4 Family Eval...What do you think?

Question

Purchase price 180k, closing costs about 6k, initial repairs roughly 5k (based on review by my property manager/inspection)

Annual income total 39,300

Tenants pay own utilities, roof is about 6 years old, newer boilers, electric is updated

Expenses $ 23,032.00

Accounting $ 500.00

Lawn and Snow $ 1,000.00

Property Insurance $ 2,200.00

Property Management $ 3,144.00

Property Taxes $ 5,400.00

Repairs, Supplies, Maintenance $ 3,930.00 (10%)

CapEx $ 2,358.00 (6%)

Trash Removal $ 500.00

Utilities: Electric $ 500.00

Utilities: Gas $ 500.00

Utilities Water $ 1,500.00

Utilities Sewer $ 1,500.00

Roy N. · Answer

Same effect on the end CFBT, but it's not an expense it's a reserve .... If your accountant is a stickler s/he might tell you it comes out of CFAT (retained earnings).   You are only putting that percentage away if your business earns enough to put it away ... if you have a spell of higher than anticipated vacancy, your reserve set-aside may be diminished or foregone for a period.

BTW:  Vacancy in our local market is running ~6% for 2-bdrm units and 3.6% for 3-bdrm units.  I still use 8.33 (1 in 12) or 10% when analysing a prospective property to be conservative.  In a similar vane we do not count secondary income streams (e.g. laundry, parking); use a higher interest rate than we can currently obtain; and assume no appreciation (or even depreciation) of the asset.

Roy N. · Answer

Eric:

I saw that.  My two items were:

1) Is the 39,300.00 the effective gross revenue or the scheduled rent (i.e. is there a vacancy allowance in your analysis)? and

2) A CAPEx reserve is not an expense, but comes from your NOI.  When you include it as an expense, it makes your operating expenses far too great a portion of your revenue ... to the point where the deal looks bad.     If you deduct the CAPEx reserve from NOI, then what is leftover needs to cover your debt service (with the low LTV you are proposing, that should not be an issue) and provide your CFBT.

With an LTV of 25%, you should see a CoC in the 12 - 14% range even if the 39,300 is your scheduled rent.

Eric Munson · Answer

Account Closed - I'm next door in Ct. If it's in a decent area and doesn't need much work I think the numbers look good. I would purchase with those numbers. Good luck.

Roy N. · Answer

Account Closed

Is that 39,300 the scheduled rent or effective gross revenue?  For now, let's assume it is gross revenue.  If it isn't you will be starting off with less revenue (35.370.00) after a vacancy allowance (10%).

Using your numbers for Operating Expenses (23,032.00) - though, technically CAPEx is an allotment made from net earnings - you are left with an NOI of 16,268.00.

This means your operating expenses are 58.6% of gross revenue.  About 8-10% over what you want for long term target.

Now, if you take the CAPEx out of expenses you have Operating Expenses of 20,174.00 and NOI of 19,126.00.  Operating Expenses are 51.3%   This is more acceptable.

You would then reserve (set-aside) ~10% of your NOI for CAPEx (~2000) leaving you with 17,126.00 (1427/month) to service debt and put money in your pocket.  A mortgage will eat between 800 & 1K of that per month ... leaving you ~$100/door CFBT.

It could work.  However, if your 39300 is scheduled rent and your effective gross revenue is closer to 35K, things will be tight.

Account Closed · Answer

@Roy N.Thanks Roy, makes sense.

Pulling out actually though, in a high risk flood zone..has a LOMA from 2013 but area is under review again per FEMA...Insurance would be thousands of dollars per year + concerned about resale

Account Closed · Answer

@Roy N. thanks again...that is the scheduled rent...I've been using 5% vacancy as that is roughly what it's been on my other properties.

I don't quite get the capex thing though. Whether it's a line item off the noi or listed as an expense isn't it the same effect on monthly cash flow? I'm still putting that percentage away right?

Account Closed · Answer

@Roy N. thanks but I included the taxes and ins as an expense and I'm putting about 25-30% down so the mortgage payment is about half of the 800-1000 you mentioned.  Sorry if I wasn't clear there

@Eric Munson I use to live in CT are you related the the munson chocolate shop in Northeast CT :) thx for the input