Is this a dream or a nightmare?

Question

So here is a deal I was just looking at, wanted to see what others thought and see how my numbers compare to others.

5-unit building Separate Electric/Gas/Heat

Price- 439,900

Taxes-5,094

Gross rent-4,175

I figured on 30% down @ 4.5% and no immediate repairs since the building is fully occupied.

Mortgage- 1,557.04

Insurance- 100

Taxes-424.50

Vacancy-334

Maintainence/Repairs-208.75

Prop Management-334(although i will be self managing for now)

Trash/Sewer/Water-300

Monthly cashflow-916.71

Let me know what you all think and since this would be my first deal, anything I may be overlooking or undercompensating could be a life saver.

Ryan Murdock · Answer

What condition are the units in? Will they all require a $5k overhaul after each current tenant leaves? Your repair cost may be $0 on Day 1 but if all the units turnover in the next year that's $25k out of pocket. I'm guessing the situation is not that severe but it could be.

How about a CapEx number? You'll need to account for some big ticket items down the road. And unless it's a brand new building some of the systems (roof, HVAC, etc) are part way through their useful life so that will need to be factored in. Example: If you're 17 years into a 20 year roof you'll need to have the means to seed that reserve fund so you'll have adequate funds to replace the roof in 3 more years.

Greg Moss · Answer

@Joe Ellis

The biggest problem I see with this is that buying a 5 unit building and putting 132k down for a 6k annual or 500/m Cashflow just doesn't seem worth it. If you are buying for other reasons then buy and hold rental then that's different (appreciation, live in one etc) but a 4.5% cash on cash for the extra risks that are involved with a multi family 5 unit just doesn't seem worth it.

People look for 6-8% sometimes on single family homes in good areas that provide virtually no headaches, If you are taking on this much risk you should look for more reward in my opinion

Greg

John Leavelle · Answer

Howdy @Joe Ellis

Based on the Price ($439,900), down payment (30%), and Mortgage ($1,557) you are planning to use a conventional 30 year Residential Mortgage.  Problem is this property is considered commercial (5+ units).  It will require a commercial loan with a shorter term (10 - 20 years).  Meaning a bigger mortgage payment and your projected Cash Flow just dropped significantly.  If I am wrong let me know.

Joe Ellis · Answer

This is exactly why i posted this.  Thank you for giving me more to consider.

Ryan Murdock · Answer

@Joe Ellis

"Repairs are TBD. I plan to save my cashflow to build my reserves up (1yr or so) until i know the property better and have a better CapEx outlook."

This exact plan nearly bankrupt me a few years back when the "TBD" quickly outpaced my "COH" (cash on hand).

Not saying your deal won't work I'd just encourage you to get as solid a handle as you possibly can on what "TBD" really means before you buy.

Joe Ellis · Answer

10% CapEx-would still leave about 500/month cashflow.  Repairs are TBD.  I plan to save my cashflow to build my reserves up (1yr or so) until i know the property better and have a better CapEx outlook.

Thanks keep em coming!

Is this a dream or a nightmare?

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