Help analyzing quad-plex turn-key property!

13 Replies

Thank you in advance for any advice!  I'm looking to do my first investment deal and want to make sure I'm asking all the right questions going into this.

Market:  Northeastern PA - Scranton.  

The property is a renovated 5,000 sq ft Victorian built in 1910.  The house has been converted into a quad-plex and is fully rented currently.  They say annual net income is $28k.  Asking price is $259,900.  Utilities are paid by owner (they haven't been split).  It is already being managed by a property management company and I plan on keeping it this way.  Property tax ~$2,000/yr.

The property is located in an area close to a college/medical school and 2 hospitals so I don't foresee any future problems renting it out.  That being said -  I don't expect any appreciation due to the area it is located.  Scranton is relatively stagnant if not declining as far as job growth/population growth.

A few more details that complicate / make this slightly challenging:  I am located in Portland, OR and the property of interest is in Scranton, PA.  Scranton is close to where I grew up and I still have a lot of family in the area including an Aunt who is a real estate agent, and an Uncle who is a fully licensed contractor.

Also financing- I plan on getting traditional mortgage with 20% down payment.  I assume this type of financing would be OK in this situation?

I definitely want to have a full inspection done and verify the credentials of the contractors who renovated this place. Any advice or experience on a deal similar to this is much appreciated! 

@Amy Engelhard , $260k for that type of property sounds a little rich to me.  I'm an agent and investor in NEPA and all of my rentals are in the Wilkes-Barre suburbs, about 20 minutes south of Scranton.  I've seen 4 units sell for $200k down here, but can't remember any going for more than that.  For what it's worth, I'd ask your aunt to send you some comps for sales in that section of Scranton that would justify that valuation.  Also, between you and me (and the rest of Bigger Pockets), I'd be very wary of paying the electric bill for four units.  I pay for gas heat at one of my 4-unit properties, and I can live with that because I can control the thermostat, but ceding control of electric would be a red flag for me.

@Kevin D. Thanks for the insight.  Being in the current Portland OR market 260k sounds like a steal.  Always good to have advice from someone local!  I've requested comps from my Aunt.  I'll inquire about the current electric bill.  Wondering if there is a way to split out the electric now that the conversion/renovations are complete.  Seems like it could be costly.

That would definitely be a steal in Portland! 

@Amy Engelhard I've separated electric at 2 properties that I have.  It has never been the whole building with 4 units, but I bought a duplex that had one electric meter and we added a second panel and the electric company came in and put in a second meter. It wasn't too costly, but I had that budgeted in when I made my offer.

@Amy Engelhard

Scranton is basically a 10 cap market. While appraisers don't use the income method to appraise small multifamilies (2 to 4 units), my experience has been that most properties fall under that range. I don't have a magic answer for why that's the case. But my theory is that most folks buying smaller multifamilies in NEPA are other investors. And most investors use the income method to evaluate a property. That may explain why most small multifamilies sell at the market cap rate. There are exceptions but they are rare. One example I can think of was this nice duplex in the middle of a very nice, Class A neighborhood. The owners listed for something like $250,000. Not sure if they got that, but I wouldn't be surprised. 

So if we assume a 10 cap, your NOI ($28k a year) suggest that the property could sell for $280k. That sounds great, but generally the seller's pro forma will always fail to factor in certain expenses (e.g. no reserves for vacancy, no reserves for repairs, etc.). Can you provide us with the breakdown of how the seller got to $28k annual income?

For financing, it depends on a few different factors. It will depend on whether you want to own it as an individual or under a fictional entity like an LLC. You should be able to get a traditional mortgage with a fourplex, but you may need to pay closer to 25%.

Contractor-wise, ask the seller to provide you with all relevant documents including contracts they signed with the contractor. You'll want to see if they provided any construction warranty and whether such warranties are assignable. Sometimes they are; sometimes they are not. If it is actually within the Scranton city limits, you can also check with the City to see if they pulled all the permits. That will give you a sense of what they did for the property. 

