all the numbers look good is to go tour it and see in what sort of shape it is in.
And don't forget capex (how old is the roof / water heater), and account for property management.
In my market, I'd be interested in that property, though taxes are a bit high. How do taxes compare to neighboring properties?
Taxes are based on assessment at 243k, so likely won't be a lot of change there. (Taxes are pretty rough around here, this actually being one of the lower tax regions in the immediate vicinity).
Roof was a complete tear off in 2014, but I'm definitely going to need to do the due diligence on the mechanicals (and capex/maintenance history). I am thinking that most everything is original, since it's not advertised in the listing. I'll find out soon.
Rents are pretty accurate, if not a bit on the conservative side for the area. I'll need to check condition to be sure though.
As you suggested going out and taking a look would be your best bet. Something tells me there are a good number of the large ticket mechanicals (Central AC, Water Heater, Appliances, etc.) which are coming up on the end of their useful life. If this is the case then you would probably need to negotiate a significant price drop to make sure the investment is worth your time. I have compared this property to 2 properties I currently have and although the returns are not as good on the quad by the airport the number are starting to get close enough to take a closer look. I will send you the .pdf I have on that quad.
Best of Luck,
Thanks a bunch! I'm thinking you're right about the mechanicals and such, although I haven't yet verified. I've placed a couple calls, but haven't received response back yet. I'll keep you updated on what I learn if you're interested. I'll definitely keep looking and ultimately I'll come up with a number. I'm thinking it's going to be quite a bit below the current list.
I appreciate you sharing that .pdf. You answered the root of my question - - - I'm very interested in other investors' criteria. There are a lot of different opinions on analysis and criteria from a theoretical perspective, but it's especially helpful to see real numbers from other local investors.
Since there are other 4-plexes near, can you find any comps? That will give you a really good insight.
A quick, back-of-the-envelope calculation shows a "pro-forma" cap rate of ~ 6.7%. Nothing particularly special, but that is a simple estimate, based on my assumptions! I go back to the comps ... what do they show, if there are any such transactions?
Also, from an operating expenses perspective, who is responsible for electricity & water - you or the tenant? That will impact the analysis greatly.
Just a couple of things to consider.
Others have mentioned the rehab and expenses, which you need to address. If the seller is willing to carry back a loan, that's where you can really make this deal work. Terms are everything. If you can negotiate a somewhat lower price, put 20% down, and convince them to carry back a note at a low rate for at least 15-20 years or longer, you can get close to good cashflow. All depends on the terms and how badly the owner needs to sell. But you'll never know until you ask! I know several investors who have gotten 0% carryback first or second loans on multi-family.
Best of luck!
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