Looking for Feedback on my analysis of a 4-unit Property

5 Replies

Hello BP!

As I'm still getting more into things I'm starting to look at properties and ask myself (why hasn't someone already scooped this up?).  With that said I wanted to run one such deal by the community for further feedback to see if I'm missing something that wouldn't be immediately apparent without visiting the property.  So with that said here are the details:

2400 sqft 4bd 4 ba 4-unit property (all 1 bedroom units).  All  four units currently rented.  Listing price of 90k. 

This unit is not in a particularly great area, but that said it is 2 blocks from the city police station and 1 block from the city hospital as well as some nice places to go out to eat/for drinks in walking distance.

I'm estimating a rent price of 500-700 a month and using the 2k per month as the low ball for evaluating this piece of real estate.  

County records show this property was sold in 11/2015 for 50k.  For tax purposes this property is valued at 57.6k.  I'm not sure of the exact tax burden for this property.

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Expenses are as follow:

Taxes 2k annually (Just guessing here)

10% Property Management Costs (I'm excluding any placement fees at the moment)

8.3% Vacancy Rate

$800 Insurance Annually (I have never had property insurance so this could be way off)

$1200 for Misc Repairs

12%($2600) of income for Variable Cost PM Work

30YR Fixed Mortage @ 5% Interest & 20% Down= ~$400/mo

I'm neglecting to include any costs for mowing the lawn as needed

I will also need to purchase an umbrella policy for myself, which would cut into the returns on this property to some extent.

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All of that said I'm calculating a 14% cap rate and 40% COC. Cash flowing almost 11k annually. Am I missing anything major on this initial look? Maybe the owner is paying utilities right now or the home isn't set up for individual metering (I could change leases to be collective on water/sewer/elec in the future). Maybe this unit needs some serious work (its fully rented though so depending that would be one unit at a time and maybe not for some months/years depending on tenant history). Maybe I'm seriously overestimating the rents (I would have to ask the broker about the current leases and tenant history anyway so that can be verified)? Is there another issue that I could be missing that makes this go from a winner to a loser?

@John Barkow , it sounds like you're missing a lot of important info that you really need to solidify.

  • Check out the county tax assessor's website to determine what the taxes were last year. This is fairly easy to do and will give you an exact number to work with.
  • You'd need to confirm whether or not there has been any deferred maintenance. It's possible that you'd have to put some money into it for repairs.
  •  I don't believe you mentioned anything about closing costs. Try this website to determine a rough estimate for closing costs: https://mintrates.com/mortgage-closing-cost-calcul...
  • You also need to get a better idea of the insurance costs... you've even admitted you could be way off. Call up an insurance company and get a quote from them.
  • You also need to determine for sure whether or not the landlord is paying for any utilities. Try calling up the realtor and asking.
  • You're neglecting to factor in savings for Cap Ex. I typically put aside 10% for this.
  • You didn't mention anything about the expenses associated with the eventual sale of the property. On average, you'll need to pay 2.9% to the buyer's agent and another 2.9% to the sellers agent when the time comes for you to sell the property.

Assuming you don't pay for any utilities, the deal definitely looks pretty good. However, be weary of it being in a not-so-great neighborhood. This could make it significantly less worth it. 

I ran some numbers:

My CoC return and monthly cashflow come up less than your estimates but it still seems like it would make for a great deal.

Your top priority should be to address all of the points I brought up above and see if you can get some more accurate numbers to work with.

I wish you all the best - let me know how it goes!

Dan

@Dan Turkel , Thanks for the response.  Very good things for me to further follow up on/work towards compiling.

With regard to the property taxes I did manage to find them, but they aren't making full sense to me.

Here It would seem that the total tax liability from 2016 to be paid during 2017 is right around 2900 dollars.

Here it looks like the owner is only having to pay about 2k total.  Why not the 2900 as listed earlier?

Lastly this is the tax information for 2015.  The gross tax liability is comparable to what I am seeing for 2016 (although around $250 less), but the net tax was around $1000 less, which we see the state asking for above.  What would this tax credit be that I'm not exactly picking up on?

This tax liability history is nice news though since the tax I estimated was higher than what the state is asking for (although I assume it will continue to rise).

EDIT:  In re-reading the tax assessment it looks like the tax would be that $2900 value, but it is capped at $1754 as a certain percentage of the assessed value (I'm assuming this is done federally).  Looks like they paid the Spring assessment late and then theres a $180 addition for the local city split between the two payments.

@John Barkow , why are you guessing the rents, when they ARE all rented? Easy fix, right?

(I reckon your offer should NOT highly rely on theoretically possible increases to rent!)

My main concern is your guess at mortgage Interest Rate, and loan term, and deposit percentage.

eg. Your guessed Interest Rate may be ok, but, your loan term may be too optimistic?

And how will your (newly calculated) numbers look if they demand 25% deposit rather than 20%? My 2c...

@John Barkow , wow - this goes into quite a bit of detail about the taxes! In my experience, I've been able to pretty easily find a single number clearly indicating the total amount of taxes paid in the previous year. If you want to PM me the address, I can certainly try and help you do this. No worries if you'd rather not. Also, who knows what that tax credit is for - you'd probably have to speak to the owner to figure out why they're getting it. 

From what I can tell though, your edit seems to make sense:

  • Total taxes owed = $2,951.46
  • But the max tax that can be imposed = $1,754.28
  • It's paid in two installments throughout the year so 1,754.28 / 2 = 877.14 per installment
  • First installment was probably paid late as you mentioned so they charged an additional 98.71 (plus a random additional charge of 90) bringing the first installment total to 1065.85. 
  • Second installment was 877.14 plus another random additional charge of 90 bringing the total to 967.14

With all of that said, it looks like the total taxes for the year were 967.14 + 1065.85 = $2,032.99

@John Fedro Talk to a property manager a due diligence guy and an appraiser. You'll find out anyway, so do it now. That way they will pin point you the issues and potential of the property. Just ask youself: "Will my chances of succeeding increase uf i bring different skillsets to analyze this asset?"

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