Inspections are good as well. As a practical matter, the bank will require it so you may not need to get your own inspector. But it's not a bad idea to hire one if you want to be careful. Should cost a few hundred bucks or so. 

Good luck!

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it as legal advice. Always consult with your attorney before you rely on the above information.

Amy, I couldn't agree with @Kevin D. more. That is a high number. I usually buy 4 units and do full gut renovations. The appraisals usually come in around $260-280k, but I always felt that was high. And these renovations include some state of the art equipment usually sprinklers. We recommend high efficiency gas heating systems along with spray foam insulation to keep your utility bills down. If the property was renovated properly, all the plumbing, mechanical and electric should have been updated. Check with the City on any permits pulled and inspected in the last several years. Also always confirm zoning, Scranton is filled with illegal conversions. 

@Amy Engelhard I'll have to agree with the other responses you've received. Paying for utilities in a structure built in the early 1900's sounds like an heating nightmare to me. Has the property been permitted to be a quad plex? All too often these large houses become converted to multifamily with no permits or proper steps taken to support the increased occupancy of the structure. Another factor to consider is the area, as you mentioned its declining job growth which is also a concern. I agree 100% that this value would be a steal in our area, however there are plenty of other options out there and I'd be happy to provide more details if you have additional questions.

@Amy Engelhard , never get sucked into the "that'd be a steal where I live"-type justification. Also, never get sucked into a "they say annual net income is $28k" justification either. Both statements need complete research and verification.

eg. A counter-argument from someone could be: "Wow, that's expensive. Where I live, you can get that same net income by only paying $150k for a similar property"!

I agree that you're probably being asked to pay more per unit than if it had 5+ units. The reason? 4-plexes can still be marketed to Owner-Occupiers, who don't have to save very much to get low interest rate owner-occupier loans.

(Also known here on BP as "house-hackers").

We'll be interested to hear back what your Aunt has to say about all this. Please continue to share. Welcome to BP...

Wow, thanks for all the feedback.  I've learned something new with every reply.  

My Aunt pulled some comps - anywhere from 140k to 240k for a 4-plex in the area.  Sounds like it could be a bit overpriced although it is the nicest as far as upgrades/renovation. I've requested the details on the financials.

As mentioned above I’d be careful about including electric...couple of window or portable AC units can kill you. Also if my math is right $28k net means each apartment nets $600 a month...using the 50% rule (and the might be a low estimate if you are paying all utilities). That means the units are renting for $1,200?

If the property was just repurposed/ rehabbed I’d make sure the taxes reflect a current assessment...this is done in arrears. I am from PA but southwest not that area, taxes seem low on a $250ish value

Can anyone recommend a good property management company in NEPA ? I have not read or seen anything positive about the ones I have found so far.  Also I have not had any return my phone calls which just doesn't make sense.  

Originally posted by @Amy Engelhard :

Wow, thanks for all the feedback.  I've learned something new with every reply.  

My Aunt pulled some comps - anywhere from 140k to 240k for a 4-plex in the area.  Sounds like it could be a bit overpriced although it is the nicest as far as upgrades/renovation. I've requested the details on the financials.

Based on this post, perhaps even the $150k lower price I suggested as someone's counter-argument, was too high!

Knowing what you know now, why would you look to be paying ANY more than the $140k comp that's out there?

The fact that the Seller made sure that "it is the nicest as far as upgrades/renovation" should not affect your BUSINESS decision one iota. They did that so that owner-occupiers would get EMOTIONAL about it. BAM! They get to make a killing!

But YOUR job is to not get sucked into such a marketing strategy (until/unless you're SELLING of course).

$100k spread between comps works in your favor - so long as YOU pay similar to the lowest, if not lower! Cheers...

@Amy Engelhard

BP has some funny rules again making direct referrals on the post. I can send you some contacts if you send me a PM. I've now more or less interacted with most property managers in the NEPA area. So I can share my thoughts. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it as legal advice. Always consult with your attorney before you rely on the above information.

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