Help analyzing a quad, 50% rule still applies?

Question

Hello all, need help seeing what I'm missing. I'm a loooong time reader/watcher and first time having a seemingly perfect opportunity fall into my own back yard/ neighborhood.

Been looking for a tri / quad forever in my little town and boom, this morning it hit the market.

4-plex, all under one roof.

210k sale price

8 bed / 4 bath *Four: 2/1's 700 sqft. No garages or car ports

Rents are $600/each, $2400 total.

Expen$e$:

P&I: $1055/mo (FHA 3.5% down @ 4.6APR for 30 years fixed) *can't put any more $$ down.

Trash: $40/mo.

Prop taxes: $3500/annually or $292/mo.

PMI: $165/mo.

Vacancies: (Est 10%) $240/mo.

Management: (Myself) $0/mo.

CapEx & maint: Estimating 50% right? *This is the sticking point, everyone says its a good rule of thumb but does it apply to quad's? as that's $1200/mo., seems outrageous for a small quad under one roof. Current status of prop is descent, no major cap-ex in sight.

So if that adds up i'm negative $-592/mo.

Help me confirm if this is correct or if i need to not count 50% to future cap-ex & maintenance.

Thanks!

Jim D. · Answer

Yea, FHA is a nice way to get in the game without a big down payment, but it does make your margins a little tighter. I wouldn't give up on it just yet though. If you are able to negotiate a lower price, or see realistic opportunity to raise rents, that could improve the numbers.

Ben Wilkins · Answer

Account Closed - the 50% rule is supposed to work as follows:

Take your monthly income, then subtract 50% for all utilities (PM, CapEx, Maintenance, insurance, vacancies)

Your initial estimate includes vacancy.

For your calculation, add in 10% maintenance, 10% CapEx. Also include at least 5% PM - your time should be worth something!

Also, take a look at what your cash flow might be after a year when you move out. That's your end goal - you may have negative while you live there, but you should be positive once you move out.

I hope that helps!

John Leavelle · Answer

Howdy Account Closed

You need to establish a solid ARV/Market Value based on recently sold comps.  That will tell you what your offer price should be.  Just because they are asking for $210K doesn't mean that is the Market Value.  Is that why you show $202,650 as purchase price and ARV of $209,900?  Also why does your analysis show 27 versus 30 years for term length?  30 years drops your payment to $1003 per month.  That's over $50 per month difference.  You also may be able to get more accurate expense numbers once you start researching the deal more.

Jim D. · Answer

Even if you're going to live in it and manage it, you should run the numbers as if you won't be living there or managing on it. That way, you can see how it will perform on its own when you move on.My biggest mistake on my first purchase was vastly underestimating the capex and maintenance costs, so I would be hesitant to tell you to reduce the budget there. $1200/month may be a little high, but I bet not by too much in the long run.

Account Closed · Answer

Preach!

Account Closed · Answer

Thanks for all the advice. It's looking like it's a little too much on the price side and a little too low on the down payment side. I'll run the numbers some more with my local investor friends and see what makes sense and if an offer is worth it.

Account Closed · Answer

That does, it brings it back into reality and possibility.

Here's the with & without me occupying one of the 4 units. I'm totally fine with eating $155/mo while living there as it'll be covered when i move out.

But at $144/mo cashflow, that's not even close to the $100/door that is recommended.

Is it just that I'm not putting enough down or is this prop overpriced?

Help analyzing a quad, 50% rule still applies?

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