Hello BP! I am hoping you can help me analyze this deal. On paper my numbers are okay-good. It's my first multifamily purchase, and I am in the process of working up an offer on four duplexes. Here are the details:
Currently asking $84K per duplex
Comps for similar duplexes range from 90K-125K per duplex.
Estimated mortgage: $1259 per month. (4.8% interest, 30 year mortgage, 25% down based on an offer of $80K per duplex)
Taxes are: $300 per month (based on 2016 tax assessment)
Insurance is: $236 per month (quote from insurer)
[email protected] 10% $400 (I currently self manage)
Maintenance @10%: $400
8% Vacancy: $320
All Units are currently rented at an average of $500 (some units have long term tenants and the rents have not been raised in a while)
Total Rent Revenue: $4000 (We plan to rent the units for $525-$550 once the current leases expire)
All units have newer HVAC units and come with (older) appliances. Units all will need roof updates soon. Estimated money for immediate repairs/updates is $30K (roof and some flooring, painting, small repairs)
Average rent for a 2 bedroom unit is $600 so these units have room for a rental increase. Also there is a new shopping center in the works near this street, which is currently a dead end. Eventually they will connect this road with an access road to the shopping center (positive near to new shopping and restaurants, negative more traffic) The area is currently a C+ area with some single family homes to the left of the property, and a small apartment complex to the right.
The purpose of the purchase would be a buy and hold with positive cash flow. Based on my estimates I'm looking about about $1100 per month cash flow with a little over a 11% Cash ROI
Am I missing anything? Typically I try to follow the 1% (though I try for 2%) rule and these would meet that.
You are purchasing four duplexes, and putting down 25% on each with an offer of 80k? So your total invested cash is 80k approximate. My advice would be to figure out the cash on cash return and not so much focus on the 1-2%rule. Also, did you include cap ex into your budget.
@Payton L. If the monthly cash flow is $1100 a month ($13200/year), with a total of 80K cash invested that would leave you with a 16.5% cash on cash return, which is pretty good
@Michael Farrugia I was including the 30K for repairs in my cash expenditures for a total of $110000. Are repairs not included when finding your cash on cash return? I didn't do a separate line for Capex I typically just run everything through maintenance. 7% (wear and tear) + 3% (big repairs). Should I bump this number up? I could change that number to 12%. I'm still new, but with every purchase I have the electrical, plumbing, major appliances and expenditures checked and repair them if needed so moving forward (hopefully) the 7% will be an accurate representation of what to expect.
Also just I'm not sure it is relevant, but the reason the seller is selling is because they are currently depreciated out for him so he's planning to sell these and reinvest.
@Payton L. Yes, the 30K should be figured into the cash on cash, as well as any other costs. Typically the older the building, the more unexpected expenses that will pop up. How old is the building? Most likely the buildings are between 10-50yrs old, which I would suggest you account for 10-15% between maintenance and your cap ex.
@Michael Farrugia They were built in 1986. At 12% Maintenance and Capex we would still be a little over $1000 cash flow per month. The good news concerning the Capex is that the AC units are all relatively new (2-5 years old) and we would be replacing the roofing. (figured into the 30K repair budget)
Go for it! keep in mind, over estimation is better then underestimation!
Howdy @Payton L.
Are you going to put offers in on each Duplex individually or one as a group? The reason I ask is it will greatly effect your financing. It's the difference between a Residential and Commercial loan.
All your initial cash invested (down payment, closing costs, and Rehab costs) should be included in your COC ROI. If properties are vacant during the Rehab period I would include that too, because, you will be paying utilities and insurance without any income.
You need to keep your CapEx and Maintenance lines separate. They fall under two distinct Tax categories. You must track them separately. Maintenance is for small repairs and upkeep of the property that occurred and claimed each year. CapEx is big ticket repairs/upgrades that are depreciated on many years.
Prior to purchasing properties I have them inspected to determine the current condition of all major components and appliances. I use this report to help determine what needs to be included in the immediate Rehab and what will be included in my CapEx reserves requirement.
You may be paying too much for the properties. If comps are $90K to $125K, and your purchase price ($80K) plus Rehab costs ($30K) equals $110K. The Rehab could be more than expected. If buying as a group you should use the income approach and Cap Rate to estimate the value and offer price.
The Seller being "depreciated out" has no bearing on your purchase. It only applies to his tax situation. Yours starts after closing.
@John Leavelle These are all great points. The 30K was rehab for all 4 so about 7500 per duplex for repairs, so the 87500 is still below comps. These are also newer than some comps in addition to being brick and having a nice parking area so I believe they will fall somewhere in the middle of the pack as far as comps. The original listing was for one duplex, but when we had our agent set up a look see, found out they actually plan to list all four. We can put an offer on all of them or individually. We will not be "house hacking" on these units so we expect to get a commercial loan that requires a 25% down payment. All units are currently leased. We usually run the numbers for maintenance together when running initial numbers but it is good to know that they are in different tax categories! I wasn't aware. All of our purchases include a ten day inspection period with an option to extend, so we will definitely be getting that done as well. Repairs are based on our first walk through and then I pad those numbers a bit because something always comes up. If during inspection we find something crazy we renegotiate or pull out of the deal.
I am discussing with my agent going in at 75K per duplex so 300K total. I don't expect this will be accepted but I'm feeling comfortable with this as a starting point.
What do you think based on the additional info?
@Payton L. that does sound better at $7,500 Rehab per Duplex. If you do the commercial loan just remember the term length will be shorter (5 to 20 years) compared to the 30 you have in your original post. However, the amortization period could be 30 years.