Getting Analysis Paralysis on this multifamily deal...

11 Replies

The deal is that there are 4 units (2br each), the place is fully rented and needs zero work to keep rented.  It will need a little plaster and paint work when/if the tenants turn over.  The place brings a monthly rent total of $1,950 and the asking price is $109,500.  The property has a 2 unit townhouse then has 2 individual 2 bed room houses all deeded as a single lot.

When I run it through the BP Rental Calculator it's telling me that if I can get the place for $85k, if I assume 8% vacancy, 7.5%CapX, 10% Maint/Repair, and a $185/mo insurance bill, it's telling me I'll still net less than $55/unit monthly.  How can this deal still be not so good?  Is it because I'm borrowing 100% purchase price?  I can't imagine this is actually a bad deal.

Although I know I should't pay for assumed rent increases, but I'm pretty sure they're about $75-$100 light.

Would you do this deal?  If so, what am I not focusing on that I should be?

Brandon

I think the biggest problem is that the rents are low. Any time you have rents below $1000, the maintenance costs will eventually result in negative cashflow. Depending on the age of the property, you may need to reserve large amounts for maintenance. Materials and labor cost the same, regardless of how much rent you charge. An air conditioner costs $3500 to replace whether you charge $500 a month in rent or $2000 rent. A roof replacement will cost, say, $7000. Even if you have 5 years left on the roof, you need to reserve $116 per month for the next 5 years to save up the $7000 to replace the roof. I hope you're getting the idea. When you add these reserves into your budget, cashflow goes negative.

I would not buy this property for that reason. I own many units, and my best performing units are the highest value ones with the highest rents.

The voice of experience. Hope that helps.

@Brandon Miller

Hey Brandon, 

I'm just a beginner in the world of REI but I'll give you my advice from what I've learned so far in my research. Hopefully it will help you in some way.

1) Unless you've got some serious negotiating skills, be careful about expecting to get the property for around $85k. If the place is bringing in steady income, doesn't need much work, and has all the units rented out already, the seller may not be so willing to negotiate their price. There's always a chance it could happen, but it's less likely with this type of property.

2) Make sure you're also accounting for property taxes and your utility bills. 

If you've done all your homework on the property, researched all the expenses that come with a multifamily property and accounted for them, and with the CURRENT rental income you can still hit your goal cash flow, then I would do the deal. Maybe leave a little more room for error to be safe, but be confident and take action. No one ever becomes wise without making mistakes, so worst case scenario you learn a lesson and move on.

@Brandon Miller .  I posted a blog about understanding the numbers earlier this week that might help you uncover where your problem is.  Here is the link if you are interested: http://www.biggerpockets.com/blogs/6815/blog_posts...

On such an inexpensive house, that $55/unit makes sense.  That's $200 a month (an infinite return on the 0 you put down).  To check your analysis, let's say you put 25% down. . . on 85k that's 21,250.  Your mortgage would be about $100 less, giving you a $300/month return on your investment.  Let's say your total acquisition cost is $25,000 after closing costs: you're still making 14% cash on cash.  That's not terrible.  

The problem is, big ticket expenses like roofs, furnaces, and driveways don't change much whether you're putting them in a $85,000 lot or a $200,000 house, so they eat more of your bottom line on a cheaper property.  The other thing to consider is all the separate buildings need separate furnaces, hot water heaters, etc.  In an area where you're paying more and charging more (or at least charging more) you can absorb those expenses without killing your return.

Originally posted by @Austin Youmans :

What kind of financing are you getting?

It seems like a decent deal but it really depend on your financing.

Do you mean the BP calc said to offer only $85?

Are you paying utilities?

Thanx Austin,

Financing is 100% purchase price at 6%apr (family deal)

The BP call said that at full asking price I would be loosing money. If I were able to get it for 85 then it would profit around 55/door. 

Tenants pay utilities

Thank you guys so much for all your quick replies! It's helped out quite a bit.  

I see what you guys are saying... With rents under $1k/unit I have to re-strategize how to lessen the maintenance and repair costs so they don't eat up the saved up cash flow. Again what I'm hearing is to start getting single roof multi unit buildings where each unit is returning closer to $1k/mo ...

Brandon

Brandon,

Kevin is right. If you are not putting down any money for this property and you are still left with $2,600 in profit. The only thing I would be concerned about is your CAPEX. You need to get a proper inspection of the property to make sure you dont get any nasty surprises down the road and that you didnt account for or put aside money for.

That said a 2. something CAP Rate is very low. If you can use your 0% down on an alternative investment with better margins I would probably do that, but if not then getting cash flow for free is not a bad alternative...

Just make sure you know the condition of the building!

Finally, If I read you correctly you can also get $100 rent increase per unit without doing anything? Then suddenly your returns go up dramatically!!

C

PS: Rent levels only matter when you take into consideration what area you are buying in. We have properties in some parts of GA where $500/month gives us amazing residents

I am assuming that 6% is on a 30 year term

So your mortgage payment would be $655

8% vacancy = $156

7.5% capex = $147

10% maint. = $195

insurance -$185 which seems high

So rent minus expenses 1950-185-195-147-156-655 = $612 

Am I missing something here?