Please help me analyze this deal!

11 Replies


I am currently looking to invest in my first multi family apartment. I found a fourplex in Union City, NJ. Each unit has 2 bedroom and 1 bathroom. I would love to get some feedback on the deal. I am going to finance this property with a 203K loan.

Price and Renovations: $420,000+$25,000=$445,000

Downpayment (3.5%) - $15,575

Mortgage with PMI: $2,266

Rent: $6,000 per month for all 4 units. However, I will be receiving $4,500 since I will be living in one of the units.

Taxes: $14,000/12=$1,166

Expenses with Vacancy, Repairs, CapEX, Property Management Included: $2,110

Cash on Cash Return: 19.92%

Cap Rate: 7.69%

Cash Flow: $424.60 per month

*These numbers are based on the $6,000 per month rent*

Could anyone please help me evaluate this deal and help me confirm if my numbers look correct? Any advice or guidance would be greatly appreciated. Thank you!

@Ryan Cheung , you should be good to go so long as 75% of the $4,500/m (income from the three units you aren't living in) completely covers your PITI. Isn't that how the 4-plex FHA rule is applied?

Also, why not base your numbers on NO income from your unit, until you can move out after your mandatory live-in time expires? (ie. FREE "rent"). If you can, hey, also try to get it for less! Cheers...

Hey @Ryan Cheung sounds very exciting! Here are some of my off-the-cuff thoughts (I own a number of multifamilies in Union City):

It looks like you're assuming $1500 for a 1 BR. I'm not sure where this is exactly in Union City, but that might be a little optimistic. If you're near 30th St, or in the 40s, or closer to Park or Palisade, you might be able to get that, but if you're somewhere else, I'd budget more like $1200-$1300/mo. to be very conservative. If you make the units up nice (which maybe you can do for $25k depending on the current condition of the property), maybe you can get more. I think it's fair when evaluating a deal to consider the worst case plausible scenario: so I think you'll be able to rent the units, but I would say, in a worst case scenario, you're getting $1300/mo.

I also usually budget at a month's vacancy in all units as a vacancy expense. Even in high demand you might lose a month's rent just because people are moving in and out, presuming you'll have new tenants every year (again, worst case though plausible scenario). So at $1300/mo/unit, that's $5200 in vacancy expenses. Repairs and maintenance etc. I budget for maybe $2000/year... again, that's a worst case scenario, but, particularly with these older homes, things will come up (not sure how much of everything you are replacing with the $25k, but, every single one of my properties has required some type of expense that I would consider non-trivial ever year: boiler breaks, central air conditioning breaks, roof leaks, bathroom and plumbing issues, electrical issues, etc.). 

You might also consider the cost of utilities. Not sure if everything is separate but I would be (pleasantly) surprised if each unit had their own furnace/boiler. If anything is shared, such as the boiler, you'll have to budget for heating costs for the whole house, plus, perhaps, other shared utilities (water, sewerage, etc.). Depending on what is shared and not shared, that might be $500-$2000/year. 

You'll also have insurance which will be an added cost, maybe $1500-$2000/year, oftentimes this is paid monthly with your mortgage payment.

Not sure what that all boils down to but, just back of the envelope, $445k for a 4 family in Union City is an OK deal... kind of depends exactly where it is and what investing $25k in improvements will get you. If it's mostly cosmetic stuff, that sounds good to me (although $25k is a lot to spend in cosmetic improvements). If you're going to gut renovate the units, replace the roof, etc. then $25k is probably not going to be enough (and the deal doesn't sound as good).

One thing to keep in mind about 4+ families in Union City is rent control. Because you'll be owner occupying the unit, your house will be exempt from rent control (rent control applies for 4+ families, unless you are owner occupying a unit, in which case, 4 and 5 family buildings are exempt). I mention it only because, unless it is vacant, there are likely below-market paying tenants in there currently. You can legally get them out and/or raise their rent, however the process of doing this may be somewhat difficult, given that the city will try to convince you to allow the tenants to stay until the end of their lease (or whatever). Moreover, once you move out of the unit, the amount money you can increase rent per year will be capped. This is less of an issue if/when you sent the rent to market rents, but the whole process of doing this is not trivial due to the insanity of the Union City building department and other agencies involved. Less of a long-term financial concern but more of just a general thing to consider.

