QUADPLEX - For a first buy?

Question

Hey guys!  I'm looking forward to your opinions on this one.  This is one of my first few analyses, so go ahead and be honest with me!  The more advice/opinions the better.

Property is a 2,300 sqft quadplex located in Columbus, MS.  Each unit is currently occupied, under lease, and with property management.  Roof is only 3 years old and all new HVAC was put in last year. Shouldn't need any repairs.  Here are the numbers:

Asking price: $138,900

Estimated closing costs: $1300 (got that from two different banks)

Monthly rent: $450 x 4 = $1800/mo

Principle and Interest: $524.12 (30 yr at 3.9% already approved)

Taxes: $107.09/mo

Vacancy: 7%

CapEx: 5%

Repairs/Maintenance: 5%

Property Management: 10%

Monthly cash flow: $682.79 . . . or if you use the 50% rule: $375.88

I tried to stay conservative where I could.  According to a local investor this one will probably go for somewhere around $125,000.  What do you think?  Missing anything? If you were after this property what would you make an offer for?

Peter Lohmann · Answer

Hate to break it to you, but nothing about your analysis is conservative.

• "Closing costs" that the banks are quoting you are merely their origination fee. Your actual out-of-pocket costs to close will be MUCH higher, more like 3 to 5k. Everyone has to get paid - title company, etc etc.
• Are you using the current property valuation for taxes? If you are paying more than the current value as listed on the Auditor's website, the property will be re-assessed at your purchase price, causing your taxes to increase. Plan on this.
• 7% vacancy? Dream on. That's not even 4 weeks per year. Units that rent for $450/mo  in Columbus are not occupied with paying tenants for 50 out of 52 weeks. Plan on 6 to 8 weeks of vacancy (or non-payment) per unit per year, at least.
• Capex - you quote "5%". Five percent of what? Rent? Capex is independent of rent. Plan on $1.00/sq ft per year. Your property is very small, so maybe double that.
• Repairs/maintenance - same as capex - these costs are completely independent of rent. Plan on $2.00/sq ft minimum.
• Property Management - nobody is going to manage your property for $45/mo per unit. If they do, they will charge first month's rent each time they lease up a unit, so add 8% to management (18%). That's more reasonable.
• Other expenses not noted: Legal/Accounting, Evictions, Landscaping, Snow Removal, Pest Control, Travel, Insurance, Utilities.

Re-run with those numbers, now we're talking.

Do not purchase a 4-plex that rents for $450/unit for 31k/unit. Personally I would not pay more than 20k/unit for such a thing.

Ryan Moran · Answer

@Brandon Schlichter

Thanks for double checking it all for me!  I definitely won't be taking this deal, but I've learned a lot just from trying to run the numbers.  It's interesting to see just how close the 50% rule is to your analysis.  I'll keep everything you've said in mind for future properties.  And sorry to keep lighting up your "Columbus" key word alert with my tiny little town in the bayou. Haha!

Brandon Schlichter · Answer

Let's say $140k for the property.P&I - $524Taxes - $107Insurance - $100Vacancy - $80Capex - $80Repairs/maint (I'd put you at no less than 10%, 15% would be more reasonable) - $160Management - $160So off of $1,600/mo income - $389/moIt's not a deal I would ever take. Granted if property is extraordinarily expensive in your area it might not be bad, but if it was here in Ohio, I wouldn't pay more than $80k for it.

Adam Morgan · Answer

Hey Ryan, sounds good up front. I just bought a quad with similar numbers in GA, but paid 90k and total rents were 1600. Things to remember: are you paying water, trash? Electrical seperatly metered? new HVAC is nice. I would say your. CAPex number is a little small. I like to actually figure it out based on remaining life span of everything and converting that to a percentage. I would say run the numbers again and go for it, but I dont think it will truly cash flow more than $400.

Adam

Brandon Schlichter · Answer

I'm in a tiny town outside Columbus so it isn't a huge deal :)

Brandon Schlichter · Answer

Also as @Peter Lohmann mentioned, PMs have tack-on fees that can get you. MANY (but not all) will charge first month's rent to locate a replacement tenant. Some will charge it each time the lease renews, so that's $1600/yr in extra fees that aren't included in the PM cost you've calculated.

Ryan Moran · Answer

@Peter Lohmann

Thanks so much for the input! I was using the Bigger Pockets rental property calculator and they will simplify things like vacancy/capex/etc. as percentages of rent.  So I used those numbers based on what I've seen around these forums.One quick note, I'm in Columbus, Mississippi, not Ohio.  Vacancies in the $400-$600 per month range are quite low.

I like your method of using the square footage as a basis for maintenance and capex.  Makes more sense to me than a rental percentage.  I'll adopt that strategy from now on.  I'm brand new to this analysis thing, so it looks like I have a lot to learn!  Thanks again!

Ryan Moran · Answer

@Brent Coombs

Good point, sir.  From my research that number is right on market rent for the area.  It's in a great location within walking distance to the local college and the downtown shopping.  But again, I've never been a landlord so I could be completely off.

Ryan Moran · Answer

Gotcha!  Thanks for the replies.  I completely blanked on insurance even though I was just calling and getting quotes today.  And I'm glad I'm not the only one who thought the asking price was high.

I know electricity and water are all separately metered, but I'm not sure about trash.  I wish I could get ALL the info right up front before sending an offer in.  Because if there's one awful tenant in there, or if there's some other ridiculous expense I'd like to know sooner rather than later.

Brent Coombs · Answer

@Ryan Moran Every time here is a vacancy, will there be a queue of applicants desperate to to pay $450/m to get into your 550sqft (quite small) unit? (ie. Is 7% conservative enough)? All the best...

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