Owner Financed 8-Plex Deal Analysis

7 Replies

I'll preface by stating that the property for sale is actually two 4-plexes, next door to each other, being sold as a package.

Some details about the property:

  • Appears to be a Class C+ or B property
  • Each unit has two bedrooms/two baths
  • Covered Parking
  • Buildings are being described as being well maintained with some updating as well.

Some details about the financials:

  • $360,000 for each building - ($720,000 total)
  • Stated Gross Income ($63,442)
  • Stated Net Income ($56,824)
  • Rents ranging from $600 - $850 right now
    • Average Rent per unit is around $660. 
    • Could imagine stabilizing all rents to $850 over the next 18 months, without much issues due to the local market and the area the property is in.

Some details about the owner financing:

  • 20% down ($144,000)
  • 6.5% rate at 15 years

What do you think about this deal??

This is my first question on Bigger Pockets, so please be nice :)

Thanks,

Hi Jay, 

Love owner financing! A great way to get into properties that would have otherwise been unavailable. 

Upon first glance, the deal seems a bit tight. I ran some of your numbers through the below Analyzer: https://docs.google.com/spreadsheets/d/1xheEYFrscC...

I used the estimated $850/mo rent...and kept the current operating expenses the same. Note that it is unlikely that these operating expenses $6,618/year are accurate. I would imagine taxes and insurance alone would get you to this number. You should also have figures for vacancy allowance, property management, repairs & maintenance, etc. If we were to enter those figures...the deal would go downhill very fast. 

Even though the cap rate may seem okay...the return on your invested capital is not the greatest. It is likely that you would be able to find a better use for your $144,000. 

Feel free to reach out personally. I can give you edit access to the analyzer so that you can toggle figures and see what comes out. 

Welcome to the BiggerPockets forums, Jay! 

As Nick said, there's more to the deal than what's on the surface. From what I've seen so far in all the deals I've analyzed and reviewed here on BP, the seller's numbers are always skewed in their favor, and naturally so. There's a lot to take into consideration, in fact. 

  • Property Management
  • Financing (Your mortgage payments, or owner-financing)
  • Utilities, depending on whether each unit is individually metered and whether the current leases stipulate that tenants pay utilities (they should, and a four-plex should be separately metered)
  • Water, and sewer (if applicable)
  • Trash
  • HOA fees (if a condominium complex or "special" gated neighborhood), yours shouldn't have any.
  • Adjustment for vacancies (they do happen)
  • Monthly "put-away" money for CapEX (capital expenditures, or major purchases, replacements, etc. think roofs, HVAC, etc)
  • Maintenance
  • Property Taxes
  • Property insurance
  • Special liability insurance, depending on where your property is. You're in New Orleans, so, like my area, flood insurance may need to be a consideration. This can be a significant expense, so be careful. 

We are in different areas, though we're both in the South. Still, your numbers and estimates may differ. 

For my area, property management ranges between 8-12%, though i sometimes calculate at 15% because you want to be pleasantly surprised, not disappointed and reaching in your wallet for more cash when you thought you'd cash-flow. 

You can find property tax info (approximate, because it's usually the prior years') online by googling "New Orleans tax assessor" and related search terms. 

CapEX and maintenance will depend on the quality of your neighborhood, tenants, and the age and condition of the property. I don't have solid recommendations here because this can vary so much. Maybe $50/unit per month of maintenance? Hopefully it works out more in your favor than that, but if only 1/4 of your tenants have any maintenance (leaky faucet, etc) in a given month, that'll be $300 that slides from expenses to income. CapEX should be a fixed percentage, and I tend to see 5% or so per month. 

The deal with vacancies is that they happen, and they can be really easy or really rough from what I've heard (As a disclaimer, I have never had tenants, just read a lot about the buy-and-hold strategy because it is my long-game). If you've sought out quality tenants you shouldn't have all that many problems with it, but big things happen in people's lives in a given year so you never know. I usually try to be conservative here and say that in a given year, 1/4 of my units will be vacant for 3 months out of the year. That means 2 units, for 1/4 of the year, are not producing income. That would mean $1320 in the expenses side. Keep it there for safety's sake, because from the outside in you have no idea how this property will do. You want to overestimate.

Well that's the basics. As a disclaimer, I have not purchased my first multi-family property yet (hard to find good ones in my market) but I'm looking for a 2-4plex in the Tampa area that I can owner-occupy (also called house-hacking around here). I've learned all that I have by spending hours each day finding and analyzing deals, and helping other people analyze deals, here on the BP forums and just by spending time looking at offers on RedFin, Zillow, Realtor.com, and LoopNet. 

Good luck, @Jay L. , could I please get access to that spreadsheet? Handy little tool you've got there! I'd like to use it for my own analyses in the future if you wouldn't mind. 

The real proof will come when you get your hands on the property's financial statements and that will tell you how the asset is preforming today.  

@Devin Beverage nicely done on analysing the deal, I do think you are very conservative with your thinking.  That's good for the surprises but don't lock yourself into not getting a deal if it's close to your numbers because it will be very difficult to find these numbers in our market.

@Nick Baldo I would also like a copy of the document.  Thank you.  

Wow! What a resource BiggerPockets is. Thank you all for the advice and for chiming in. 

Thank you for sharing that spreadsheet, it's really nice :)

After hearing the much appreciated advice from @Nick Baldo @Devin Beverage @Chris Frazier @Adrian Smude I've decided to pass on pursuing that specific property, but not of my goals of securing my first multi-family property by the end of the year.

PS: That property just dropped to $690,000, so who knows, if it drops into a sweet spot, where the numbers check out, I might have to reevaluate.  

@Jay L. if you like the property but not the price figure out what YOUR price would be and put an offer in.  My last two deals ended up about half of what the original asking price was.  Worse case they say no, but they know you are interested.  

@Adrian Smude  

Absolutely. I can't get the numbers to work, at-least for my personal investing goals, without lowering the purchase price by at-least 25%.

I did just come across another interesting property this morning though.

Here's the quick breakdown:

  • Class C Building
  • 2 Small Apartment Buildings - 20 Units (2 bedroom /1 bath)
  • Asking Price: $625,000
  • Stated GOI: $132,000
  • Stated NOI: $83,688

I'm currently waiting on more details from the broker, but 20 units does seem more intimidating than 8. I'm just trying to soak up as much knowledge as I can.