Help with analysis on first deal

17 Replies

Hi everyone,

I've come across a 4 family unit deal in Western Massachusetts that I'd like to put an offer on, I'd just like some input from everyone on the numbers before I go forward with it. This is my first deal so I want to make sure I'm not missing anything.

Property Cost: $200,000

Down Payment: 25% (50,000)

Mortgage terms: 30 year

Mortgage Rate: 5%? 

Anual Taxes: $4128

Gross Monthly Rent: $3,225 (the current tenants are underpaying. When they leave we will raise rents to total $3,900 or $4,000

Monthly Insurance: $194

Management fees: 10%

Utility costs I will have to pay per month: $391

Using the bigger pockets calculator, I'm not exactly sure what to include there for vacancy rate, repairs/maintenance, and cap ex. I put 7% for these as an estimate because the property has a newer roof, new boilers, and does not have a septic system. It seems to be very well maintained and in really good condition. Any repairs I can see would be minor cosmetic. I think the vacancy rate is 7% but am not 100% sure.

Any help would be greatly appreciated. I'd like to put in an offer tonight but want to make sure the numbers all make sense. If I can raise the rents to $3900 total, using the bigger pockets calculator it looks like I'll get just under $1,000 net income after all expenses per month. I've heard that $250 profit per unit in Massachusetts is good, and I think I'm just about there after we raise rates and assume all the numbers I calculated for expenses are correct. Is this profit also good for the amount of money I'm considering putting down?

Thanks!

-Joe

@Joe Rinella

  • Make sure you are offering based on how the property is performing now, not how it will or may perform after you raise rents
  • You have a question mark after your interest rate.  Does this mean you haven't been pre qualified? In order to make sure you are running accurate numbers you want to verify what financing you will have access to

If you assume 8.33% vacancy (about 1 month per year per unit), 1% of purchase price in annual maintenance and 1% of purchase price in pro-rated annual capex, that brings your expenses (including vacancy and capex) to almost exactly 50%...which is about where you would expect it to be.

At $200K purchase, 25% down at 5% amortized over 30 years, and with stabilized rent of $3900, your net income is about $13K, for about 27% cash-on-cash return.

Those are good numbers (in my opinion), and if they're accurate, this is a great deal.  You should verify there is no deferred maintenance, and also verify that your plan to raise rents is viable.

@Joe Rinella , the big elephant in this room is WHERE in Western MA?  The answer to that question will impact vacancy rates, expected repairs, turnover costs, and general hassle.  

Some towns like North Adams are coming from nothing on the way to nowhere.  Other cities like Holyoke have made grown men cry, (read that "experienced landlords give up and sell") because of the difficulty in the tenant base.  High crime rates or declining jobs and population make lots of parts of western MA difficult.  Northampton, on the other hand, is doing just fine it seems, w/ UMass there.  

So realistic advise will depend on where it is.

Thank you for the input everyone. @Michael Noto I got pre approved yesterday and rates weren't available on Sunday's. I should get the rate today. I'm expecting 4% but made it 5% in my calculations just in case.

@J Scott thanks for the input. In talking with our real estate agent it was suggested that we coils raise rates after the existing tenants move out and I think it's definitely viable.

@Ann Bellamy this is in Fitchburg MA. It doesn't appear to be in a very bad part and isn't far from the University. Any advice?

Thanks everyone,

-Joe

@Joe Rinella Get a better idea for the area you are about to buy in.  Go there and walk the streets and get a feel for the neighborhood.

You are about to take $50k of your hard earned money and invest it in a piece of property, that should give you incentive enough to be the authority on that particular neighborhood.  Your numbers will be impact drastically based on this one factor like @Ann Bellamy points out.

Joe, Fitchburg is usually considered to be Central MA, not Western MA, just letting you know when you speak to others.  Considering you are in Waltham, it probably feels to you like it's Western MA because to you, it is way out there.  :-)

It falls into the "Grown Men Cry" category.  Definitely become an expert on Fitchburg, it changes street by street.  Before you even consider buying in Fitchburg, educate yourself.  There is a group run by @Brian Lucier called NWCLA (Northern Worcester County Landlords Assn, and he is very knowledgeable about Fitchburg landlording.  Also Dave Fleckner knows that city well, as does Dan Botwinik.  You can usually connect with Dave at NewEnglandREIA.com, he's usually at the meetings.  the next one is this Wed.  Any one of the three will be found attending my Black Diamond event in Worcester, depending on topic.  That next meeting is 8/18.  

I don't even lend there, it's one of the towns I exclude, and 50K per door sounds like a lot of money for Fitchburg.  

Hey Joe,

As Ann said Fitchburg is not a blue chip area...

Definitely want to pad your vacancy and maintenance numbers for that kind of area.  Also would temper my expectations on rents.  Unless they are like 4BR units I think that seems like rents (if all 4 units are occupied) are around market if not above already.  Hard to say for sure but I'd expect a 2BR to be well under a thousand and even 3BRs probably just scraping that level probably in the $900 range.

As I said without the address it is hard to say but I did just to a rentometer search around an address for a listed 4 fam that is asking a little over $200K and it gave the median for a 3BR as $850.  Not gospel truth but I usually find that it gives a reasonable estimate.

Also just so you know $200K is a LOT for a 4 family in Fitchburg.  Currently there are 2 places listed above that one for $246K (63 DOM as of today) and the one I did my rent search on at $209,900 (164 DOM).  Only 3 sold comps over $200K in the last 6 months ranging from $205,000 and $217,500 with 30, 80 and 371(!) DOM.

Also in the last 6 months there are 12 other active, pending or solds listed under $200K.  With the 5 solds ranging from $5K (no digits left out!!!) to $185K.  There are multiple decent looking places that are occupied listed under $160K right now.

Basically this is NOT any kind of screaming off market deal you have to move fast on.  If they are going to otherwise put it on the market for something north of $200K just make an offer on it in a couple months after it has been sitting there with no interest...

Joe Rinella Have you accounted for landscape and snow removal? I carry 7-10% for each vacancy capex and repairs depending on what street I'm on and the age of the building. I've purchased four 3-4 units in Fitchburg in the past few years. Be conservative when estimating your expenses. Best of luck with your purchase!

@Eric Dubrule Thanks for the info, I've been calculating 7% for vacancy, capex and repairs. The property was in great condition but I should calculate 10% just to be conservative like you said. I was figuring maintenance like snow removal and landscaping would fall into the 7-10% maintenance/repairs estimate. Do you think I should account for the landscaping and snow removal separately? Last Winter was a bad one.

separate. again 30% for capex,  repairs and vacancy might be high if you have a solid building in a nice area of Fitchburg. for landscape and snow--  40-100 per storm depending if you have a driveway. 200-500 for landscape for the season assuming you've only got a small area. I don't doubt the building could be worth 200k but it would need to be in a good area. 

4 units, at $800 each. Are these all 3BR? If so, you might push to $850-$900 if they are spacious and in great shape. Otherwise, you are right in the price range for that area. As another poster stated, don't count on the increase, odds are the rents are what the market will pay. But don't take our word for it. You said 10% management fee. The people who will manage it should know the area and advise what the going rent would be. There's a clear difference in rent from Fitchburg to Leominster, just one town away.  

Originally posted by @George P. :

wow,  u are getting first class help here.  good luck 

 I was thinking the same thing.  2-3 Veterans with very local knowledge telling it how it is. Pretty amazing.