5 Unit MultiFamily Analysis - First Investment

Real Estate Deal Analysis & Advice
10yFollow

5 Unit MultiFamily Analysis - First Investment

Michael Morton
Harvard, MA · Member since 2015 · 25 posts · 8 votes

I'm looking at my first rental property.  This is in an working-class town 60 minutes west of Boston.  It's in good shape, doesn't need much work at all - maybe some minor stuff.  Long-term tenants occupy most units (10+ years!) so rents are on the low side by $100 / unit or so - but not much hassle from tenants

Price: $375,000 

5 Units.  Gross Monthly Income of $4100

2 Garages.  Gross Monthly Income of $1200

Expenses (Yearly):

Utilities: Gas ($800), Insurance ($3k), Elec ($3k), Water ($5k), Oil ($6k), Taxes ($5k)

Other: Vacancy ($1200 / 2%), CapEx ($3k), Snow/Lawn ($1800), Repairs ($2400), Garbage ($600), Management ($3500), P&I: $18k (30% Downpayment)

Yearly Income vs Expenses: $64k - 54k = $10k

Cash on Cash = 7.5% (10k on 120k)

My questions/comments are:

* Do those numbers look "reasonable" and am I missing anything big?  I've gone through the BP Analysis Tool.

* This seems OK, not great.  The big "killer" seems to be the utilities are very high.

* I'm interested in exploring splitting the utilities out to the tenants somehow.  It's an older multi-family so it's pretty complicated (I would think) to do that.  

* The ROI goes up quite a bit if I can raise the rents to be more inline with the area. $100 / unit x 5 units changes that to about 12% return.

* For what it's worth, the 50% rule shows $1500 / month cashflow, but actuals (above) show $800.  I think it's the expensive utilities.  Or maybe I'm overestimating the other costs.

Any feedback REALLY appreciated!

Thanks, Mike

0Reply
46 views

Most Popular Reply

Logan Hassinger
Specialist · Fort Worth, TX · Member since 2014 · 528 posts · 226 votes
10y

@Michael Morton

First off I see that your debt service is much too low at 18k/annual. It appears that you have estimated this pmt of $1,500 on a 30 year term. That is very unlikely, 20 year notes are most common on commercial financing. Also the rate is going to be somewhere between 5-6%.  With 30% down and terms of 240 and 5.5%, you're looking at a pmt of $1,800/month. 

Additionally, for the current rents, I would say this building is over priced by about 100k. Even with increased rents like you say of 920/unit/month, I would like to see you get this property more around 310k. 

You also state that this is an "ok deal", why would you want that?  

If the figures you have for utilities were provided by the seller and not a shot in dark, then you're right, the utilities are killing this deal. 

I say move on and look for spectacular deals, not ones where you are barely getting by. 

Check some of @Ben Leybovich posts regarding cap-ex.

https://www.biggerpockets.com/renewsblog/2015/03/0...

5Reply
See this reply in the discussion

19 Replies

Jump to latestLatest
  • Nick B.
    Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes
    10y

    Are you sure you're calculating expenses right? P&I is not an expense and should go below NOI:

    Gross Potential Rent 
    - Economic Vacancy
    = Net rent
    + Other Income
    = Total Operating Income
    - Operating Expenses
    = Net Operating Income (NOI)
    - Non-Operating Expenses
    + Non-Operating Income
    - Debt Service (P&I)
    = Cash Flow

    4Reply
  • Logan Hassinger
    Specialist · Fort Worth, TX · Member since 2014 · 528 posts · 226 votes
    10y

    @Michael Morton

    First off I see that your debt service is much too low at 18k/annual. It appears that you have estimated this pmt of $1,500 on a 30 year term. That is very unlikely, 20 year notes are most common on commercial financing. Also the rate is going to be somewhere between 5-6%.  With 30% down and terms of 240 and 5.5%, you're looking at a pmt of $1,800/month. 

    Additionally, for the current rents, I would say this building is over priced by about 100k. Even with increased rents like you say of 920/unit/month, I would like to see you get this property more around 310k. 

    You also state that this is an "ok deal", why would you want that?  

    If the figures you have for utilities were provided by the seller and not a shot in dark, then you're right, the utilities are killing this deal. 

    I say move on and look for spectacular deals, not ones where you are barely getting by. 

    Check some of @Ben Leybovich posts regarding cap-ex.

    https://www.biggerpockets.com/renewsblog/2015/03/0...

    5Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    10y

    You'll be cutting it very, very close on this. The only reason to consider this is if you expect massive appreciation. Based strictly on CF there is nothing here :(

    $100/door of value add is not enough to save this either...

    1Reply
  • Kenneth LaVoie
    Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
    10y

    I used the following to analyze your property

    25% down / 20 years @ 5% (very likely scenario)

    10% repairs / 5% capex + factored in 10k unexpected repairs initially which I've included as part of acquisition costs. 

