Massachusetts Deal Analysis

11 Replies

Hello Everyone,

I was hoping you all could take a look at this deal that I am looking at for a second time. We are not under contract and I want to make sure my math and my estimates make sense so I can go in with a strong position as what to offer. 

I put the details in the google doc as its easier to display than in the posting section.

https://docs.google.com/spreadsheets/d/1Gi7HweJKvb...

Additional Non numbers information

  • This would be my first property
  • Yes there are cheaper places
  • No I can't buy those as they are too far from my and my fiances places of employment (this one is already on the edge)
  • Owner Revenue is us paying ourselves our current rent
  • Would consider this a B property in C neighborhood 
  • Each unit has central air, W/D, & Dishwasher, all of which are considered luxury items in an apartment. Means premium rents for the unit sizes.

Facts & Assumptions

  • Owner did major renovation approximately 5-8 years ago including roof, heating systems, water tanks, windows, and central air. 
  • 1BR units Heat is not separate, but has new energy efficient gas heater.
  • No Comps are available
  • In my opinion it is priced too high as if it was priced correctly, it would have sold, will attempt to push price down as I doubt it will appraise
  • I believe the maintenance amount provided is artificially high due to inclement winter weather, we had record snow this year. Being a owner occupant means that I would do my own snow removal vs paying for it.
  • House is over 100 years old
  • First house I have found to cash flow in my search radius
  • Using FHA or Mass Housing (similar to FHA) loan with a 3.5% or 5% cash down
  • Have cash reserves above and beyond down payment

What do you guys think? Would you do this deal? Am I forgetting anything major in my cash flow calculations? My biggest concern with this property is that I don't believe the seller will budge on the price, which means it won't appraise, which means I don't qualify for the loan.

Thanks in advance!

Andrew

Andrew Auger this doesn't look like a good deal. I don't know how many units there are but regardless you have less than a 1% rental. If I'm correct you have a 5 cap. I don't know your area but I would never buy a 5 cap in multifamily. You also have water and electricity expenses. Unless you can find a way to push that onto the tenants, pass on it. There's too much risk in paying for all the utilities as the landlord, that's asking for trouble. I always use the 50% expense rule ( it's just a rule so take it with a grain of salt ) but I have 23k after using that rule as net income. Basically that's your mortgage. Ultimately, this is a negative cash flow property.

@Andrew Auger definitely a tight deal but not terrible for an owner occupied property. Keep in mind that your owner's unit rent is fine for your cash flow analysis but you can't use it for tax purposes (you can't pay yourself rent). You also can only deduct 75% of all building wide expenses and you can't deduct any related to your unit. You can deduct mortgage interest and property taxes fully as they are deductible on your personal taxes as well as schedule E. 

Also if the one tenant is moving out prior to close you should plan to have six months of rent in reserves while you find a new tenant. It looks to me like you are negative cash flow from day one which is not good. 

As far as your analysis, reformat the document. At the top list all the rents then total it. You may someday add in coin laundry income or if you rent out garage spaces that would be rent that makes up gross rent.

Take your mortgage payment out of the calculation. That's not an operating expense. Use 8% for vacancy, 5% for maintenance, and you can start with 5% for management but in reality you won't get somebody to manage a four family for 5%. Closer to 10% is likely. A bank is going to want to see the management expense in there since you have no experience managing rental properties.

After you total your income and subtract your operating expenses you get your net operating income.

You can then deduct your principal/interest payment from your NOI and that is your cash flow.

Also, regarding the water/sewer, you can get that info from the city/town. Ask for a three year history. 

You should contact an insurance agent with some details on the property. If the seller owns several properties he may pay less for insurance then you might as a new investor. Being owner occupied may have an effect as well. 

Taxes you should verify from the city/town as well. Ask for a copy of their 2014 and 2013 Schedule E for the property. 

Also, make sure any work that was done was permitted. 

Just some things to consider without forming an opinion on whether or not it's a good deal. That's very relative. 

@Devan Mcclish , the unit is a 4 plex. The units are separated for electricity, but it has a separate meter for outdoor security lighting and indoor hallway lighting which I see as a very good thing as in Massachusetts the Tenant/Landlord laws are incredibly strict and tenants paying for common space utilities is a big no no. The heating is partially separate. The largest unit, 3BR 2Bath, is completely separate and paid by the tenant, but the three 1BR units are owner paid and we would be in one of them, but they have a very new efficient gas heater which is by far the cheapest heating source up in our area. That is where most of that cost comes from, so it is not as bad as you thought. 

As for the cap rate, as you can tell by the price, Massachusetts is pretty expensive and the properties that might produce a higher cap rate are in an area I can't commute to work from and this is the best I have found in our commutable radius thus far. Even though its technically negative cash flow with me paying nothing, I would be paying way less than my current rent, so its additional money in my pocket every month.

Thank you for your input!

I took a quick look over your pro forma and I would note your water expense looks low. With 4 units and you mentioned most have w/d in unit and dishwashers. Your actual water bill may be 2X or 3X what you quoted. I would reach out to the town and they should be able to supply the history. 

Medium four point individuRob L., Four Points Property Management | [email protected] | 978‑360‑7817 | http://www.fourpointspm.net

@Rob Beland Can you also deduct depreciation for the building at the same 75% rate? I have never been able to get a solid answer on that, no matter how much searching I have done...

Six months reserves, got it

When I get home from work today I will give the worksheet another work over to show cash flow then the NOI.

When doing the calculations, your taking the percentage off the gross rents... do you think I should add my "owner" portion as well? I don't intend on living here forever so this might give a better idea of how it will perform after we have moved on?

I never thought of asking for the sellers schedule E before. That's an amazing tip! I am adding that to my list of things to ask for right now!

Thank you for your input!

@Rob L. I will definitely look into that further, the dishwashers are half sized, and I only got into 2 of the units, both had washer/dryers in them.

Thanks for your input!

@Mike Hurney

Hi Mike,

My goal is positive cash flow, but at the same time I understand with us living in the property, it is highly unlikely to be found in the area I can commute to work from and find a property that I and more importantly the fiance find livable.  This particular property, although with us paying nothing, is technically cash flow negative. However, if you take into account that in order to live in the property, it would cost us a measly $300 ish dollars to break even, or roughly $750 less than I am paying in rent, my personal cash flow goes up by that much each month. That's money in my pocket I can turn around and reinvest in a property that does truly cash flow since we wont be living in it. Also, if we are not living in the property, and is rented out, it is cash flow positive as far as I can tell.

Don't know if that is what you were looking for in your question, but there it is. :)

Let me know what you think.

Andrew

@Andrew Auger It's important to know exactly what you're looking for. Otherwise you may end up like Jack (of beanstock fame)