4-plex Deal Analysis - Milwaukee

5 Replies

Is it weird that I have the chorus to "Summer of 69" stuck in my head ever since listening to the most recent podcast....

Anyways, back to the question at hand: I have a 4 plex that I went to look at yesterday and am looking for some universal wisdom. Here is the information.

  1. 1. B/B+ neighborhood (would be comfortable letting my wife be down there after dark), also across the street from an elementary school. In Washington Heights Neighborhood about 3 blocks away from Wauwatosa.
  2. 2. Asking price $237,000 (I wouldn't pay that much)
  3. 3. 4 1 bedroom units, each about 1,000sqft
  4. 4. 2 units are rented for $675 each, the third has a "pay what she can" informal agreement, fourth unit is occupied by the current owner who is looking to retire and move near family. 
  5. 5. Owner is very interested in selling, but would like to stay for a couple months after closing to wrap some things up in Milwaukee
  6. 6. I'm expecting PITI and other categories from the bigger pockets calculator to come to monthly expenses of $2,000 per month for a $190k purchase price, up to $2,500 per month for a $237k purchase prices
  7. 7. Rents conservatively should be around $675 per unit per month
  8. 8. Each of the units needs some work, though mostly cosmetic (paint, slight ceiling repair, floors, etc.)
  9. 9. I would estimate $5000 for repairs right off the bat to get the third and fourth unit in rent ready condition. I would come back and fix up the other 2 units in the months and years to come.

My situation is as follows:

I currently have 3 other rental properties for a total of 6 units fully rented out. These were purchased using a commercial loan with 20% down. I am a bit snug on funding so open to other ideas on how to creatively finance this, but likely would try for the same conventional loan using the same bank as the other properties. 

Three questions:

1. What should I pay for it?

2. Any other ideas on simple ways to finance this in case the bank won't approve based on cash on hand, etc? 

3. Any advice on getting the seller 70+ yr old man, who is incentivised  to move and doesn't like having the property, to sell it to me?

Thanks in advance!!!!

Dave Carpenter

    @Dave Carpenter

    Good luck moving forward with the deal. I really like the Washington Heights neighborhood. 

    I would ask your lender if they would allow you to use some of the equity you have in your other rentals as collateral and a source of down payment for your next purchase. Even if the equity would not allow for a full 20% down payment, it could still mean less straight cash coming from you. 

    Is the property owned free and clear? If so, ask the owner if he would carry a note. If he's motivated sell him on the fact that he will be getting a guaranteed monthly payment, secured by his property, at a higher interest rate than he get in any bank right now. And he won't have to do any work, collect rents, deal with tenants, etc. 

    If those options don't work, maybe consider a HELOC, signature loan, or crowdfunding request as other possible ways to gather necessary cash for the DP.

    Without looking at comps, his $237k price is probably in the ballpark for a retail purchaser, assuming it's not located right on the fringe area of Washington Heights.  Obviously I would be more interested in the $180-$190 range. 

    I find it interesting that each unit has 1,000 sq ft but only 1 bedroom each. That's a big area for only 1 bedroom units.  I am assuming tenants pay their own heat and electric?  

    Let us know how it goes. 

    @Darren Budahn he has a pretty large loan on the property that he has used for repairs, etc. He is hopeful to get some cash out of the deal, which makes me wonder how large this loan is...

    Good suggestions on borrowing against equity. The properties I currently have may provide some help, though I unfortunately do not have a large amount of equity at this point.

    The $237k price would be pretty good if the property were in good shape, however the interior will need some work. All cosmetic for the most part, but paint peeling on ceilings, floors being refinished and kitchens could use a little "sprucing up". This wouldn't all have to be done right away, but the building appears much nicer on the outside than it does on the inside.  

    I'll let you know how it goes. The great news is the location is probably the best part of the heights, short of being right on 60th st. 

    Dave Carpenter

      @Dave Carpenter there are many ways to fund a deal like this, but a completley different approach could be a master lease with option to purchase. Maybe this would provide some tax incentives to your seller and you can use cashflow to accumualte the down payment. Just food for thought. Good luck.

      @Marcus Auerbach that's an interesting idea. I'm not familiar with it, but is the basic idea that I lease the entire building and then get my money from individual rents. He would retain ownership of the building, but I would get the option to buy down the road? Never would have considered it, but a very interesting idea. How often is something like that done?

      Dave Carpenter

        @Dave Carpenter  

        yes, that's the basic concept. I have discussed it with a couple sellers earley on when I was still interested in MF but never actually closed a deal. The big question is if you can structure the deal in a way that the numbers work for both of you. The master lease payment needs to be high enough to be attractive for the seller, cover his PITI and then some. And you need enough cashflow left to acumulate the down payment. Good thing for the seller is he pockets the mortgage pay down, gets the full tax write off but does not have to deal with the property anymore. Also he avoids or deferrs capital gains tax.

        As always, please consult with your lawyer and CPA ;-)

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