Looking for advice on an analysis of a triplex in Minnesota

Real Estate Deal Analysis & Advice
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Looking for advice on an analysis of a triplex in Minnesota

Account Closed
Saint Paul, MN · Member since 2017 · 28 posts · 8 votes

Hello fellow BP members.  My name is Sean Dawson, I am a biggerpockets member and have been analyzing multifamily deals in the outer areas of the Twin Cities using the biggerpockets calculators and ran across a triplex that looked promising.  I was hoping to get some feedback on my numbers since I don't live in that area and don't know the market up there.   Is there something I'm missing?  This is one of the only deals I've seen where cashflow isn't negative. 

1968 triplex with 3 car garage on the market for 71 days.

Purchase price: $289,900

Estimated cost of repairs:  $5000

ARV: $335,000 (this is best guess with what comps I was able to dig up)

Closing costs: $2500

Down pmt: 25% ($72,475)

Loan amt: $217,425 amortized over 39 years @ 5% interest

Utilities are paid by tenants so I would only have to worry about trash ($84/mo), insurance ($167/mo).

Maintanance and repairs: $132.10

CapEx: $264.20

Vacancy: $132.10

Property taxes: $279.67

Rental income: $2642.00

Cash flow: $415.75

Cash on cash ROI: $6.24%

I have not walked the property so I can't be certain what the HVAC or roof look like.  The purchase price is also the asking price, which means I could potentially ask less since it's been on the market so long.

Any advice or input would be greatly appreciated in my quest for knowledge and education.  Thank you in advance.

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Jennifer Rysdam
Rental Property Investor · Cleveland, MN · Member since 2017 · 518 posts · 354 votes
9y

I don't have any answers for you, as I am also new. I just wanted to give my support and say that you are doing a great job just doing your homework and asking for advice. There is a lot of great advice on BP and I've sure learned a lot here. Best wishes with your first purchase.

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  • Jonathan G.Pro Member
    Investor · Tyler, TX · Member since 2014 · 96 posts · 22 votes
    9y

    @Account Closed great info! Just a few things you may want to consider... I have noticed that a lot of successful investors on BP try and shoot for a minimum of 11%-15% Cash on Cash ROI and try to get anywhere between $100 to $300 per door. With $415 for a triplex that would give you roughly $105 per door which is good but I would be a little concerned with your Cash on Cash being as low as it is. You are definitely on the right track when it comes to counting the cost and calculating as much as you can and utilizing the BP calculators and tools. My only advice would be to look at some other deals where your Cash on Cash would be better.

    Also I try to budget close to $200 per unit for Cap Ex and Repairs.  So for a triplex I would make sure that I would be putting away a minimum of $600 a month for the 3 units.  You may find that after you make those adjustments this property will not cash flow what you think or need.  It is always best to err on the side of budgeting too much then budgeting too little!

    Don't give up and keep looking for the deal!  Good work!

    0Reply
  • Bruce Runn
    Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes
    9y

    I'm not going to try to sugar coat it:

    Is there upside in rent as that's one of the most important things I look for.

    Based on my experience, the cap ex is probably high.

    You won't be able to get a 40 year loan so that pushes your mortgage amount up and your cash flow down.

    You should be able to get lower than 5% unless you are only going into a commercial loan.

    Terrible cash on cash return

    any property I buy needs more than $5,000 in repairs.  That hardly covers anything unless it's just been fully renovated

    2Reply
  • Tim SwierczekPro Member
    Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Account Closed It's so hard to analyze a deal without intimate knowledge of the transaction, but here are my thoughts.  In MN you need to pay water as part of your LL utilities.  I'm a lender and I have no clue how you can find a loan for only $2500 closing costs.  The title and state taxes & fees should cost more than that, even if there are no lender costs.  Are you paying an above market rate?  How many are bed's & baths the units?  If they are a mix of 1 & 2 beds that rent is inline and that's ok at best.  If they are 2 & 3 beds then the rent is low and under rented which is great for you and makes this deal look a lot better.  

    Correction, I see you're paying 5% so that's why the costs are so low.  and 39 years just to get 415 on 3 units is with 255 Down is awful.  The only way you do this deal is if it's a mix of 2 & 3-bed units.  Otherwise, that deal is down right terrible.

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  • Account Closed
    OP
    Saint Paul, MN · Member since 2017 · 28 posts · 8 votes
    9y

    @Jonathan G. Thanks for the input. Being new to the real estate investment industry (still looking for my first property) I was going off percentages Brandon had used in a couple of his webinars. I'll make a note on the CapEx cost and use that from now on.

    @Bruce Runn I didn't ask for sugar coating so thanks. Having no experience, I've been analyzing based off numbers and percentages I've either heard on podcasts or tried to be as conservative as I could. The 40 year mortgage was a misprint. The loan is based on a 30 year amort. Same goes with the interest rate. I'm using a VA loan to refinance my primary residence to build up my seed money and since that rate was so low and knowing I would be going with a conventional loan (if I couldn't find a private lender) I wanted to be conservative in that as well. I agree with your statement on the cash on cash return. Since $5000 is low, what would be a good "ballpark" number to initially analyze a deal before putting boot on the ground? $10k? $20k? From the pictures, the property looks pretty clean. It already has long term renters who would like to stay. Does that have an effect on the analysis?

