4Plex Analysis - Need Opinions!

13 Replies

Evenin' BP! Looking to purchase my first rental and found a 4plex I'm interested in. Rents are $800/unit...probably fetch a bit more with updated units but using $800 for my analysis. C- neighborhood, only looking at it to cash flow. Price is $63k, will need good amount of rehab. First glance estimating $40k but going to walk thru with contractor to know with more certainty. Assuming that rehab budget...are my other numbers reasonable? Since units will be rehabbed, I feel I'm assuming too much in repairs and CapEx. I've got a management number, may do it myself but have it in there. What else am I missing?

Appreciative to all opinions, constructive and otherwise.  Am I bat**** crazy on this one?

@Jared Sanderson obviously it is hard to make a good analysis based on the information given just because I personally do not know your market/area. I am also assuming this property is not currently under contract and is 100% leased up.

I do see some expense for utility usage that you would be paying. Is this for common area utilities or are you paying for your tenant's utilities? If the owner covers utilities for all 4 units, I would put that amount much higher. If there is common area yard maintenance needed I would factor that in as well (maybe in your Misc).

Also, with it being stated as a "Class C" MFH that needs some work, I would maybe factor in a tad more on the vacancy at first or be prepared for higher vacancies at the start. In these types of properties when there is a new owner, there may be a repositioning period to get the property more stable. You may have to evict current tenants, have tenants leave without notice, attend to more deferred maintenance issues, ect... Although all of those items may seem daunting, that maybe one reason that you have the opportunity to buy the property at a lower price and there is a value add opportunity. I would be prepared to have access to funds for repairs and proper maintenance on this property.

Here are some items I would look into and see if they are a good fit for you:

  • Write your offer with an inspection clause and study the report of the property to see if there are any more defects that you have not noticed and that maybe deal breakers.
  • Get a copy of the current leases
  • Get some sort of income verification of these rents. Estoppel certificate, bank statements, rent payment schedules, ect... Just verify that tenants are paying on time and in full. This will help you see if there are any problem tenants currently.
  • Know your ARV and have an exit strategy.

Hope that gives you some tips and good luck in all your future REI ventures!

@Jared Sanderson

CAPEx is not an expense, but a re-investment of earnings back into the business. It should not be part of your operating expenses, but located "below the line" as a reserve taken from NOI in a manner similar to your debt service.

To be conservative in your analysis, I would boost the vacancy allowance to 10%,   Have you accounted for garbage collection (or is it provided by the municipality) and grounds keeping?

When/If you make an offer, ensure that you obtain copies of all leases with tenants and contracts with service providers.  Using the information provided by the Vendor, draught estoppels.  You, or your agent, should then review the estoppels with the respective tenants; record any missing information or variation to the information presented {this is how you find side deals or catch un-ethical vendors}; and have the tenants attest the estoppel (i.e. sign with a witness).

If the attested estoppels differ from the information provided by the Vendor, you go back to Vendor to work why.

Jim Wilcox More info would have helped out! Sorry I️ missed in my original message: property is vacant and not in rentable shape. Rehab would bring it up to snuff and need CO from the town. It’s not a complete dump - I’ve seen worse in my search, but it will be a fun renovation!

From what I️ know right now, there are no common areas so I️ was projecting keeping the unit(s) climate controlled while vacant. Is that reasonable, too high, none of the above? Building has separate utilities so tenant pays all.

Appreciate your other thoughts, thank you.

@Roy N Didn’t think about the trash pickup, I’ll have to research that answer, not sure if it’s included as part of the property taxes number. Agree on bumping to 10%. Thanks on the CapEx explanation, missed that one!

If it is an older building and has been vacant chances are there are major issues with electrical, plumbing and sewer.  Is the property on a sewer (if so what is that cost) or septic?  Regardless all needs to be inspected.  With the first property I bought, the contractor I hired to do the inspection did not check the sewer lines and connection.  Three days after the deal closed, there was a sewage flood from my complex (it was rather large) that flooded half a city block.  What a mess and insurance will not cover the leak only any damage caused.  So I speak from experience.

Pay close attention the foundation as that can be a major cost if compromised especially if it is in an area where sink holes or ground water has been a problem.  Orlando does not seem like a city that suffers from high vacancy rates.  If it is within reasonable vacinity of the entertainment parks and attractions, several units could be rented as vacation rentals which would bring higher income, but also higher time expenditure for management.  If you are good at rehabs and like it, after you do your engineering studies, depending on what your inspector finds,  you should make an offer that allows for the risk you are taking and gives you that chance at cash flow.  It does not sound like there are a heard of developers going after this property so you may be in a buyer's market.  But I suggest you check with your local chapter of NARPM to see if they have data on vacancy rates in the area where this building is located.  Good luck.  Please post what happens.  It is always interesting to read post mortems in the real estate biz.

@Jared Sanderson ok that makes more sense with the price. How are you going to fund the repair? Are there any title issues with this property? A "construction loan" or "renovation loan" may be a good fit in this scenario. You will likely have to take the property "as is" but knowing what you are getting into is very critical with vacant properties. However, at least you will not have to deal with inherited tenants. Taking a vacant 4-plex property on for a first deal will be quite the challenge. 