    8% management fee regardless of whether you manage it yourself or not. By deducting this, you can see what you're getting for putting your money into it (as compared to mutual fund, C D, etc.) without deducting it, you only see what your return is for both putting your money in AND putting your time in. 

    8% vacancy. Don't you DARE use 2% vacancy!!! I don't care if you have rent controlled building and the framers of the constitution have multi generational leases!! 8% can cover an eviction or two, etc. 

    using those numbers, I come up with similar results. 8.3% COC and 19.9% ROIC which includes debt paydown, 1% appreciation, and factors in tax benefit.

    I would certainly say you have some potential for lowering utilities. I suspect that there is some weatherization to do. Figure out what price this would command to bring your return to 12%, for example, and offer that. Spell it out nicely in a counter offer letter, explaining why.  Then get on the weatherization band wagon. Maybe you have some state funded programs in Mass like we do in Maine? I've received over 100K in rebates so far which have gone a long way toward letting me use that money to improve my holdings. But even without, do it anyway. Oil is cheap right now but may climb later. We brought a couple buildings down from 4,500 gallons to 2,500 gallons with some insulation and new boilers. We figure a 3-4 year payback. 

    4Reply
  • Michael Morton
    OP
    Harvard, MA · Member since 2015 · 25 posts · 8 votes
    10y

    Wow - thanks everyone!  Awesome feedback.

    @Nick B. - I think I'm calculating correctly since its straight from the BP tool.  However I may not have labeled everything quite right - like where the P&I is.  Still learning - thanks!

    @Logan Hassinger - This is my first commercial loan, so thanks for the feedback on the terms - I'll adjust my analysis.  Also for the link - awesome.

    @Ben Leybovich - my feeling too on the "cutting it too close".  So I look again, but maybe offer something that gives me a much larger margin-of-error.

    @Kenneth LaVoie - Thanks for really digging into the numbers and double-checking.  Sounds like you got similar results, which is encouraging to me (that I did the analysis fairly correctly).  Also love the feedback on vacancy - got it ;)  Yeah - the utilities look high so I'm sure there are things to do - would love to get that into the hands of tenants ultimately.

    Thanks for giving me a great sanity-check on this and confirming my suspicions.  This has been an awesome learning opportunity!  Time to get out there and keep doing more.

    0Reply
  • John D.
    Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    10y

    Given you are 60 minutes from Boston, the ballpark numbers look pretty good to me -- not the easiest area for rental returns.  If you would, re-do them making the corrections other BP members have mentioned and re-post them?  The profit (or lack thereof) is in the details.

    1Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    10y
    Originally posted by @Michael Morton:

    Wow - thanks everyone!  Awesome feedback.

    @Nick B. - I think I'm calculating correctly since its straight from the BP tool.  However I may not have labeled everything quite right - like where the P&I is.  Still learning - thanks!

    @Logan Hassinger - This is my first commercial loan, so thanks for the feedback on the terms - I'll adjust my analysis.  Also for the link - awesome.

    @Ben Leybovich - my feeling too on the "cutting it too close".  So I look again, but maybe offer something that gives me a much larger margin-of-error.

    @Kenneth LaVoie - Thanks for really digging into the numbers and double-checking.  Sounds like you got similar results, which is encouraging to me (that I did the analysis fairly correctly).  Also love the feedback on vacancy - got it ;)  Yeah - the utilities look high so I'm sure there are things to do - would love to get that into the hands of tenants ultimately.

    Thanks for giving me a great sanity-check on this and confirming my suspicions.  This has been an awesome learning opportunity!  Time to get out there and keep doing more.

     A - it's funny that you assume that because it's a BP tool, it is correct :) Build your own tool!

    Secondly - yes, there may be a price that makes sense, it's just not close to $375,000...

    1Reply
  • Ross WilliamsPro Member
    Investor · Boston MA, Big Sky MT · Member since 2014 · 92 posts · 67 votes
    10y

    Michael, I am a Boston area investor and returns superior to those you mentioned can still be had here. My concern is that at this late stage in the cycle (my opinion), smaller, peripheral markets like yours tend to be the first to decline. More importantly, your first deal is your most crucial deal of your career. A successful first deal will give the the confidence to do your next one and so on. This cannot be overstated. So make it a great, not good, one. I recommend you target minimum 10%+ cash-on-cash returns, 8+ cap rate and 1.3+ DCR to be safe. These metrics are getting harder and harder to achieve but they are out there if you dig. I would also recommend a property with below market rents as the simplest value-play to start, as in your example. @Kenneth LaVoie makes a great point using a very conservative 8% vacancy number; this leaves you room for evictions and turn-over which can kill a properties return metrics very quickly. As you get more experienced as a landlord you will be able to reduce this number towards ~5%, but I still model 8% even in my Section 8 properties which re-rent immediately. Best of luck!

