4-Plex in Compton, CA

16 Replies

Hello - currently me and a partner are having discussions over a property that is for sale in the area of Compton, CA.

I will provide the numbers about as accurate as I have them. 

The units are on a main street, sits on about .5 an acre.

Asking price is 575,000 

4 units

Unit A: 3 bedroom/1bath -- Rent is 1400 per month

Unit B: 2 bedroom/1bath -- Rent is 1150 per month

Unit C: 1 bedroom/1bath -- Rent is 840 per month

Unit D: Studio w/kitchen & Bath -- Rent is 675 per month

all units have their own gas/electric meter.

Additional costs:

Insurance per year ~ 1200 per year

Trash per year ~ 4300 per year

Water ~ 4300 per year

Taxes ~ 7000 per year 

Gross income: 4065 per month

insurance + trash + water+ taxes ~ 1400 per month

gross income - (insurance + trash + water + taxes) ~ 2665$ left over per month

Assuming we do 20% down (115,000$) - principal and interest come out to be ~ 2300 per month.

So assuming no repairs, no vacancy 2665 - 2300 = 365 left over. ( Yes, assuming no vacancy, no repairs is outright stupid).  

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Now, doing conventional 20% down is absurd. 

FHA 3.5% down -- number looks as follows. If we were to get it, we would likely get the 2 bedroom 1 bathroom spot delivered vacant ( Lets assume for arguments sake that the place passed FHA inspection)

Principal + Interest + PMI ~ 3100 per month

Since we would occupy the 2bedroom/1 bathroom spot...

Gross income would be ~2915

Gross income - (Principal + Interest + PMI) = -185$ Since we are each living in one bedroom this cost would be split 50/50. No problem there. 

Now, we also have to cover insurance + trash + water + taxes -- which from before is about 1400 per month.  Now we have to cover ~1600 per month. Same as before, this would be split between both of us, 800 each. 

( Yes, I know, this also assumes all tenants never vacate, always pay -- and this situation does not occur.)

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Intangibles: 

Just some things to note, both the property on the left and right ( east and west) are same/similar sized lots that are apartment complexes. In the future, this property could be torn down and eventually build a 10 unit complex in its place. (Just an observation)

Very close to public transportation light rail line. 

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My partner and myself have completely different views on this property. One of us believes this is a deal. The other believes that this is a pass. 

I am curious to see what fellow BP people think about this. I would like to give my impression of the property and I will give my partners impression of the property - but I do not want either of our views to influence your thoughts. (EDIT) We have walked the property, but did not see the inside of the units.Will gladly provide his and my opinion on it once this post gets some traction.Will gladly provide his and my opinion on it once this post gets some traction. 

Thank you very much! 

( and if you are in the south bay, LA area -- Private message me, we would love to pick your brain/have a coffee/drink) 

I would pass on this one, rent ratio and purchase price are not sufficient enough. At $575,000 PP, this property should produce at least $5,750 a month rent, you will be negative cashflow every month no matter which route you take.

@Samantha Klein 1 percent rule property are unicorns in greater los angeles area. The mentioned property has been listed for 190 days. So offering full price would not happen. We have a number in mind for what we think this property could go for, but curious to hear some more thoughts. 

Thanks for the reply!

@Max Valdes Are the rents at market or is there room with some improvement to raise them? If you can raise rents significantly and get the seller down alot, I'd do more due diligence and proceed.

If it was me I would rework the numbers and make the tenants pay for water and trash and bill them separately by square footage since you on't have a separate water meter.  With trash there is a number of ways to spread out the costs - sometimes its as simple as charging by the barrel size each unit is assigned, other times square footage - that will reduce expenses to you.  Of course you need to follow whatever protocol you will use after acquisition to get the tenants on the new utility requirement.  Good luck.

@Samantha Klein Rents are within range of market price. Since we have not seen the inside of the property, I could not speak to the condition of them. 

@Paul Krause Interesting approach. My partner nor myself had considered that.  

Be it as it is, the price is much to high. IF an offer were to be made, it would be a very low ball offer as the seller has had it on the market since 04/20/2016. Also just an interesting note, the seller tried to sell the property in late 2009 for 500,000. That is completely absurd, especially considering how property in this part of town tanked. 

@Max Valdes Maybe you can find out more about what the seller really wants.  Maybe they just want another investment property and if that's the case an exchange would be more suitable than a cash offer.  

I own two 4plex complexes in south central 90044 zip, non rent control area.  Your estimates seem off for expenses....trash should not be that high and I get it on my tax bill.  I purchased 1 bed 1 baths that all rent for 1,050 granted its very clean and maintained for the comparable surroundings. 

Another thing that's off is I don't think you can get fha on non owner occupied.  Another thing ....I've rarely come across properties in the area that don't need at least 80 to 120k of work.  Given all this id offer 450k or 475k.  500k Max only if you raise rents about 10%

@Alex J. Thanks for the input. The numbers used for FHA assumed we would be living in it. Hence the higher out of pocket cost, lower income so forth.

Based on current condition from an exterior walk-through, it does look like the property would need some updating/renovating/repairs. 

IMO Pass! Too many things have to go just right in order for it to work. Make your $ going into the deal & have some exit strategies. I would recommend either a lowball offer or just wait until the impending market correction is over.

TJ

@Tim Jones Thanks for the input. I agree. Making a crazy lowball offer is the only sound route. But, the seller tried to sell this same property in late 2009 for $499,000 - thus I highly doubt that he would accept anything that low. 

You also mention 'impending market correction is over', I am curious as to why you think there is a market correction coming/in progress. 

@Shawn Ackerman I am of the opinion that this is a major pass. Too many warning signs. 

@Bigger Pockets Community - i'm really looking for someone who thinks this a good deal. What my business partner has mentioned hasn't swayed me from passing on this. 

@Max Valdes

Just my gut feeling when looking at property values and input from some RE professionals. Every time a property comes up in my market I look at the sales history. Most if not all are at 2004 or higher values...you know, the run up to stupidity. It's a seller's market and I see a lot of investors getting out. There's still a fair amount of foreclosures happening. Market cycle is overdue. Also, I'm not confident that the US has really paid the full price of the Great Recession. Quantitative Easing is masking some of our true problems...

Just an opinion...nothing more.

TJ

looks like votes are pretty unanimous with the given numbers, there are very few scenarios that this could go well. ask low and raise rents is always the first choice. an official walk through might help out with the numbers, checking things like plumbing electrical and foundation could help sway this deal in either direction, and yes if possible see if there is anything else that the seller might be interested in or why he is selling.

Double check the property is not rent controlled. We got out of rent control condo, the rules are completely against property owners. 

Would never buy rent control area again.

JC

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