4 Unit Property - Deal or No Deal?

Real Estate Deal Analysis & Advice
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4 Unit Property - Deal or No Deal?

Steve K.
Specialist · PA · Member since 2016 · 143 posts · 71 votes

I'm just starting out. 

Is this an ok deal? If yes why? If no why? (Everyone evaluates differently)

4 Units - Section 8 (S8) Approved - 2 Unit with Section 8 tenants and 2 Regular tenants. All occupied.

On my Initial visit. Saw 2 Unit and couldn't get into other 2. Building didn't need work, in my analysis.

65 Year Old Building.

New Roof being installed

Expected Purchase Price 300 K

Number below don't include property value appreciation

Loan to Value 81.07%
Cashflow / Initial Investment (CoC) 0.79%
Cashflow / Assets 0.18%
CAP Rate 6.01%
TOTAL OPERATING EXPENSES $15,610
NET OPERATING INCOME $16,819
Less: Annual Debt Service $(16,324)
CASH FLOW BEFORE TAXES $495
Add Back:Principal Payments $4,406
- Depreciation $(617)
TAXABLE NET INCOME (LOSS) $4,285
Monthly Income Per Unit Pre Tax $10.32

Thank you

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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
9y

I think Samir doesn't understand the flow of your numbers.  I think you've done an excellent job of laying out cash flow and then calculating your actual taxable income.  

It's tough to say if this is truly an ok deal though.  You've obfuscated the actual income and expenses, so it's tough to know if you've allocated for any vacancy, what your capex and maintenance amounts are, etc.

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  • Samir Shahani
    Investor · Easton, PA · Member since 2017 · 131 posts · 102 votes
    9y

    I would never invest in that property with the numbers you presented unless there are some significant value add opportunities.  

    Principle payments you make on your mortgage from your tenants rent should not be added back to the property's cash flow.  You only realize this equity when you sell the home. Also, do not declare principle payments on taxable income; big mistake.

    If you want that property to work, you have to find a way to increase rents significantly. 

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    I think Samir doesn't understand the flow of your numbers.  I think you've done an excellent job of laying out cash flow and then calculating your actual taxable income.  

    It's tough to say if this is truly an ok deal though.  You've obfuscated the actual income and expenses, so it's tough to know if you've allocated for any vacancy, what your capex and maintenance amounts are, etc.

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  • Jay Dewberry
    Covington, GA · Member since 2014 · 295 posts · 93 votes
    9y

    I would have to agree with @Samir Shahani The numbers don’t seem to leave much room for any cashflow. Even if including appreciation and depreciation (which seems low for a $300k property) to ascertain an overall investment picture, this seems somewhat bleak if there is not any value added or rent increase potential. Then there’s Capital Expenditures to worry about. My thoughts are if you are going to purchase this property, have plenty of reserves.

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  • Steve K.
    OP
    Specialist · PA · Member since 2016 · 143 posts · 71 votes
    9y

    @Linda Weygant Thank you for feedback

    Vacancy = 10%

    CapEx = 10%

    Maintenance reserves = 10%

    Property Management = 9%

    I just found out. There are more bills. It add $2000 to annual expenses. Here are revised numbers

    Ratio Information
    Loan to Value78.28%
    Cashflow / Initial Investment (CoC)-1.90%
    Cashflow / Assets-0.41%
    CAP Rate5.22%
    TOTAL OPERATING EXPENSES $17,303
    NET OPERATING INCOME $15,126
    Less: Annual Debt Service $(16,324)
    CASH FLOW BEFORE TAXES $(1,198)
    Add Back:Principal Payments $4,406
    - Depreciation $(617)
    TAXABLE NET INCOME (LOSS) $2,592
    Monthly Income Per Unit Pre Tax $(24.95)
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  • Samir Shahani
    Investor · Easton, PA · Member since 2017 · 131 posts · 102 votes
    9y
    Originally posted by @Linda Weygant:

    I think Samir doesn't understand the flow of your numbers.  I think you've done an excellent job of laying out cash flow and then calculating your actual taxable income.  

    It's tough to say if this is truly an ok deal though.  You've obfuscated the actual income and expenses, so it's tough to know if you've allocated for any vacancy, what your capex and maintenance amounts are, etc.

    Please correct me if I'm wrong, but  I think that the correct way to calculate your taxable income would be as follows:

    + Primary Income (if you have a W2 job)

    + Rental Income

    - depreciation (27.5  SL)

    - interest payments on mortgage

    - business  related expenses (insurance, advertising, maintenance,  etc)

    You  may end up with  the same answer by doing it the way you suggested, but in many cases you won't.  So verify and make sure that you are doing it in accordance with tax laws.

    As suggested above please correct me if I'm wrong,  I do not mean to publish incorrect information. 

    But, either way, from a cash flow standpoint this house will not be self-sufficient based on the numbers you provided.  So unless you are expecting some really great appreciation then  this is probably a bad investment. 

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