Los Angeles, CA · Member since 2016 · 3 posts · 1 vote
Long time listener of BiggerPockets - finally decided to take the plunge and ask for feedback & analysis on the transaction below. Numbers are pro-forma done by me. Property is a 4 unit 2 bed/1 bathapartment complex in northern california. I want to preface this analysis by saying the entire building is vacant. Which is why i'm hesitant.
This is a flip from an investment firm which rebuild the complex. It's on a street lined with about 16 other similar shaped apartment complexes and it is by far the best looking/cleanest.
Area - working class, across the street from a park, walking distance to a mall, across the street from an elementary school
Asking price: $389K
My area analysis concludes that I can charge $1000-$1150. Numbers below are $1000USD
Free Cash Flow Before Tax Monthly - $1390 Free Cash Flow Before Tax Annual - $16690
ROI:
Cash on Cash Return - 122.51% Cap Rate - 9.73% GCM - 7.82
I feel like these numbers are a little nebulous because the unit sits unoccupied as a result of the rehab. Just curious to get other people's opinion on this? P.S. I've reviewed over 50 properties in this area and I can't find a single one that hits the 2% rule on gross income, this one barely clears 1% - any thoughts?
Realtor · Sequim WA & Port Angeles, WA · Member since 2016 · 164 posts · 78 votes
9y
i would check out the town and area? Northern Ca covers a larger area. Also why would you buy a multifamily surrounded by other multifamilies ? Buy a multifamily surrounded by homes, they will be much easier to rent out !
Entire building vacant? I would look into why.... Vacancy kills your cash flow and you have to take in to account you have to fill all 4 units... the time it takes to market, screen, and find tenants to fill the vacancy's-
I would go on the low end for your projected rents. Check CL within a mile of the property to ensure you can get the 1000 or 1050 per unit.
Do any of the units need work or are they rentable?
How are you financing the property?
Repair/Cap ex-15% this may be ok.. depends on the condition of the home Vacancy- I would suggest at least 8%.. Pm - I would suggest around 10% of gross rents which is much lager then the 150$ Insurance- did you call to get a quote for this? Water sewer- Do you pay or do the tenants?
Also, the 2% rule is just a rule of thumb, not every market can hit 2% let alone 1%, I would not stress on that
Also, would you offer ask? How long has this been on the market?
Investor · Reno, NV · Member since 2013 · 39 posts · 41 votes
9y
One of the podcasts I recently listened to (#111) t/a developing a Craiglist ad to advertise the property prior to buying it. If he got 20-30 calls quickly he knew rental area was strong. I may be getting the details exactly wrong but I would do some assessment of the rental market and that is a free way to do it.
Investor · Irvine, CA · Member since 2016 · 81 posts · 27 votes
9y
@John Cook The expenses should be proportion to rents. It is a mistake that you used 4x the unit rent for total gross income but used 1x unit rent as the basis for total expenses. Assuming $1K for unit rent, my calculated NOI is only $612. In addition, you need to pad vacancy and utility, which would further eat into your profit.
Realtor · Sequim WA & Port Angeles, WA · Member since 2016 · 164 posts · 78 votes
9y
i would check out the town and area? Northern Ca covers a larger area. Also why would you buy a multifamily surrounded by other multifamilies ? Buy a multifamily surrounded by homes, they will be much easier to rent out !
Investor · Napa, CA · Member since 2016 · 82 posts · 42 votes
9y
Based on your post I am getting so many red flags. I would doublecheck your numbers, market numbers, get pest control, general contractor and anyone else to take a full look at the home. Also make sure you have extra reserves because that small profit turns into a large negative is with a few months of 50% or 75% vacancies.
Where in CA is this?
Los Angeles, CA · Member since 2016 · 3 posts · 1 vote
9y
Thank you everyone for taking the time to reply to this - i've revised my cash flow estimate to better reflect additional expenses (utilities), a 10% vacancy rate, and property management fee of $295 monthly. This yields FCFBT of $485 monthly, much lower than my original estimate. This now seems like an expensive investment to generate just $400-500 of free cash flow.
Please see below
@Wei Xie if I estimate gross rent to be $4000/monthly (4 units, @$1000USD) and allocate 15% for operating expense related repairs, this results at a reserve of $600 monthly. What is your thought on % allocation for apartment complexes?