    2Reply
  • Michael Morton
    OP
    Harvard, MA · Member since 2015 · 25 posts · 8 votes
    10y

    @John D. - I'll keep evaluating this property and come up with a target offer price and re-post soon.  Thanks for the encouragement.

    @Ben Leybovich - Ha!  Yeah - I should crunch the numbers myself.  I will do that.  Mostly to confirm and also to continue to learn by doing some math myself.  Good call.

    @Ross Williams - I really appreciate hearing about the local market, so thanks for that feedback.  I'll see if I can find a price to make an offer on this place that would fit better numbers.  Really nice to hear about what to shoot for in the Boston area, thanks.

    0Reply
  • John D.
    Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    10y

    if you can get rents up a bit, and cut utility costs (I'd encourage you to dig into these costs in detail, and get actual historical bills, those numbers are too round) I think this dog might hunt. Also while I always encourage people to be conservative on CAPEX and maintenance, it's possible you'll do better then those projections since I wouldn't expect much expense from the garages.

    If you can only do one deal in the next 12-18 months it might be worth waiting for something better. If you can do a few, this one wouldn't be a bad one to get your feet wet on imo, assuming the details shake out in your favor, as you do more research. 

    My first deal was far from my best, but it was better done then not, and definitely helped me jump in and learn for the 12 properties I bought in the 18 months after. 

    1Reply
  • JT Spangler
    Buy and Hold Investor · Nashville, TN · Member since 2013 · 264 posts · 102 votes
    10y

    I like the extra income from the garages and the long term tenants, but I hate the utility costs. I think you need to offer quite a bit lower than 375k if it's gonna be workable. You're talking about putting a lot of your own cash into this, and 120k will buy you a lot elsewhere in the country. 

    1Reply
  • Colleen F.Pro Member
    Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
    10y

    Not sure about the 30% down and 5-6 % ,  I would think you could get 25% /20 years adj at  5 yr intervals for a commercial loan.  Recommend you find a local lender and get an idea of what would be typical terms. 

    The thing about utilities included is a lot of times people don't add that as a value to their rent, they compare rent utilities or not, it is really only worth it if you can cut these down. It  looks like you are paying everyone's heat, electric and water, no separate meters. Any possibility to at least get them paying their own electric or water? (think how wasteful they probably are now).   Garage rent sounds high.  600/mo/unit?  and snow/lawn looks low at $1800 for both but it depends on the size of the plowing and lawn. Check area costs If you upgrade the units will you get more or are you topped out for the area?

    Expenses will be 60 % or better based on what you are paying for utilities.  How many square foot?  Is it insulated and does it have an efficient furnace.  Your oil cost is in the ballpark for what we pay for a RI similar property but we still have some energy improvements that would make it better. Low flow toilets can  half your water use over the older models.  Any room for improvement there?  Water at 1k/unit/year seems high too. How many occupants?   We are outside Worcester and paying like  400/year for a 4 person occupancy in our personal home.  Our  RI MF has run  30-60 gallons/person/day depending on leaks.  Not sure what the cost would be as it is a well.  Hope that gets you some things to think about.

    2Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y

    Never understood where the "50% Rule" came from and if it applied to a property of interest, I would be demanding owners Sch E for two years.   My experience has found that 30% expense ratio is the boundary for extra scrutiny.

    0Reply
  • Michael Morton
    OP
    Harvard, MA · Member since 2015 · 25 posts · 8 votes
    10y

    I really appreciate all the comments.  I've learned a ton during this exchange.  Thank you everyone. 

    Here's my latest review on this property, still running the numbers given the feedback above. 

    • Price: $300k (about $80k less than asking).  $5k initial repair, $3k closing.
    • Income: $5500 / month (5 units + 2 garages).  That is current rates, which are low by $100 / month / unit.
    • Utilities (yearly): Water ($5k), Gas ($800), Elec ($3k), Oil ($6k), Snow/Lawn ($1800), Garbage ($600)
    • Other Expenses (yearly): vacancy (6% / $4k), CapEx (5% / $3330), Insurance ($3k), Repairs (5% / $3330), Management (8% / $4k), Taxes ($5k)
    • P&I: $18k -- 25% down / 20 year loan / 5.5% (just using numbers, have not looked at local financing yet)

    Yields:

    • Income: $66k (potential rent) - $4k (vacancy) = $62k
    • NOI: $62k (Income) - $36k (expenses) = $26k
    • Cash Flow: $26k - $18.5 = $7.5k.
    • Cash on Cash ROI: $7.5k / $83k = 9%

    Thoughts: 

    • To me, this seems like a pretty conservative plan.  However since I'm new, and based on comments above, I'm reading this as "reality" and not conservative.  Great feedback from the community.
    • I feel at this price, it's a really good opportunity because the rents are low and the utility expenses are high.  Therefore, there's great potential for upside.  
      • Raising rents by $100 / unit and putting oil/elec on tenants yields ROI 23%.

