Please Help Me Analyze this Triplex in Charlotte, NC

4 Replies

Hi BP Community, I have a triplex under contract that I'd like your help in analyzing.  I have experience with single family homes, but none with multifamily.

The contract price is 215k.  Rent between the three units is $2,100.  I've estimated the following expenses:

Management             (210)       Assumes 10%

Vacancy                     (126)       Assumes 6%

Property Taxes           (175) 

Lawn Maintenance     (100) 

Repairs                       (360) 

Water                          (200) 

Insurance                    (150) 

CapEx Reserve (300) Does this seem reasonable?

Total Expenses         (1,627)

NOI 473 2.64% cap rate

It's pretty clear that as is, this property is terrible from a cash flow perspective.  The reason I'm still considering it is (1) I think rents are below market and (2) it's in a part of Charlotte that is close to uptown and likely to appreciate above average as Charlotte continues to grow.  Several surveys rank Charlotte as one of the fastest growing cities in America.

My plan would be to raise rents to $800 / month and install meters so that the tenants pay for their own water. That would be a $500 / month swing in NOI and get the cap rate to 5.00%. However, it also means each tenant on average would pay $167 more than they are accustomed to which could mean a lot of turnover initially. (On average, the tenants have been there 5 years and the landlord has not increased rents in line with market rates.)

The second part of the plan is to renovate the units as tenants vacate with new kitchens, baths, flooring, etc for about 15k per unit.  This should make the units among the most attractive in the area and I believe I could then raise rents to at least 900 / month per unit.  The cap rate only improves to around 5.30% given the 45k in renovations, but I believe having fully renovated units will let me capture any rent / price increases in the area more successfully if the area does indeed experience a rapid boom.

While I do not like to count on appreciation when I buy, at a 5+% cap rate, the property is paying for itself and so any price appreciation would be a bonus. I do wonder whether a triplex is the best way to capitalize on price appreciation, though, as I would be limited to selling to other investors and not owner occupants.

Are my repair and CapEx assumptions too high? I tend to be very conservative in my modeling, but want to be reasonable so I don't pass on a good deal unnecessarily.

Lots of people talk about how duplexes and triplexes cash flow better, but based on my modeling, I am not seeing that.  Rents are not any higher, but expenses are ($200 for utilities + $100 for lawn maintenance).  Am I missing something?

Sorry for the wall of text and many thanks in advance!

Howdy @Paul C.

Your expense estimates do seem high. I like using 55% of income to be conservative on initial analysis assumptions. You are over 77%. I think the problem is your Maintenance/Repair $(360) and CapEx ($300). Cut those back to 10% ($210) for now until you verify actual repair data and get an inspection completed. Once you can get an idea of the life expectancy of major components and appliances you can develop a more accurate CapEx reserves requirement.

How old and in what condition is the property?  Any immediate Rehab needed or is it all deferred?  Are you planning to hold additional funds aside for the $45K in Rehab?

You say the "contract price" is $215K. Does that mean you've already put in an offer and have it under contract? What is the Market Value/ARV that you are using? Did you get recently sold comps? That is how the property should be valued. Small multi family (2-4 units) are valued based on comps (just like SFR) not Cap Rate. Given the purchase price ($215K) and Rehab costs ($45K) totaling $260K I would expect a ARV/Market Value over $300K. So what are the comps? Are you over paying for the property (including Rehab)?

If you raise rents and transfer utility costs to the tenants at the same time you probably will have a high turnover.  You probably have good justification to start raising rents at a moderate rate due to improper management in the past.

The last thing is what kind of financing are you planning?

Hope this helps.  Good luck.

@Paul C. This might be a minor point but I'd take a look at the payback period for your proposed renovations. If you drop $15K into a kitchen renovation and increase the rent $100/month it's a 12 year payback period. After 12 years your tenants are going to give your kitchen renovation a heck of a beating. Regardless of the renovation in question, you should take a look at payback period more than cap-rate. I'd do the same with individual metering. I've looked into it and sometimes it's more expensive than you'd think. And if those updates (like metering) cause units to turn over you'll have to add the costs of getting a unit rent-ready (not free) as well as 2-4 weeks of vacancy. Just some food for thought.

@Curtis Waters @John Leavelle @Andrew Johnson

Thanks for your replies.  You all bring up some great points.  As far as expense estimates, I took a look at what I've been averaging across my single family portfolio over the past 3 years which was around $150/unit per month.  A decent amount of that comes from the repairs that happen when the houses turnover.  So I may go months without any repairs, but then all of a sudden a paint job and new carpet will take that average up.

On the CapEx front, I listed out the major components and expected lifetimes and came up with my estimate. The issue is there's three of everything (HVACs, water heaters, etc.) except the roof. So while $300 seems high, I think it's appropriate. Also, the cost of items like HVACs and water heaters are not any cheaper on a lower rent unit so those "fixed" costs tend to be a high percentage of the rent.

Anyway, you all have given me some good points to consider and I very much appreciate it.