@Steve Bracero The building was bought buy an investor for ~$210KUSD July 2016, It was not in an habitable condition. His firm rehabbed it and it is now on the market for $389K. Thank you for your feedback regarding water. In Sacramento, landlord pays water - i have revised that in my estimate.
@Ravi Rada - thank you Ravi, i've revised the cash flow statement to include vacancy loss and utilities
@Catherine German - It is in Sacramento CA. Can you please elaborate more on apartment complexes w/in housing communities vs. apartment communities. Does the data actually suggest an identical apartment in a housing community will yield higher rental income?
@Jackson Carr - it is in Sacramento CA. Thank you, after revising the cash flow statement - FCFBT is lower. I've included it below for your review
Parameters:
Federal Tax Rate
33%
Vacancy Loss Rate
10%
Repair Witholding
15%
Down Payment
$ 13,615.00
Asking Price
$ 389,000.00
Amount Financed
$ 375,385.00
Monthly Bank Note
$ 1,763.00
Annual Property Tax
$ 3,696.00
Home Owners Insurance
$ 1,164.00
Annual Property Management Fee
$ 3,540.00
Estimated Interest Expense
$ 14,400.00
Monthly Water/Sewer/Garbage
$ 100.00
Asking Rent
$ 1,000.00
Output:
Occupancy
Rental Income
$4,000.00
Gross Rent - Annual
$48,000.00
Expenses
Total Vacancy Loss - Monthly
$ 400.00
Repair Holdings - Monthly
$600.00
Management Fee - Monthly
$295.00
Property Insurance - Monthly
$ 97.00
Utilities - Monthly
$360.00
Total Monthly Operating Expense (Sum of Expenses)
$1,352.00
Total Annual Operating Expense
$16,224.00
Net Operating Income - Monthly (Gross Rent - Sum of Expenses - Vacancy
Real Estate Agent · Phoenix, AZ · Member since 2016 · 738 posts · 1k+ votes
9y
@John Cook -- is the property on the MLS? I can't find any fourplexes listed that match the criteria described... is a listing agent involved? Or are they trying to sell this without any agents being involved in the process? I couldn't find this on loopnet either, or craigslist.
Like @Avi Garg mentioned, have you talked with your lender about what your finance terms will be? 3.5% is generally reserved for FHA, 5% is typically minimum for conventional, and once you start getting into investment and non-owner-occupied properties you're looking at 20-25% easily. Bad news is that's a lot more down, but the good news is it will increase your cash flow. I would confirm with your lender what type of terms you will need to get the loan.
The first question you have to ask yourself is "Do I want the deal?" Like does it 'make you feel good in your tummy when you sleep at night' kind of want it? Does this property feel right with you on a gut level? Once you know the answer to that question, then you can start to approach the valuation of the property and make the deal happen. If your first reaction to that question is "Oh, well I don't know" or "Hmmm, maybe" then you've got a problem.
2-4 unit properties are usually appraised using a combined approach, as in "what did other similar properties in the area sell for, regardless of rents?" and "what was the GRM and income of properties sold nearby?" It's not as simple as Single Family Homes on one end and Commercial properties on the other. I would take a look at what the multifamily properties that sold for in the area had in regards to income and values. You can bet this guy is most likely asking above what the property is currently worth, so make sure you understand the comps and local multifamily market before signing on the deal. I'd be glad to help you since I can easily access this information through the MLS.
The vacancy gives me pause... because what if you purchase this thing, and then realize there's some issue that prevents you from being able to rent it until fixed? That could be a nightmare! The property would also be a lot more marketable if tenants were already in it, since that wouldn't be a question. @Sonny Ruckstuhl gave a great tip, and try to see if you can get this thing rented before buying it. Hell, what's to stop you from going door-to-door on the other nearby units and asking the tenants what they're currently paying? Then you'll pretty much know for sure what you can get. You might even be able to steal a tenant or two!
As far as the 2% rule, that simply doesn't fly here in California. It's simple math. There are some places in the US where it's possible to buy a $50,000 property that rents for $1,000 a month, which would be a phenomenal deal. But to match that here in the California you'd have to find a $400,000 property that rents for $8,000 per month. And if you ever find one of those, please let me be the first to know! I'd estimate less than 10% of all properties in California surpass 1%, and the highest I'd ever seen was about 1.25% but the property needed a lot of work. 0.70 - 0.80% is a lot more common for deals, with 0.90%+ being more rare. You're looking at 1.03% with this property, so I'd say at face value it looks like a deal. The average of every single 2-4 unit property currently listed on the MLS is 0.60%, so this property is definitely worth looking further into.