    Thanks to everyone for their comments on this thread!

    0Reply
  • John D.
    Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    10y

    can you put the oil/electric on the tenants, and at what expense?

    0Reply
  • Richard Bradshaw
    Investor · St Petersburg, FL · Member since 2015 · 127 posts · 39 votes
    10y
    Originally posted by @Logan Hassinger:

    @Michael Morton

    First off I see that your debt service is much too low at 18k/annual. It appears that you have estimated this pmt of $1,500 on a 30 year term. That is very unlikely, 20 year notes are most common on commercial financing. Also the rate is going to be somewhere between 5-6%.  With 30% down and terms of 240 and 5.5%, you're looking at a pmt of $1,800/month. 

    Additionally, for the current rents, I would say this building is over priced by about 100k. Even with increased rents like you say of 920/unit/month, I would like to see you get this property more around 310k. 

    You also state that this is an "ok deal", why would you want that?  

    If the figures you have for utilities were provided by the seller and not a shot in dark, then you're right, the utilities are killing this deal. 

    I say move on and look for spectacular deals, not ones where you are barely getting by. 

    Check some of @Ben Leybovich posts regarding cap-ex.

    https://www.biggerpockets.com/renewsblog/2015/03/0...

    How did you come up with the $310k number for what you think a good selling price would be? 

    0Reply
  • Jack Chamberlain
    Investor · Edmond, OK · Member since 2015 · 19 posts · 7 votes
    10y

    As I've read all the posts and your responses, this is what I've heard:

    Bp posters- It's an ok deal.  Not a great area.  Rents are market or above. There is some room for improvement in the building with capex. Look for something better. 

    You: I really want this property and am talking myself into buying it because I'm so close to getting where I want to be.  

    I can't tell if it's a great deal or not, but this is what I'm hearing when I read.  I would say keep going over and over the worst case scenarios.  It seems like wether you buy or not, you are learning a ton.   Just try and control your excitement and don't talk yourself into the deal...lets the numbers do if.

    Real life advice.  As soon as you buy the place, 1 refrigerator, a microwave and some system will fail.  It looks like you are factoring that in.  The utilities in my area charge like $1000 in deposits...so remember that.  Also, in my commercial deals, I couldn't roll in taxes or ins into my closing costs, so that was also out of pocket.  Sometimes escrow uses rents and tax money to compensate for closing costs, but remember that you need this next month to make a payment.  I just closed a few 10 unit blds and my note is a 20 due in 10, 4.125% fixed for 5 and 1.25 over prime fixed for 5.  

    Finally, I'm about to try and rent some places at market prices and when we sign the lease, let them know that they just pay a water/trash fee of $20 or something like that.  It won't cover my bill but it will def help me - at a minimal charge to the tenants.  You might try it too.

    Good luck!

    2Reply
  • JT Spangler
    Buy and Hold Investor · Nashville, TN · Member since 2013 · 264 posts · 102 votes
    10y

    Even your revised numbers are too liberal, in my opinion. You have a total of 10% for CapEx and maintenance, and with as high as the utilities are you're probably looking at needing to do quite a bit of both in the next five years. 

    You can make money on this deal, but only if everything goes perfectly. I think when analyzing a property is not the time to be a wide eyed optimist. Consider this scenario: you buy this place, and in the first two months the boiler breaks and needs to be replaced and one of the inherited tenants moves out, leaving behind a unit that can't be rented without new paint and new flooring in at least half of the space (may as well do the whole space so it's consistent throughout, right?). Now you're on the hook for 15-20k and your gross rents are down by 25%. This is the sort of thing that can and will happen.

    1Reply
  • Michael Morton
    OP
    Harvard, MA · Member since 2015 · 25 posts · 8 votes
    10y

    @John D. - I would plan on doing that - and it'd cost quite a bit.  (but save a lot too).  Good return on investment for that, but obviously out-of-pocket at the start.  I don't know the numbers, but obviously would have to in order to proceed.

    @Jack Chamberlain - Great comment, thank you.  You have read it pretty well.  Although I also recognize my enthusiasm and will NOT let that overtake me.  Neither will my (reasonable) wife.  Thank you for the reminder.

    @JT Spangler - Great reminder of a reasonable future.  Having not been through it, having to rely on others experiences and definitely appreciate it.  Thanks.

    I'm going to call the agent (local) and let him know my interest is only at a MUCH lower price if the seller is interested.  I'm not pushing or pursuing, will see if it plays out over the coming weeks.  No big deal - lots of other properties to look at.  

    Thanks everyone.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free