Fourplex Deal Analysis

30 Replies

Hello Everyone,

I was wondering if anyone can look at this deal and share some feedback, concerns or questions. I am trying to figure out if the numbers will work and if I should put an offer. I appreciate any help. Here are the details:

Asking Price: 389,000

Down payment 25%: 97,250  Loan Interest: 5%  Loan Term: 25 Yrs

Units: 4 (2 Units are 3/2  - 2 Units are 2/1.5

Total Gross income: 3,700

Total Operating Expenses: 18,119

Year Built: 2006 Located in a nice part of town

Thanks!!!

Eddie Q.

Well it's under the 1% rule?

Have you figured in Vacency?

Have you figured in mantanence and repairs?

do you plan on having a Property Manager and if so are you figuring 10% cost of a PM? 

Post all these numbers so we can have a better idea.  
Is the place currently leased and at what rents?


@Eddie Quispe - Barbara is correct - this does not meet the 1% rule. You should be really aiming for properties that can hit 1.5 - 2%. How old is the property? How long have the tenants been in place?

Barbara/Justin

The operating expenses include Maintenance and Repairs as well as the 10% Management Fee.  It doesn't include the Vacancy rate, I'll add that into my calculations.

The property was built in 2006, it has tile roof and it is in great shape.  Tenants have been there under 3 years. 

What is the potential to raise the rent?  My 4-plexes were considerably cheaper ($270K, and rents higher ($4,400).  

A new building, such as that one, should have lighter maintenance for a few years.

I have been seeing some banks require you factor in an additional 5% for "cash reserves" now as well. 

5% on the loan?  Is this because you are putting down 25%?  I could do a lot of damage with almost $100K instead of tying it up in only four units....

Eric, the Annual Operating expenses from the owner shows 1200.00 annual maintenance and repairs.  How old is your building and how much maintenance and repairs do you have per year?  I don't want to overpay just because it is a new building. I own a home nearby and looking at the rent, I don't think there is room to increase it.

@Joshua De Young  

 The 5% is only an approx on interest rate but it's probably pretty close to what the bank will charge me. In your investment experience you wouldn't tie up 100K on a property like this? In what other ways will you invest 100K that will provide greater returns?

@Eddie Quispe

I wouldn't pay more than 65k/door for the rents the property is currently operating on. 

(214) 864-9796

@eddiequispe

It seems like there are very narrow margins on this deal. From the numbers you have given, It is currently a 6.7 CAP and about a 4.5% Cash on cash. Even if you negotiated the deal down to 350,000, it be a mid 7 CAP and 7% cash on cash.

Given that you know your market, are there better returns to be found in multiple single family properties or commercial property? 

(970) 672-6282

@Eddie Quispe @Stuart Birdsong

Cap rates are irrelevant in this deal because of the unit size. Anything 4 units or less is valued on comps with the income factored in slightly. As long as you understand and know the GRM for this given area, that will allow you gauge what the market is offering and compare the market to this specific 4-plex.

With that said, I don't factor in what the market is asking or willing to accept in my analysis. It's my numbers that need to make sense regardless of the next investor. Determine what it's worth to you and mallke your decision. 

(214) 864-9796

@loganhassinger

Would you say that it is too small for a CAP Rate to be relevant? I would like to know more. Thanks

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@Stuart Birdsong

First, I didn't mean to say size of units but number of units. Two very different statements. 

Correct Stuart, 4 units or less do not use CAP rates for obtaining a valuation, as they are still considered residential. Commercial properties (5 units or more) utilize CAP rates.

Comparable sales and GRM (Gross Rent Multiplier) are valuation metrics used for 1-4 family residents.

Does that help?

(214) 864-9796

@Eddie Quispe

Do you have a set goal/standard you are looking for, i.e. Cash Flow $150 month per unit?   This is a Multi-Family property ... Cash Flow is the name of the game.  Therefore, it's extremely important to get all your numbers right.

Does the Total Operating Exspenes ($18,119) include Tax, Insurance, HOA fees, Landscape maint., any utilities? If so what is the breakdown?

You will need to include CapEx .... Something will eventually breakdown or need replacing.

So add in the Vacancy Rate (5%) = $2200

CapEx (5%) = $2200

Also, don't forget Closing Cost (2%) = $7780

Is there any Rehab/Improvements needed after purchase?  Cosmetic even!

The bank will be looking at the DSCR

NOI ($26,281) ÷ Debt Service ($291,750) = .09

This ratio needs to be over 1.0.  They will consider .09 as negative cash flow.

Bottom line .... Get more details on expenses.  If you still want this property you will need to make a much lower offer to make it CashFlow.

