Hi all, found a single level triplex with 2x 1-bed 1-bath units and a 2-bed 2-bath unit. All three units are currently occupied and are leased until sept 2018. This is my first multifamily deal and need a little help to see if it's a good deal or not. Also, could use your advice on financing the property. I have the cash for a 25% down deposit, but would like to limit the cash I put into the deal as much as possible. Two contracts have been placed, but both fell through because the inspection report stated that the electrical fuse box is in a closet and therefore not up to code...perhaps I have some leverage here for a better deal. The units were recently updated and refreshed with new interior and exterior paint and new flooring. Here are the numbers:
- Seller Price: $149,999
- Tax assessment: $112,000
- Built in 1979
- 3 units (2x1br1ba =$475 each, 1x2br2br=$600)
- Gross rental income: $1550/month
- Rental property insurance cost: $1220/yr
- Property tax: $2200/yr
- Management costs: $0 (in house)
How much should I account for maintenance and capex? My plan is to offer $115k, the seller is very motivated to sell and is the typical tired landlord. The property is located on a quiet cul-de-sac in a class C area. Any and all advice is appreciated!
Howdy @Navid A.
What is the Market Value or ARV of the property? Do not use tax assessment to determine the value. It will be hard to justify an offer that is 30% below asking price without knowing the market value. Relocating the electrical box is not enough. If they come back with a counter offer then I guess you can play ball.
You did not provide enough expense data. Vacancy rate, Maintenance, CapEx, Owner paid utilities, lawn care need to be accounted for. I would always include Property Management even if you are self managing. Your time is worth something. And if you plan to grow you may want to use a PM in the future. I always stay conservative with expenses when analyzing properties.
My quick estimate of the deal. At asking price with 25% down payment, 4.5%APR/30 year mortgage and using the 50% rule for expenses you end up with ruffly $200 per month Cash Flow. If you can get the property for your Offer the Cash Flow would be around $338.
Obviously, if actual expenses are lower than 50% the Cash Flow will go up.
@John Leavelle , thanks for the reply. The property has a good history of occupancy over the past 3 years with no vacancy loss. I've calculated about $181/mo for CapEx, $45/mo for lawn care, and about $100/mo for maintenance. I've become a savvy DIY-er over the years and can take care of most common maintenance issues around the house. I understand the balance between time vs. money, but currently, I'm in a unique position where I have more time and can thus save more money!
The ARV of the property is roughly $150-160k. This is based on the willingness of two separate buyers putting in offers at those valuations and going under contract. Both buyers backed out due to the inspection report of the electrical box issue. What do you think would be a good entry offer, is $115k too low? Thanks, appreciate your help and time.
I understand about saving the PM money. That’s fine. You should still keep it in your analysis for the possibility of future PM services.
As far as your offer goes it will depend on a couple of things. What is the issue with the electrical box and how much will it cost to bring it up to code. Are there any other immediate repairs needed? And lastly what is the acceptable mortgage payment amount that allows you to meet your Cash Flow criteria? What is your minimum Cash Flow criteria? Come up with a Maximum Allowable Offer (MAO) that meets that criteria. Then start your Offer somewhere below that.
If your minimum Cash Flow criteria is $100 per unit, that would be $300 per month on this property (using the 50% rule). Therefore, your $115,000 Offer would be close to your starting point. You asked me what I would do that’s why I am using the 50% rule. If you truly think expenses will be lower or you are confident you can raise rents, then your Offer may not need to be that low to meet the Cash Flow criteria.
Good luck. Keep us posted on how it goes.
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