If someone like to play with numbers, I have a deal here that you could practice on. My neighbor would really like to sell his 4plex to me. He wants to build a house so needs some of the equity in cash. He is open to carrying a contract for deed for part of it though. The numbers just don't come out very well. I know there are ways with appreciation, compound interest, and the opportunity advantage of no money down that can cover over face value of a higher purchase price. If anyone has any good ideas let me know.
As you can see, the rents are quite a ways below market value but it will take a while to get them worked up to where they should be.
The building is in really good shape. New roof 5 years ago. Quiet town, apartment close to a school so it has been popular with school teachers. I have the numbers figured as 100% financed. So if I had the owner carry a balance for 5 years until I could get rents stabilized to area rates that would help. Would still need to pay him off eventually. It will need to be reworked to get at least a bit of positive cash flow.
@Kyle Koehn - it looks like it doesn't work based on your numbers. I would go back and sit down with him and explain why you can't pay that price, then make another offer.
Also, look up the tax records and see what he bought it for.
@Kyle Koehn - Landlord paying electricity is already a turnoff for me for a quad. My next concern is 5% for maintenance and nothing for CapEx - I would have these numbers closer (or at) 10% each.
The only (quick) way to increase cash flow on this deal would be to decrease your mortgage. Since the seller needs cash for something immediate, I'm sure that he already has a set number in his head.
Even if you were to split the electricity to the tenants, I'm still not seeing a good deal on this property.
@Andrew Kerr I basically had that conversation with him. Pretty much told him I wasn't interested and went over the numbers with him as to why. I think he wants to sell pretty bad though so I wouldn't mind coming up with a deal to help him out. I have other opportunity so I'm not emotionally attached to this deal so that gives me the upper hand. He says he has 200k in it with a 30k roof 5 years ago plus some interior renovation.
I'm not sure how this would all work and if it is even legal but one thought I had was if he would hold a note for lets say 40% of the price (whatever we decide on) and I was able to still get an 80% loan on the rest of it, I could use that to cover the down payment on another property that I have my eye on that cash flows a lot better. I have the money to cover the down payment myself but this would two properties without having to touch any of my own capital. Infinite return. I'm just trying to stretch my creativity to see if I can get what we both want.
@Ben Wilkins The building has an electric boiler that heats the whole building. Any way to separate that out to the tenants?
Most people use the 1% rule or 1.5% rule if you're more conservative. That means if he wants to sell the property for $225,000 it should rent for $2,250-3,3750 per month as is. To avoid over-paying you need to set your price based on what the property is able to cash flow right now, because any improvements, tenant turnovers, evictions, etc. are going to be on your wallet not his.
Since there are tenants in place, it would be good to know when their leases expire and if they are actually paying their rent on time. If you have 6 months left on their lease and they haven't paid on time once and their rent is already below market rate how is this a good deal for you? Your time is valuable and you're losing it on non-performing tenants that you can't necessarily get rid of right away to improve the units. Buying with tenants in place is always riskier than having a property delivered vacant and that should be built into your contract price.
For me it's a no-go since this property can't pass the 1% rule as is and has tenants in place (I prefer to use 1.5% as my rule of thumb as I analyze deals).
@Kyle Koehn - without splitting out four separate water heaters, there isn't a way. At $300 per month, I would hope this includes the electric for the entire building which is what made me assume that the landlord pays for all electric.
Ignoring the electric for a minute: if you add 10% CapEx, 10% maintenance, and your vacancy, you're looking at negative cash flow even if you increase rent. I threw in the comment about splitting electric as a side option if you wanted to force appreciation on the property by decreasing your expenses.
Tenants all in place. The only one that has a current lease is the 1 bedroom. All solid tenants. Loan officer at our local small town bank, the current owner in the 5 bedroom, and two teachers that teach at the school across the road from my place. The 3 bedroom tenant has been there for 15 years. That is the main reason hers is so cheap. Was hard for the owner to buck up and tell her that her rent was going up.