Ok, well I lived in Sacramento for several years and it's a large area. Is it in Carmichael, Natomas, S. Sac, Arden ? You don't want to buy a multifamily surrounded by multifamilies no matter where this property is located. That is never a good idea. I have been renting out properties (started in Stockton, CA) since the 80's. Multifamilies in a multifamily neighborhood are just always going to be C or lower in N. Ca. Just my 2 cents. I'm not a bean counter, numbers cruncher or data gal I just know what rents and doesn't rent. So please look for a 4 plex in a residential area and when you do buy it remember to send me a thank you card !
investor · modesto, CA · Member since 2015 · 4 posts · 1 vote
9y
I'm from stockton area and I would double and triple check numbers cause 1000 month rents does not add up. 2/1units normally rent between $750-900 unless your in a high end neighborhood..
Real Estate Investor · Sacramento, CA · Member since 2016 · 96 posts · 26 votes
9y
@Armando Angulo your right, the rents does seem little high. Especially for 2/1 units, unless the units have more than a 1000 sq ft then it would make sense. I'm an agent and investor locally in Sac and I have not really seen a lot of 2/1 rented out for $1000. @John Cook If the complex is surrounded by other multi-plex, I would just do a little more research and find out what the unit rents are for the neighboring complexes.
Realtor · San Jose, CA · Member since 2015 · 318 posts · 154 votes
9y
I live in San Jose, so I not only know Northern California well, but I also know Sacramento well.
This property must be in a D class neighborhood to be at that purchase price, I am guessing somewhere like North Highlands. So let's assume your numbers are sound, although I also think the rent estimate is high for the presumed area. I am not a numbers guy yet, so I will leave that alone.
While I like Wes' suggestion to ask neighborhood rents by door knocking, assuming my guess is right about the area, you may not want to knock on all the doors in those areas unless you are prepared for some roughness.
Also you need to make sure your property management company specializes in filling vacants in that area because if they don't you will have to do it yourself or expect to be vacant for awhile.
Everything else aside, Sacramento is supposed to be one of the best areas to purchase because of the mass genertrification and migration of Bay residents to a more affordable market.
If your numbers are even close, I would say it's a good deal since you can expect it to appreciate. You just need to make sure you can fill the vacants.
Also, to touch on your earlier post, I am working on closing a Triplex in Oakland and have seen a lot of properties. 2% rule is non-existent in our land.
I live in San Jose, so I not only know Northern California well, but I also know Sacramento well.
This property must be in a D class neighborhood to be at that purchase price, I am guessing somewhere like North Highlands. So let's assume your numbers are sound, although I also think the rent estimate is high for the presumed area. I am not a numbers guy yet, so I will leave that alone.
While I like Wes' suggestion to ask neighborhood rents by door knocking, assuming my guess is right about the area, you may not want to knock on all the doors in those areas unless you are prepared for some roughness.
Also you need to make sure your property management company specializes in filling vacants in that area because if they don't you will have to do it yourself or expect to be vacant for awhile.
Everything else aside, Sacramento is supposed to be one of the best areas to purchase because of the mass genertrification and migration of Bay residents to a more affordable market.
If your numbers are even close, I would say it's a good deal since you can expect it to appreciate. You just need to make sure you can fill the vacants.
Also, to touch on your earlier post, I am working on closing a Triplex in Oakland and have seen a lot of properties. 2% rule is non-existent in our land.
Please don't say that the 2% rule is non-existent in our land. Maybe in San Jose and San Francisco. Surely not in Oakland. My last 3 4plexes shatter the 2% rule. Stick to what you know.
I live in San Jose, so I not only know Northern California well, but I also know Sacramento well.
This property must be in a D class neighborhood to be at that purchase price, I am guessing somewhere like North Highlands. So let's assume your numbers are sound, although I also think the rent estimate is high for the presumed area. I am not a numbers guy yet, so I will leave that alone.
While I like Wes' suggestion to ask neighborhood rents by door knocking, assuming my guess is right about the area, you may not want to knock on all the doors in those areas unless you are prepared for some roughness.
Also you need to make sure your property management company specializes in filling vacants in that area because if they don't you will have to do it yourself or expect to be vacant for awhile.
Everything else aside, Sacramento is supposed to be one of the best areas to purchase because of the mass genertrification and migration of Bay residents to a more affordable market.
