I'm in the middle of a negotiation of my first deal. It's a 1963 multifamily 4plex brick building. Total of approx 3500 sf. This is a low income neighborhood, I'm not sure if some of the tenants are section 8, I'll know that only if we go into escrow. The seller said repairs and maintenance are $1500 a year, which sounds a bit low. I budgeted $4000 (a year). The difference in this cost I did, pretty much make the deal a lot tighter for me based on the price he wants - leaving me on a 8.45% cash on cash (25% down).
My question is did I overbudget this or is that a decent cost for repairs in such a building?
Based on year built, class of tenant and size of building you should assume all expenses (not just repairs) will easily be 50% of your total rental income. This is assuming no major deferred maintenance.
If his repairs/maintenance is only $1500 I would be very concerned.
Ask to see a couple years of his tax returns to support his claim.
Thanks for the feedback. The $1500 does not include insurance, taxes, water. I'm referring only to the repairs and maintenance of other things. In the real estate deal calculator it is described as the "Repairs and maintenance" field.
We cannot provide a reliable response since you have not provided any data to go by. What are your numbers? Purchase price, rents rates, and current condition of property (any Rehab or updating required?). It is common to use 5% - 10% of NOI for maintenance/repairs (depending on age and condition of property). This is an older property, low income area, possible section 8 tenants, could mean more repairs needed and higher turnover rates. I would go with a higher percentage more than likely (8% - 10%). It all depends on what the projected NOI is whether $1,500 or $4,000 is the most reasonable amount.
NOI is about $15,400. No rehab required. But I'm kind of having difficulty understanding why the repair costs would have anything to do with how much money the place is generating? if someone breaks something for example, the cost to repair it would be the same regardless if the NOI is 100K or 5K?
Correct me if i'm not looking at this in the right way.
Yes the cost of a repair will cost the same no matter what the NOI is. But, the real question is "How often will you need to repair/replace something?". This is an older property (1963). Things wear out more frequently than newer properties. You say no Rehab required. Have you walked the property with a general contractor or has it been professionally inspected? Or are you going by Sellers word?
You also said it is in a low income area and possibly section 8 tenants (hopefully not a war zone). You will probably have higher turnover rate than you think. Believe me you will have repairs, damage, cleaning needed after each tenant moves out.
Bottom line is from a conservative investor point of view you want to plan for the worst and hope for the best. Plan on the repair expenses we are suggesting. If you never had to use that amount by the end of the year,then, great. That's more cash in your pockets. However, if you do have that amount of maintenance/repairs required then you are prepared to accommodate them with little effect on your Cash Flow projection.
I like your feedback and I'm going to act on it exactly like you said. I put in 10% for repairs and an extra 5% for capex.
My question was more of trying to understand if I'm being too conservitave and killing a deal that is actually a good one, due to my lack of knowledge. Seems like my numbers are where they need to be.
Thanks for the help!
1500/year in for a 4plex built in 1963 sounds like it should be compared to a unicorn.
I would budget overall expenses to be about 50% of gross rent. That doesn't include the note. From what it sounds like this property might not cash flow.
I don't know all the details but doesn't sound like a great deal.
When the furnace dies after 20 years or the roof is past its useful life you cant make the tenants pay for it because they didn't break it. These are owners responsibilities for example. These are big ticket times and you want to have money put away to replace them. You might want to take a look at this website to give you an idea how long items last.
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