IDK what utilities run down there or the shape of the systems that would be delivering your AC. For all, I know your AC is not even functional for all 4 units. Case in point, for this type of property you will need reserves or at least access to cash if/when your renovation budget goes over.

You should listen to BP Podcast Episode #234 with Ryan Murdock. He goes over a little about the trouble you can run into on not having access to capital and how much renovations can hurt cash flow. 

@Timmi Ryerson This property is on sewer.  Great point on checking the lines and connection!  Wouldn't have thought about that since I've never done it on my personal homes.  Knowing the property has been vacant for some time, I'm going to see what kind of prices I can get on electric and plumbing redo.  Electric for safety and probably insurance, plumbing to remove copper to prevent...or probably minimize...any damage trying to get the copper pipes.  I'll have peace of mind knowing those two things are done and won't have to be touched for a very long time.

@Jim Wilcox I'm probably going HML to fund this. I'm trying to figure out the best exit strategy as I want to keep this property. Any thoughts/have you done something similar? Because I don't have >2 years of rental income under my belt, what options are there to refi the hard money into long term financing to make this bad boy cash flow?

HVAC guy will be coming for the walk thru, I'm not expecting much in terms of functional anything on property, just need to get the rehab budget accurate for everything involved.  I've done 2 rehabs on my own personal residences (current house closer in shape to this 4plex), definitely not afraid to take on the risk...I just need to know what those risks are.  I'll take a listen to #234, thanks!

Howdy @Jared Sanderson

You are basically doing a BRRRR strategy. One of the first things you must determine is the ARV. Use recently sold comps that are in like new (rentable) condition. It is important to have a good idea what an appraisal will be for the Refinance loan. Every thing is based off that amount. Once the ARV is established work backwards to determine everything else. Example:

ARV = $175K

Refi Loan Amount = $131,250 (ARV/Appraised Value x 75%)

All-in costs = $122,500 (ARV x 70%)

Then subtract your Rehab estimate to get Your Maximum Allowable Offer (MAO). $122,500 - $40,000 = $82,500 MAO. I try to keep my, Purchase price, Holding and Closing costs all within this amount.

Your current numbers $63K Purchase price + $40K Rehab = $103K would be ok IF the ARV is $160K to $175K. Anything less and you run the chance of running over budget.

@Jared Sanderson as mentioned it just all depends on the ARV, in this case, assuming you want to get some of your money back out (BRRRR). I personally have never used HML since I can get cheaper money, but they can be a tool that can help with a project like this. With HML you definitely want a good exit strategy since you will be paying a lot in interest on these types of loans. You will also want to find a lender that is ok with a smaller or no "seasoning period" and a HML that is ok with extending their loan out for a longer period of time. This is where private money may be a good option since they are more likely to extend a loan for a longer period of time and at a better rate. Also, a lender that does construction or renovation loans, that a mentioned before, maybe an option as well since the rates are lower than hard money. You just need to determine which strategy works best for your goals and the type of project.

Some lenders will also take the income on the property once rented out to help your debt to income ratio. The 2 years rental income may not even be a factor for some lenders. It becomes more of an issue once you have a couple of rentals because you will likely by then have a lot of loans and debt to your name. Hopefully, by then it is "good debt" that produces income for you.

Jim Wilcox thanks Jim! I’m looking into private lenders now as well based on feedback here. If you can believe it, the hardest part so far has been able to get into the building. Tomorrow will be the 4th call to the realty company that has the listing. Her guy never showed up on Friday to let me in.

@Jared Sanderson it happens more than should be acceptable. This could be a sign that the realtor is not motived to sell the property (lower commission), value-add potential since the agent isn't good at marketing the property (if you can't get in others can't either), or they are not seeing you as a serious buyer, and many other reasons. You could maybe try making an offer with an inspection contingency to get the process moving. Assume the worse and see if they want to play ball. 

We once took over a property from a property management company that couldn't even get us the keys to the units after trying multiple times. This was during our due diligence phase. Once we finally got the property only 1 unit key worked out of the 4 keys that were supposed to finally be the "right" ones. Just rekeyed the other 3 units and moved on. Poor PM was one of the value adds we had for that property. It has been one of our best purchases to date. Hope it is same for you, but I would be very conservative on a vacant property like this. 

Originally posted by @Jim Wilcox:
 ..... 

We once took over a property from a property management company that couldn't even get us the keys to the units after trying multiple times. This was during our due diligence phase. Once we finally got the property only 1 unit key worked out of the 4 keys that were supposed to finally be the "right" ones. Just rekeyed the other 3 units and moved on. Poor PM was one of the value adds we had for that property. It has been one of our best purchases to date. Hope it is same for you, but I would be very conservative on a vacant property like this. 

 Jim:

That was good for a smile :-)

We bought a six-unit this summer and were handed a "clutch" of keys at Close:  Keys were missing for two units and the key provided for a third didn't work.   The PM presented us with another "bundle" of keys ... we then had 20 different keys for a 6-unit building.

Needless to say, we now have eight (one for each unit, one for the mechanical room and a master) different keys.

@Roy N.  Wow that is awesome lol! Yeah, it is kind of sad scenario but it is just all part of the game. More opportunity for us other investors that can at least run it better. Likewise, I can't be too disappointed. ;)