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@John Errico thanks for your incredibly detailed response! Each unit is actually 2 bedrooms and the tenants are currently being charged $1200 per month for rent. Do you think raising it up to $1500 is reasonable? The units are pretty small, probably around 600 square feet per unit.

I have included 8% vacancy, 5% repairs, 10% cap ex and 10% property management in my analysis, which I think may be too much, but better to over estimate than to under estimate! The units have actually been recently updated, and most of the work will be cosmetic. I am unsure as to how much I will need to actually renovate them, but I am also considering adding coin operated laundry machines in the basement for additional income.

I am a bit concerned about the rent control. From my understanding, if I am living there, I can raise rents, but what will happen when I leave? Will I be able to maintain the rent at. $1500 or will I need to reduce them?

@Ryan Cheung , if your Lender calculates 75% off say $1200/m (x3) rather than $1500/m, it'll be harder for you to prove that your PITI (yes, includes Tax and Insurance) will be fully covered!

Even at $1500/m x3, will 75% of that really give you the self-sustaining result that FHA requires?

Maybe that's why it hasn't ALREADY been snatched up!?...

Hi @Ryan Cheung , I'm an investor from West New York. I recently used an FHA loan for a 3-family in the area.

1. My lender used the appraised rents for vacant units and actual rents for the 1 occupied unit in their 75% calculation, so you should be fine on that front. 

2. Rents - For 2 bedroom, 1 bath apartments (or any unit for that matter) the rent really depends on the location and condition of the unit, which we don't know. However, unless you're in a really nice area of Union City, I'd say $1500/month is at the highest range of what you might expect to get, today. And you never want to analyze a deal with the best case scenario. To be conservative, I would use $1300/month as your figure. Anything more is pushing it IMO. 

3. Rent stabilization question - I don't see why you wouldn't be able to keep rents the same when you leave.

4. Homeowner's insurance - Did you factor this into your expenses?

5. From an initial pass, this looks like a decent deal. Best of luck!

Hey @Ryan Cheung --yea I think $1500 is a little bit optimistic for units that size in Union City. I think $1300ish is what I would expect or budget for as @Dan Rivera suggested. 

To second @Brent Coombs ' point, I have definitely heard of/encountered lenders who will give you a hard time with determining rents. FHA for 3+ units requires a "self-suffiency" where you need to prove that the rental income you receive is sufficient to cover the monthly expenses for a property. Having not done this myself I am not sure of the exact requirements, but I know people who have gotten into trouble even with good deals and reasonable rents. I've known of appraisers that will nonsensically determine that the market rent for an apartment is 20-40% below what I would consider the market rent, so that is obviously very problematic. A lot depends on your appraiser/lender.

I wouldn't necessarily worry about rent control issues, only to the extent that the city may attempt to convince you to keep your pre-existing tenants for longer than you'd like when you move in (your old tenants may call the mayor and/or city when they figure out you are raising the rent, and the mayor/city is very proactive about trying to help tenants in need, etc.). Once your leave the unit, your rents should be reset to whatever you set them at when you were living there... however, knowing Union City, I would suggest that you be as proactive and on top of whatever issues may happen as much as you possibly can be. I've had (and many other investors have had) many, many, many horrible experience dealing with the UC building department and related departments.

One quick thought: I'm not a huge fan of coin operated "common" laundry in lower income areas like UC. I find that tenants will invite their friends over to use your laundry machines which inevitably leads to them breaking, etc. because you'll have the whole neighborhood using your laundry machines (plus random people you don't know hanging out in your basement). I suppose since you're physically living there you can monitor this a little bit, but the cost/time/effort it will take to repair your broken laundry machines and worry about strangers being invited into your building to wash their clothes versus the amount of money you'll make on it is, in my opinion, not worth it. Your mileage may vary though, of course.

@John Errico thanks for the reply. I agree with you and @Dan Rivera that I should be conservative and use $1,300 as my rental income per unit. 

