8 Family Unit - Good Deal?

6 Replies

Good afternoon everyone,

I'm new to both real estate and to this forum. I've done a fair amount of researching which included reading books and viewing some investment videos. I want to hit the ground running so I did some research on potential opportunities.

I found a local property that's 8 units, newly renovated, brick building and it's completely vacant. Asking for the property is $550,000 and I plan on using a FHA loan to purchase the property. Property is located in an urban area (East Orange, NJ) with the possibility of section 8 being offered. They're stating based on their analysis that it's a 13.53% cap rate.

- 5 rooms, 3 bed, 1 bath per unit with 8 units

- Saying the market rate for each unit is $1,200 or section 8 is $1,632 

Here is a copy of the analysis that was sent to me:

Link to analysis

(If it's too small then I'll put it into an excel file)

What do you guys think about this deal?

Thank you all.

Hi Amaf,

First, I would like to address the FHA loan that you mentioned. As far as I know, FHA loans are ONLY available for 1-4 unit properties, otherwise that property is not eligible.

Next, as far as the asking price, you should run comps in your area for that $550,000 price and see if it aligns with other 8-units. Also check to see that the rents, given on the pro-forma, are also standard for your area. Be careful with the cap rate because that is based on 100% occupancy at $1,200 rent. DO NOT forget to account for less than 100% occupancy on your analysis (just for precautionary measures)...

If you are getting really serious with this purchase, verify all the information you can. Call to verify the taxes, trash, management cut (if you are going to use a property manager), etc. Verify all you can on the proforma as soon as possible, you can possible use your new numbers to possible arrange a discount. Get quotes from management companies in that area as well as account for maintenance and repairs (to your liking).

Lastly, account for the expenses you will be incurring before you acquire tenants. Depending on how long getting the units occupied takes, you could be paying out of pocket for a lot of things. Taxes, insurance, etc.

These are just my two cents, if I missed anything, tag me back and I will gladly respond.

Gino 

Amaf,

It will be challenging to qualify for traditional financing on a 100% vacant building.



Originally posted by @Amaf J. :

Good afternoon everyone,

I'm new to both real estate and to this forum. I've done a fair amount of researching which included reading books and viewing some investment videos. I want to hit the ground running so I did some research on potential opportunities.

I found a local property that's 8 units, newly renovated, brick building and it's completely vacant. Asking for the property is $550,000 and I plan on using a FHA loan to purchase the property. Property is located in an urban area (East Orange, NJ) with the possibility of section 8 being offered. They're stating based on their analysis that it's a 13.53% cap rate.

- 5 rooms, 3 bed, 1 bath per unit with 8 units

- Saying the market rate for each unit is $1,200 or section 8 is $1,632 

Here is a copy of the analysis that was sent to me:

Link to analysis

(If it's too small then I'll put it into an excel file)

What do you guys think about this deal?

Thank you all.

Medium realgroup360 480x270Ellis San Jose, Real Estate Group 360-The Note Guys | (805) 852‑7418 | http://www.realestategroup360.com | CA Agent # BRE#01855039

@Gino DelGais, thanks again for all the information. I did not know the FHA was limited to just four (4) units. I'll start to limit my search to 2-4 units then. When checking comps, do I search using zillow and property shark? Also, how do I look up the average rent in specific areas? When verifying that information, do I call the local city office and property management companies?

@Ellis San Jose, thanks for the heads up. As long as the building is somewhat occupied, I shouldn't have any issues with financing?

@Gino DelGais , great response!

@Amaf J. , regarding your question about local rents. There are softwares that can help you with that, and the low tech approach is to check Craigslist for your area. 

@Amaf J.

When checking comps, you can use whatever software or websites you feel comfortable navigating. Zillow is good, there are a couple others, but if you are using a Real Estate Broker/Salesperson to find this property, you can ask them to use the MLS to check property comps and rent comps. @Ben Rutkevitz has suggested a good strategy as well that not many think of, pretend you are going to rent, google homes/apartments for rent and use your criteria (#Bd, #Ba) and see what you come up with. I would suggest, however, to fully utilize the Real Estate Salesperson/Broker for comps and average rents.

To verify all the proforma information, call the respective agencies involved. Insurance, call insurance companies, explain your situation, and get quotes. Same goes for property management, call and request quotes. As far as the taxes, most of the time that information can be found online or by calling the city office.

To touch on the financing part, which I would rather not, nobody will really be able to tell you if you will or will not have issues getting financing besides that specific bank and banker. There are many things that underwriters look at and not being an underwriter I would prefer to leave my opinion out.

Something to keep in mind though, with FHA loans, the law requires that property to be owner occupied or a principle residence, meaning, you have to live there or you will not qualify. However, this does not stop you from purchasing a 2-4 unit property and living in one of the units (Look into 'House Hacking'). Again, I would rather a finance professional touch on the FHA part.

Mention me as needed Amaf!

Gino

I thought with a commercial property (5+ units) you don't use comps to determine value? I have heard everywhere that you base value on the income the property produces, not what other similar sized buildings go for .