Hello BPers!

Need some help analyzing my first potential deal:

It's a 4-plex in a burgeoning neighborhood in downtown Richmond, VA. Lots of development going on with associated gentrification. It is a newly constructed building, only two years old.

It has 4 one-bedrooms, each about 700sq ft.

Currently three are rented for $850, one for $900, for a total monthly income of $3450. One of the tenants is moving out at the end of this month. Possibly can increase rent to $900?

Landlord pays about $200 a month for water, other utilities paid by tenants.

Asking price is $499,000 which is completely out of reach.

Crunching the numbers, I think $350,000 would be reasonable. That would give me roughly $450 of monthly cash flow (about $100 per door), with cash on cash ROI of 7% assuming 20% down payment and minimal repairs. Further assumptions are 5% vacancy, 5% repairs/maintenance, 10% cap ex, and 10% management fees. Total monthly expenses hovering close to $3,000.

The owner has moved out of town, and according to his realtor is looking to unload the place. I don't know if he will even go for this, but it never hurts to ask!

One more question for the veterans, how would you work possible seller financing into the deal? Would you try to get 20% seller financing, 80% traditional, to minimize upfront cost? 100% seller financing? If so, would you be willing to accept a higher sales price to keep more liquid cash on hand?

Thanks for your help!  

Randy

@Randy Frederick , why do you think the owner would accept 70% of asking price? It doesn't sound like there's a ton of work to be done on the property.

I really don't think the owner would go for that price AND seller financing. There's very little upside for him.

If you effectively finance 100% of the property, it's going to be very hard to cashflow.

Not knowing your market, it's hard to make sense of your numbers. But the rents sound very low compared to the asking price. 

Howdy @Randy Frederick

Totally agree with @Jaysen Medhurst assessment.  I have looked at a ton of "New" 4-plex's and Duplex's.  Most Sellers will not drop the asking price much unless they are desperate to unload the property because they are upside down on the mortgage.  I know nothing about your market, but, can assume downtown properties (like most cities) demand higher prices.  However, the rent rate is way to low for the purchase price.  Normally I would say $850 - $900 for a 1Bed/1Bath unit (700sf) is a decent Rate.  But not for a growing downtown area.  Who are the target tenants for that area?  What kind of finishes will they want?

Personally I don't like 1B/1B units unless they are in larger Multi (10+ units).   Too low of a ceiling for rents.

Unless you want to put a ton of cash for a down payment into this deal I would keep looking.

@Jaysen Medhurst and @John Leavelle

Thanks for taking a look at this! To be honest, I am not sure the seller would go for a price %70 of asking, but I thought I would give it a shot. He did move out of town and is looking to sell, so why not shoot for the moon?

The $850-900 for a 700 sq ft one bedroom does seem on par with the market, but I agree that the asking price seemed excessively high relative to rental income. As for the type of tenants, it seems to be attracting young singles/couples quasi-professional looking to live in a walkable urban area. 

Finally, regarding the financing, I suppose I was trying not to deploy all of my cash on hand into a downpayment for one property. Thinking it is necessary to have some reserve and additional cash on hand if another deal comes along. Is it difficult to get a seller to finance? Is it disadvantageous for them? I will admit, I have a tentative grasp on the matter.

I appreciate your input! Back to the drawing board.

@Randy Frederick

You are thinking right.  I would not to put all my available cash into a down payment.  You do need some reserves to cover the unexpected operating expenses for the first few months.  I also would not use it to grab a second property until you have the first stabilized and reserves from that property are building.

Seller financing is a great way to get properties.  However, I don't think Seller Financing is going to be an option for this deal.  The Seller would need to have a significant amount of equity in the property in order to create flexible terms.  

Again, the the Elephant in the room is the rental income and asking price.  I would not keep pursuing this deal.

Did you mention expenses for insurance and property taxes or maybe you have that calculated in the mortgage payment?

@Bernie Huckestein

Yessir. All expenses factored in using the handy-dandy BP rental calculator!

Thanks again everybody! I am glad to hear more experienced investors echo what I thought to be true. 

Still in search of my first deal...

Hi @Randy Frederick

Richmond is a pretty specific market for small multi's. They tend to only exist in a handful of neighborhoods and fall into one of two main categories: prestige location driven or income driven. Examples of each would include areas like the Chamberlayne Ave corridor which are almost entirely driven by income or income potential. Prices there tend to reflect that dynamic as there are very few owner-occupied properties along Chamberlayne (south of Azalea anyway). 

The prestige locations would include areas like Church Hill (near Broad), the Fan, and Museum district to name a few. These are valued more like a single family home would be using comparative analysis. Because of this, multi's in these areas will never line up with the "rule of thumb" analysis criteria most investors are looking for. People who invest in multi's in areas like this typically have a different strategy in mind than pure annual cash-on-cash returns. They are interested in the "evergreen" nature of the Fan market where demand is less affected by macro-economic trends. Basically, these areas can be more liquid and are more likely to appreciate. There are legitimate reasons for taking this route, like if you are a high-earner and just need to "park" cash in a safe investment in exchange for lower returns or perhaps as a hedge against vacancy, rental market fluctuations as the rental demand in these areas is limitless even in challenging economic environments. 

Something to consider would be two single-family rentals that generate the same amount of rent. So for $200k you could realistically find a couple single-family homes in a suburban section of the Richmond market that would each rent for $1700/month and generate the same revenue for a $100k lower acquisition cost. That would also put you at a lower cash outlay since most residential lenders are going to want %30 down for a quad that is non-owner occupied. So $150 down for the quad or $80k down for two singles at %20. 

That's just some food for thought. Feel free to connect if you'd like to discuss the multi-family market in more detail. Best of luck!