However, when I lower my rental income from $1,500 per unit to $1,300, my cash flow significantly drops to only about $120 per month. This is with my PITI, Vacancy (8%), Repairs (5%), CapEx (5%), and Property Mangement (10%) expenses already factored in. However, if I decide not to use a 203k loan and get a FHA, my cash flow increases to about $300 per month. 

The property is already in pretty good shape, and was recently renovated. It is already in a liveable condition. Would you recommend that I forgo the 203k loan in order to increase my cashflow, or use the loan to improve the property and potentially increase rents in the future, while dropping my current cash flow? I would be willing to learn and do some of the renovations myself in order to save costs. 

Also, keep in mind that raising rents may be an issue, so even if I do renovate, I might still have an issue with that.

There is also a basement in the building, which I have not yet seen. If it is large enough, would you recommend that I create another unit? Has anyone had experience with doing this in Union City? What is the process like?

@James LaPosta I did in fact get personally pre approved from a lender, and that gave me a budget for how much home I could purchase. I then used that budget to look for multifamily homes within my price range. I was able to find the lender by asking my agent for a referral. I am continuing to look in the area as well. Raising rents may be an issue from what I have been hearing, so please keep that in mind. Good luck!

Hey @Ryan Cheung

One thing to consider? Does this 4 plex already have a full fire suppression (sprinkler) and interconnected fire alarm systems? If not you will need to install one when adding the 5th unit. In NJ NFPA 13R will apply for all multi family housing units that are 3 and above. Since your unit is already a 4 flex - and if it doesn't have a fire suppression (sprinkler), you are not required to. Im assuming this is a typical wood framed structure.

I just designed one for a property in the middle of Newton NJ and am currently debating on purchasing a commercial space which will require a full FP system if I turn it into residential rentals

As for general pricing assumptions; $20,000 to $25,000 for the incoming secondary fire service (can't use the domestic - must be separate feed line), back flow preventer, wet tap, pavement and back fill, FP riser, alarms, ect. Include an additional $4 to $10 a square foot for distribution lines and heads.

The DOH (NJ Department of Housing) will verify all of this before issuing you a 'green card' to be able receive your Certificate of Occupancy (CoO) to rent the spaces when your construction is complete. They work hand in hand in most cases.

I would speak to the town zoning / planning and construction code officials to ensure you are not going to be required to upgrade or install any new system. Typically at this stage the construction official / AHJ (Authority having Jurisdiction) will review your plans to make sure you fare in compliance with the State of NJ building renovation code called the UCC (Uniform Construction Code). Common upgrades are additional exit lights and signs, second egress from all floors above the 2nd floor, path of travel to exits, ect. All RE investors should do this before purchasing a multi family unit.

Good luck and let us know how it goes / when you pull the trigger.


Hey @Ryan Cheung : not sure if you're still working on this deal, but it may be the case that 203k is the only way to go if you can't get "normal" FHA financing due to whatever reason (rents too low, or even cosmetic issues can tank FHA deals). Again, a lot depends on the appraiser and lender as to what is going on. If you do need to loan money to do more cosmetic-like repairs, just conceptually loaning money at ~4% or whatever your interest rate is sounds like a good idea to me, however, I know there are added complexities with 203k loans. I've never been down that road myself. In addition, this is definitely not a buyer's market, so you may need to overpay to have the "luxury" of doing an FHA loan or 203k loan, as sellers and their agents are wary that you won't be able to close, and likely to go with people that have a higher downpayment, etc.

It's going to be quite difficult and challenging to convert the basement into another apartment as @Paul Ashworth has suggested. Notwithstanding whatever requirements the state may impose, the Union City building department is an absolute nightmare to work with, and will impose a range of sometimes insane sounding requirements (that are arguably not legal or in contravention of what you would assume is the law). I'm currently dealing with a 2 to 3 family conversion here, and it's been n nightmare (and this is not for a basement apartment). Several years back, Union City had a leniency program where basement apartments could more easily be converted into legal units, however, this it no longer the case. Although many, many homes here do illegally rent out their basements, I wouldn't recommend this for all sorts of legal and liability reasons. 

In my opinion, the time/effort/money that you'll spend converting the basement into a legal unit, if Union City will even allow it, is probably not going to be worth it, and renting it out illegally is probably a bad idea.