Cincinnati, OH · Member since 2015 · 42 posts · 8 votes
4-family under contract for 150k. Comps are a little under that number, but this deal came through MLS and under multiple offers. Inspection showed that there is probably $15k repairs that need made (roof, driveway, water heater, boiler) not including the little things in each unit.
Seller will make no concessions in price.
Gross rents: $29,340
- 8% vacancy = $26,992
OE: $14,854
NOI: 12,138
with LTV 80%, 5.25% interest 30yr fixed I'd get a cash flow of $4187/yr
Annual cash on cash is around 8% 1st year taking into account closing costs, repairs, and purchase. I'd love for that to be higher but some people would say that is a good number and I know that is personal preference.
So basically, do the numbers seem good? Even if so, put in the repairs on top of the purchase price and I'm paying 17k more than the comp'ed ARV. Would you go for it or try to find another deal? Exit strategy is to hold long term, but was hoping to refi at some point sooner rather than later to get my money out of it.
Your operating expenses are far too high on the property. You need to find out why and determine if they can be reduced through better management. If that is possible it may be a worth while investment otherwise I do not believe it is worth your time.
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
Brian Cooke 4-units are valued by comps so if the appraisal comes in low you're going to have to come out-of-pocket for the difference. That, of course, hurts your cash-on-cash return. Is this property unique in some way where you can justify overpaying? Or do you think that the current owner is trying to set a valuation using a cap-rate on a 4-unit (non-commercial) property? If you do want to overpay because of cap-rate how long will it take to earn your money back? If it's an 8-cap vs. a 7-cap does that give you an extra $20/month or $200/month? You can run your numbers and figure out what amounts to the "payback period" for overpaying.
That said, I wouldn't do it personally, but maybe I've given you some ways to think about assessing if it's right for you.
Cincinnati, OH · Member since 2015 · 42 posts · 8 votes
9y
Landlord paid water and heat...very common in this area and definitely increases the operating expenses. I've heard that nationwide the average operating expenses are around 45%, but around here the average is closer to 55%. I didn't do that market research myself so take it with a grain of salt, but close to 55% is what I frequently get when I run numbers on MLS deals.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
9y
That level of expenses (assuming they are comprehensive and accurate) is an expense ratio of 55%. That is high as noted - - beware of repairs from obsolescence.
Cincinnati, OH · Member since 2015 · 42 posts · 8 votes
9y
@David Dachtera The initial attraction was that it seemed pretty turn-key. I could buy it, have a property manager, and be fairly hands-off. That has proved false, so maybe now I'm just struggling against a sunk-cost fallacy, even though the cost has just been paying the inspector.
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
@Brian Cooke Be happy you have the sunk-cost in an inspection to avoid a bad purchase. As others have noted you have high expenses and you're projection $15K in repairs. As you've noted, neither of those things qualify is "pretty turn-key". Not to mention I'd imagine that it would only get worse (not better) if you started to peel back the layers during a renovation. You paid a few hundred dollars to save yourself thousands and a $150K albatross. Count yourself lucky...