    @Tim Swierczek  Good to know about the H2O.  Didn't know that.  I have yet to purchase my first property so I don't know how much closing costs are going to be.  I just went off the numbers in the bp calculator.  What should I be using for a better number if my interest rate is lower?  The purchase cost is the asking price. Since it's been on the market so long (72 days as of today) I figure I could offer less, which would obviously affect my cash flow.  I forgot to include the unit numbers.  Unit 1 & 2: 2 bed 1 bath, 800sf. Unit 3: 1 bed, 1 bath, 700sf.  Also, the property is located on .75 acres next to a stream.

    Thanks again for all the input.  I'm still in the learning phase of my journey so you'll have to forgive me.  Just trying to get a handle on analyzing deals.  

    1Reply
  • Jennifer Rysdam
    Rental Property Investor · Cleveland, MN · Member since 2017 · 518 posts · 354 votes
    9y

    I don't have any answers for you, as I am also new. I just wanted to give my support and say that you are doing a great job just doing your homework and asking for advice. There is a lot of great advice on BP and I've sure learned a lot here. Best wishes with your first purchase.

    3Reply
  • Account Closed
    OP
    Saint Paul, MN · Member since 2017 · 28 posts · 8 votes
    9y

    @Jennifer Rysdam  Thanks.  Trying to stay patient and learn as much as possible.  Just want to get that first deal under contract.

    0Reply
  • Bruce Runn
    Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes
    9y

    @Account Closed

    When people ask for advise, I like to give it straight and just don't want them to think, I'm negative, just analytical.  Just be careful to want to get into any deal if it's not a really good deal for you.  I'm an advocate that you can't buy anything off a calculator since they are often so co servatice they may prevent you from pursuing a good deal so getting into as many multi family properties shortens your learning curve- make sure you have a realtor that is a pro on multi family properties or owns some as they would be invaluable

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  • Jim Adrian
    Architect · Papillion, NE · Member since 2015 · 1k+ posts · 840 votes
    9y

    @Account Closed

    Make sure you include the PM fee of 10% even if you are self managing. This is just under 1% rule (guideline). A lot of this will depend on the condition of the property, which we don't know. I would look at the rent and see if they are under market value. Did you account for lawncare? If you add in $85 for each lawn, water, trash each month, this deal just went south to 1% CoC and $68 cash flow.

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  • Account Closed
    OP
    Saint Paul, MN · Member since 2017 · 28 posts · 8 votes
    9y

    @Jim Adrian Thanks for the tip on lawn care.  One of the current tenants gets a discount for lawn care and snow removal so I didn't even think about property maintenance.

    @Bruce Runn. Because I'm still in the education phase of this journey I suppose I should have said "opportunity" instead of deal. I met a realtor who has a SFR. Do you have any suggestions on a multifamily realtor?

    0Reply
  • John Woodrich
    Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    I don't like it - I think you are missing management fee expense, repairs reserve, and capX reserve.  You should include the management fee in your analysis even if you will self manage because it will be used against you when you go to selling the property.

    I haven't double checked your COC return but that is not a good COC return. I would expect your CAP rate is pretty low also.

    I second that $5k in repairs is low on about every multi-family property unless it is fairly new. If it only needs $5k and it has sat at that price for that long your ARV is likely in question. If it was priced right and if your ARV is near correct it wouldn't sit that long.

    I haven't used or seen the BP calculators but using them along with general rates you have heard on this forum may be an OK place to start but you shouldn't rely on them.  Any estimate based on a percentage will largely vary in accuracy because prices are different across the board.  If you are renting a house for $5,000 per month the expense ratio would be quite different than for someone renting a house for $1,000 per month.  That is the problem with looking at national forums for advice, what may be good in one area may be horrible in another.

    2Reply
  • Tim SwierczekPro Member
    Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Account Closed  what city is it in?  This deal looks a lot better being it's a  3/2/2.  If the location is right then yes you should strongly consider this one.  I have 3 tenant move outs today so I will not be in front of a computer.  Feel free to call me if you care to discuss.  If this place is in the twin cities the rents on 2 beds range from 1000-14000 and 3 bed 1200-1800.  even at average rents 1200 X2 and 1500 X1, this deal with 3700 in gross rent looks much better.  Closing costs vary but if you include your escrow set up your probably looking at 8,000 on that price.  feel free to PM me your number.  I won't be able to reply by computer today and likely not tomorrow.  the rate will be lower too.  4.-5 to 4.75 is likely.  Unless you don't own a home now and then your strategy should be a house hack.  I love these deals and have helped dozens of people execute them.