If your numbers are even close, I would say it's a good deal since you can expect it to appreciate. You just need to make sure you can fill the vacants.
Also, to touch on your earlier post, I am working on closing a Triplex in Oakland and have seen a lot of properties. 2% rule is non-existent in our land.
Please don't say that the 2% rule is non-existent in our land. Maybe in San Jose and San Francisco. Surely not in Oakland. My last 3 4plexes shatter the 2% rule. Stick to what you know.
Hey Saj,
If you know something, I don't I definitely down to learn more. I read your profile and based on your experience we are definitely at two different points in our investment careers, and my applause goes out to you.
Questions -- when did you purchase your last property? Are you getting these 2% deals off MLS, if so what do you look for? Describe your last deal
I live in San Jose, so I not only know Northern California well, but I also know Sacramento well.
This property must be in a D class neighborhood to be at that purchase price, I am guessing somewhere like North Highlands. So let's assume your numbers are sound, although I also think the rent estimate is high for the presumed area. I am not a numbers guy yet, so I will leave that alone.
While I like Wes' suggestion to ask neighborhood rents by door knocking, assuming my guess is right about the area, you may not want to knock on all the doors in those areas unless you are prepared for some roughness.
Also you need to make sure your property management company specializes in filling vacants in that area because if they don't you will have to do it yourself or expect to be vacant for awhile.
Everything else aside, Sacramento is supposed to be one of the best areas to purchase because of the mass genertrification and migration of Bay residents to a more affordable market.
If your numbers are even close, I would say it's a good deal since you can expect it to appreciate. You just need to make sure you can fill the vacants.
Also, to touch on your earlier post, I am working on closing a Triplex in Oakland and have seen a lot of properties. 2% rule is non-existent in our land.
Please don't say that the 2% rule is non-existent in our land. Maybe in San Jose and San Francisco. Surely not in Oakland. My last 3 4plexes shatter the 2% rule. Stick to what you know.
Hey Saj,
If you know something, I don't I definitely down to learn more. I read your profile and based on your experience we are definitely at two different points in our investment careers, and my applause goes out to you.
Questions -- when did you purchase your last property? Are you getting these 2% deals off MLS, if so what do you look for? Describe your last deal
I have purchased 3 properties in Oakland this year - total of 9 units this year.
Units. The first in March, then September, then November. All MLS deals.
I am not sure that you living in San Jose and owning a piece of property out there qualifies you to give out investment advice to those looking to invest in Sacramento.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
9y
Talk to listing agent and get concrete Days On Market number - - the longer the more concern. Big DOM says no or few offers, area vacancy issues (determine why).
I live in San Jose, so I not only know Northern California well, but I also know Sacramento well.
This property must be in a D class neighborhood to be at that purchase price, I am guessing somewhere like North Highlands. So let's assume your numbers are sound, although I also think the rent estimate is high for the presumed area. I am not a numbers guy yet, so I will leave that alone.
While I like Wes' suggestion to ask neighborhood rents by door knocking, assuming my guess is right about the area, you may not want to knock on all the doors in those areas unless you are prepared for some roughness.
Also you need to make sure your property management company specializes in filling vacants in that area because if they don't you will have to do it yourself or expect to be vacant for awhile.
Everything else aside, Sacramento is supposed to be one of the best areas to purchase because of the mass genertrification and migration of Bay residents to a more affordable market.
If your numbers are even close, I would say it's a good deal since you can expect it to appreciate. You just need to make sure you can fill the vacants.
Also, to touch on your earlier post, I am working on closing a Triplex in Oakland and have seen a lot of properties. 2% rule is non-existent in our land.
Please don't say that the 2% rule is non-existent in our land. Maybe in San Jose and San Francisco. Surely not in Oakland. My last 3 4plexes shatter the 2% rule. Stick to what you know.
Hey Saj,
If you know something, I don't I definitely down to learn more. I read your profile and based on your experience we are definitely at two different points in our investment careers, and my applause goes out to you.
Questions -- when did you purchase your last property? Are you getting these 2% deals off MLS, if so what do you look for? Describe your last deal
I have purchased 3 properties in Oakland this year - total of 9 units this year.
Units. The first in March, then September, then November. All MLS deals.
I am not sure that you living in San Jose and owning a piece of property out there qualifies you to give out investment advice to those looking to invest in Sacramento.
Great thanks Saj,
What kind of financing did you do on these properties?