Hope this helps 

John

@loganhassinger

It does, Thanks

(970) 672-6282

I don't know of a lender touching anything less than 1.2 DSCR.

(214) 864-9796

@Eddie Quispe , the rates are frankly not very good.  Are they common to your area?  One thing I will point out is that the nicer the property, often the worse the cash flow.  When people talk about a 1.5% or higher flow rate thet are usually referring to a C or lower level property.  I suspect that this is at least a B pr even a B+ property.  Those often make less money but are a safer buy based upon they demand.  When other properties are vacant they will still rent and the quality of tenants make them a joy to manage compared many other properties.  If you are looking for good cash flow, these are not for you.  If you are looking for appreciation or an ultra safe investment then this is that type of property.  I would suggest you try to get them down to at least $370K if your are dead set on getting them.  Good luck they sound like an exceptionally nice property.

While what Logan said above that the cap rate and the C/C do not matter for the valuation is true in market terms, it probably matters to you as an investor. The market value will matter to you only to ensure you are buying right and eventually when you sell, if you are planning to hold this long term then you need to be comfortable with the cashflow of the property. Does the roughly 6.5% cap and 6% C/C work for your investment strategy? For me personally I would look for a property with a higher DSCR because I see very little reason to get a lower Cash return versus outright cap rate. Leveraging any asset adds risk to the deal and therefore you need to be able to get a higher return to justify that risk.

What are the taxes? If they are low it could still have a decent cash-flow. Run everything through a calculator, be very conservative with expenses. I like "real estate analysis free," which gives me a good indication of cash-flow.

Originally posted by @Eddie Quispe :

Eric, the Annual Operating expenses from the owner shows 1200.00 annual maintenance and repairs.  How old is your building and how much maintenance and repairs do you have per year?  I don't want to overpay just because it is a new building. I own a home nearby and looking at the rent, I don't think there is room to increase it.

 Eric,

you probably know this already but if you move forward with this deal, ensure that you get the last year or two of expenses confirmed.  asked to see the actual utility bills (that you are responsible for) and any other expenses.  i dont know your area but 1200/yr--$100/month--or about $25/month/door sounds very low.  i cant tell you how many times i have seen seller quoted expenses come in much lower than actual....they use last year's taxes instead of this years, they dont include yard maintenance or property management fees, etc.

@John Leavelle :

Hi John, thanks for the detailed feedback. Yes I would like to get at least 100/door for the market I am in. The Total Operating Expenses include Tax, Insurance, Landscape, Repairs and Maint, Pest Control, Utilities (water), property mgmt, 5% vacancy rate and there are no HOA fees.

I didn't add any CapEx but I'll add it to the calculations. I also need to add the closing cost and Rehab just in case, even though it looks like everything is in order (I won't know for sure until I do an formal inspection if I decide to go with this deal).

Looks like I need to negotiate the asking price as low as I can to make this work based on my goals.

Thanks a bunch!!!

 @Jerry W.:

 Hi Jerry,

A similar unit within a mile of this property sold for 365K and the rent rates are about the same in this area.  You are correct this is a B+ property fairly new, well built and in a decent part of town.  The more I look at the numbers and the feedback I am getting from everyone it doesn't seem to be great deal.

Originally posted by @Scott Weaner :

What are the taxes? If they are low it could still have a decent cash-flow. Run everything through a calculator, be very conservative with expenses. I like "real estate analysis free," which gives me a good indication of cash-flow.

 Hi Scott,

Taxes are 3177.00 and insurance 1877.00  Where can I get the Real estate analysis free tool?  Thanks!  Eddie

Originally posted by @Eddie Quispe :
@Joshua De Young 

 The 5% is only an approx on interest rate but it's probably pretty close to what the bank will charge me. In your investment experience you wouldn't tie up 100K on a property like this? In what other ways will you invest 100K that will provide greater returns?

 Any of my commercial loans from the past few years I've closed are typically ranging from the 6.25-6.75% range.

With 100K I would much rather buy a property that needs some work in a good neighborhood, "tenant proof" them (ceramic tile, refinish hardwood floors, semi-gloss paint), and have my margins be significantly bigger.  I know it can be a headache to handle renovations and establishing relationships with contractors, but in my opinion that is they way to go.  

I know we are in different markets, but I have purchased 13 units in Evansville, Indiana, three fourplexs and a house on the same block for $300K and only had to put 15% down ($45K).  All the units bring in $5200+/mo (I only pay water for one of the fourplexes, the rest is on the tenant).   I think you can do better by searching a little more.  I could probably pick up a portfolio of 25-30 units easily with a downpayment of $100K and have money to dump some money in a few.  

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