    0Reply
  • Patrick Britton
    Ann Arbor, MI · Member since 2014 · 1k+ posts · 997 votes
    9y

    @Account Closed among a few things, i think your cap-ex is too high.  Following what another investor in an entirely different marketplace does rarely works.  As well, keep in mind that the other investor's risk tolerance will be different from yours.  He or she could have very different long-term investment goals as well.  

    And as far as those "rules" go...hogwash. 1%, 2%, 50% of income, 70% of ARV, etc., don't account for an individual's tolerance for risk and their need for return. Because those rules are simpler than analyzing your own risk/reward profile or long-term investment goals, they attract a lot of attention. Instead of "Rules", think "guidelines for a particular area."

    and you're definitely going to want to involve a realtor close by who can double check the numbers.  not only yours, but also the numbers stated by the seller.  Strangely, sellers have been known to provide incorrect figures...who knew!?!?!?   :)

    0Reply
  • Account Closed
    OP
    Saint Paul, MN · Member since 2017 · 28 posts · 8 votes
    9y

    @John Woodrich. I understand how a national forum could be bad for advice.  How would one go about localizing the discussion so that doesn't happen?  As stated earlier, I'm still in the learning phase of this journey and am just trying to get a better handle on how to analyze opportunities.  Thanks for the advice.

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  • John Woodrich
    Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Tim Swierczek The triplex he is talking about is a 2/2/1, not a 3/2/2.

    @Account Closed I guess what I am trying to say is that I wouldn't follow any of the "general rules" posted nationally. I would try to get information specific to your property to determine your projected expenses.  For example I was looking at a 9 plex that was fully rented and advertised at a 9 cap rate.  Of course the 9 cap rate assumed full occupancy and was missing many expenses.  I looked at their gross rent number of $55,000 (which assumes 100% occupancy), saw that the prior 3 years showed gross rents of $50,000, and calculated a vacancy rate of ($5,000 / $55,000) 9%.  That may sound high and I may be able to do better but that is the number I used for my vacancy rate.  For repairs I look at the past few years, average it out, and decide whether that is OK after looking at the general condition. 

    Taking a general "rule" is not a good way to calculate anything until you have the given experience in a particular area.  Minneapolis itself has different numbers in several locations.  

    0Reply
  • Bruce Runn
    Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes
    9y

    Do you have the down payment shown or are you doing an exercise to get up to speed and learn?  There are better deals even some off market ones if you're interested - connect with me and I'll share one.

    0Reply
  • Account Closed
    OP
    Saint Paul, MN · Member since 2017 · 28 posts · 8 votes
    9y

    @Bruce Runn I am just doing an excercise to get up to speed and learn. I guess I should have made that more clear in my original post. What is your strategy for getting off market deals? I've been using the MLS for most of the analyzing I've been doing. I did run across an off market deal that turned into a non-deal (if that's a word).

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  • Account Closed
    Las Vegas, NV · Member since 2017 · 32 posts · 18 votes
    9y

    In todays market could it be Brandon is creating unachievable expectations for the new investor.  It seems so many of people who cite Brandon come up with QUESTIONABLE deals.  All the rules that applied 6-7 years ago just dont work today.

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  • Bruce Runn
    Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes
    9y

    @Account Closed

    I'd recommend Kevin Powell as an realtor who almost exclusively works with new investors and owns multiple investment properties.  He's in Minneapolis.  If you want someone in St. Paul, I'd advise looking for a realtor who owns properties already and understands the dynamics of the actual formulas on costs/expenses as you will need guidance on a lot of details.  Off Market deals are found from hard work but I don't advise you start that route if you are not prepared to pull the trigger quick.   The basics are to get your down payment and financing in place by working with a bank to make sure you know what size loan you can get a loan you qualify for.  Get a realtor you feel comfortable with and put a game plan together

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  • Account Closed
    OP
    Saint Paul, MN · Member since 2017 · 28 posts · 8 votes
    9y

    @Bruce Runn Thanks for the tip.  Do you have Kevin's contact info?  I would also be interested in taking a look at that deal you were refering to (for educational purposes).  Might be able to get a better idea how to run an analysis.  By the way, do you use the calculators here on BP that seem to be so popular or do you have a different way of analyzing a deal?

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  • John Woodrich
    Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Account Closed if all of this is for an exercise I would recommend you tell the realtor and everyone who is helping you up-front.  Bruce's realtor will likely be willing to help but he may not want to spend hours helping if a deal is not in sight.

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  • Amber Gonion
    Real Estate Broker · Hugo, MN · Member since 2016 · 688 posts · 596 votes
    9y
    Sean Dawson give us a call if you want to run some numbers for practice. We would be happy to analyze some deals. We work with lots of new investors and provide help before and after the sale.
    0Reply
  • Bruce Runn
    Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes
    9y

    @John Woodrich

    John's right, if you are anywhere close- great but  a realtor isn't interested in taking you to places just to practice your numbers and use their time up.  If you are getting close to buying or have the capability, use an experienced realtor but don't waste their time-  good point

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