Anyone willing to "grade" my work? Willing to take criticism :)

Real Estate Deal Analysis & Advice
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Anyone willing to "grade" my work? Willing to take criticism :)

Dustin Beam
Kansas City, MO · Member since 2015 · 609 posts · 321 votes

Hey everybody,

I'm looking at a "deal" that could be my first, so there's a lot of caution on my end. I would assume most of you know the feeling. I'm a believer in the old saying "the devil is in the details" so I'm trying to analyze this property thoroughly and correctly. So, I'll try to be brief and will truly appreciate any feedback you're willing to give. 

Background: Two 4plex buildings.

Cost: Shooting for $250k

Rent: $500/unit/mo, $4000 total

Mortgage only: $890/mo

2% rule (of thumb): Fail

50% rule (of thumb): Pass for me

Detailed Analysis

Expenses:

Vacancy (10%):                          $400/mo

Taxes (verified):                          $216/mo

Insurance (est.):                          $175/mo

Mortgage:                                   $890/mo

Future management (10% est):  $400/mo

Cap X***:                                     $190/mo

Miscellaneous:                            $ X

Total:                                           $ 2271 + X

*** - I used this site for average life of components and Home depot for prices. Included components for CapX were water heaters, roof, furnaces, refrigerators, range/ovens, and window unit ACs.

OK, So if those estimates are accurate, the miscellaneous amount could total as much as $925/mo and I'd still make $800 month in cash flow. Although those rent numbers may indicate this in a shady area, it really isn't, yet those numbers resemble "bad area numbers" from the times I've analyzed them. So what do you think, am I missing anything critical?

Thanks,

Dustin

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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y

2 - 4 plex buildings

Look at crime for the area on a site like crimemapping etc. Look for violent vs non-violent crimes for severity and frequency. If the whole area is infested then it will not matter what you do for fixing up your buildings. Additionally how many quads are on this street?

Research WHO the owners are and what they owe on the properties. Some will be slum lords and devalue your property and make it harder to rent and have rent growth in the future. So when you do not own a larger self enclosed complex where you control the whole development this becomes more critical what type of other owners are around you.

Make sure your 500 rent estimate is a real number that is middle market. You do not want rents too low that there is a long waiting list. You do not want too high as when a new product hits the market you will have excess turnover and vacancy. Middle market rent your place stays mostly full and even with annual rent increases you are still one of the better deals in town. As long as the property is taken care of tenants will like to stay.

Does landlord pay water or heat?

If so take 60% off of gross expected rents. If not take off 50%.

Verify the 500  a month isn't giving free rent credit which would take the effective rent down. 

Confirm insurance on older buildings as that can get really high if you have original plumbing and electrical etc. that has not been updated. Additionally check water to see if it has gone up much the past few years  or not. During the last downturn most cities and counties waived increases just to keep everything going.

Now that economies are healthier in a lot of places these governments are pushing utility increases on what they charge plus also increasing and re-assessing property taxes.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    2 - 4 plex buildings

    Look at crime for the area on a site like crimemapping etc. Look for violent vs non-violent crimes for severity and frequency. If the whole area is infested then it will not matter what you do for fixing up your buildings. Additionally how many quads are on this street?

    Research WHO the owners are and what they owe on the properties. Some will be slum lords and devalue your property and make it harder to rent and have rent growth in the future. So when you do not own a larger self enclosed complex where you control the whole development this becomes more critical what type of other owners are around you.

    Make sure your 500 rent estimate is a real number that is middle market. You do not want rents too low that there is a long waiting list. You do not want too high as when a new product hits the market you will have excess turnover and vacancy. Middle market rent your place stays mostly full and even with annual rent increases you are still one of the better deals in town. As long as the property is taken care of tenants will like to stay.

    Does landlord pay water or heat?

    If so take 60% off of gross expected rents. If not take off 50%.

    Verify the 500  a month isn't giving free rent credit which would take the effective rent down. 

    Confirm insurance on older buildings as that can get really high if you have original plumbing and electrical etc. that has not been updated. Additionally check water to see if it has gone up much the past few years  or not. During the last downturn most cities and counties waived increases just to keep everything going.

    Now that economies are healthier in a lot of places these governments are pushing utility increases on what they charge plus also increasing and re-assessing property taxes.

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    2Reply
  • Dustin Beam
    OP
    Kansas City, MO · Member since 2015 · 609 posts · 321 votes
    10y

    Thanks for the input @Joel Owens. You make valid points. See below for more info in relation to your post:

    The area is low crime. In fact, it's a few blocks from a police station.

    I'm still collecting information, but I believe the owner pays water and trash only. I do expect it will need some improvements on the units. How much? Not sure, but I'll see soon as I have a scheduled appointment to see the property. 

    I didn't want to bog down my first post more than it was, but you're right to point out surrounding properties. It is probably my primary concern (outside of simply missing unaccounted expenses). This property is probably surrounded by approximately 30-35 other similar buildings. The good part is that they mostly rent for $550 (verified) and appear to be under good management.

    0Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y

    Verify separately metered utilities to offload that expense.

    What's the occupancy NOW and will you 'inherit them'?

    Absolutely use the Commercial Purchase Agreement form to protect you with the correct contingencies.

    1Reply
  • Dustin Beam
    OP
    Kansas City, MO · Member since 2015 · 609 posts · 321 votes
    10y
    Originally posted by @Jeff B.:

    Verify separately metered utilities to offload that expense.

    What's the occupancy NOW and will you 'inherit them'?

    Absolutely use the Commercial Purchase Agreement form to protect you with the correct contingencies.

    Verifying how they are metered is absolutely on my to-do list. 

    I'm not exactly sure how many tenants are there, but it's not empty as I know that for an initial visit, I will only be able to view a couple units because of the occupants. Should this progress to the point of me making an offer, it will be contingent on viewing all units.

    I will look up the purchase agreement. Thanks!

    0Reply
  • Dustin Beam
    OP
    Kansas City, MO · Member since 2015 · 609 posts · 321 votes
    10y

    Well, I let my agent  know to put in an offer. *fingers crossed* 

    Still willing to take any advice being offered. I added in a few more figures like water and trash. I dunno why, but I thought it was 2 x 4plexes but it was an 8 plex. I just glanced at the outside pic and paid attention to the interior. I know that changes financing a little, but the banker said it's still all ok.

    0Reply
  • Darwin Crawford
    Rental Property Investor · Scottsdale, AZ · Member since 2016 · 296 posts · 243 votes
    10y

    @Dustin Beam - camera inspect all sewer lines.  this can be a deal-breaker, and having done a full re-pipe, I can tell you its a poo-filled, expensive experience.  The camera job shouldn't be more than $200.  

    Also - look at current leases, and current tenants to give yourself an idea of WHO you're buying, not just WHAT.  

    Keep in mind that when things go wrong in a multi-plex, it can affect more than 1 unit.  Not uncommon for a burst pipe to take out 2-3 kitchens, depending on layout.  

    Check for termite bond if wood frame is present.

    get a good tech to come out and check HVAC systems, age of wiring, and electrical panels.  Those all add up pretty darn quick.  

    1Reply
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