Newbie....practicing analyzing your insight/advice please

14 Replies

Hi - My name is Mellisa and I'm very interested buy & hold multi-family units. I currently have one rental unit that used to be my primary residence, so I'm just now getting involved in what I've always dreamed of doing....better late than never I guess. :/

I've been reading forums for a few weeks now - and upgraded recently to the PRO so I can practice analyzing various deals.   As I said I'm very new - so please feel free to add your tips and correct any unrealistic assumptions you might see :)  I'm trying to learn all I can before I jump into something ...here's what I'm looking at - 

Fourplex in great condition - each unit has 2 beds/1.5 bath and full basements.  Town outside of Pittsburgh.

Purchase price $199,000

After repair value - I'm not sure how to really estimate this without getting a real estate agent involved and I don't want to waste anyone's time while I'm practicing so I assumed $200,000 (based on online searches of surrounding area -  is there a better way?) - since the units are in good shape I've estimated $10,000 for some cosmetic upgrades.

3% down at 6% for 30 years assuming full asking price.

Each unit rents $750 = $3,000 month or  $36000 annual

Tenant pays all utilities. Property taxes are approx $2800 (based on PA tax online) and about $166 for MIP.

I'm assuming 5% for vacancy, repairs, capX & management fee's.

I'm also assuming 2% annual income growth, PV growth, etc. 

Based on all the above the buy & hold analysis indicated $836.35 monthly cash flow and that's a 45.68% cash on cash ROI - that sounds a little high for this property? Am I missing something?

Thanks for your time. 

Melissa:

Keep plugging away!   

When you say 5% for vacancy, repairs, capx & management, are you saying 5% for each or as a whole?

I usually budget for 8% vacancy (one month per year) although that should be conservative.   In my experience, most property management will cost you 8-10% of revenue depending on location and property.  On my SFRs I spent an average of $150/property/mo long term on Cap-Ex / repairs.  I would think that would be slightly higher on a quad.

If the property is in good condition, you are probably paying market value for it. You may find the best deals are the really ugly properties, especially if they are in such bad condition they cannot get a conforming mortgage. Those properties have less competition so can often be bought and rehabbed for below ARV, driving up CoC returns.

Good luck!

Hi Mellisa! Looks like a good start. That's awesome that you're practicing real-life deals!

It's always good to plug in the asking price like you did for worst case scenarios. Of course, though, you'll negotiate a lower price. ;-)

I noticed you calculated rental income for renting out all 4 units. However, I'm pretty sure you will not be able to put only 3% down on an investment property. You *could* get that deal for 3.5% - 5% down if *you* would be living in one of the units for the first year of the mortgage. After that year, typically, you can then move and make it a full investment property.

Next thing I noticed is that it seems you need to clarify what you mean by the property being in great shape. If it's in great shape, to me, that means it's good as is and requires no money to fix it up. So, why $10,000 in cosmetic upgrades?

Oh, and I'd like to add that while many multi-families have separate electric/gas meters, they might not have separate water meters. If not, you would need to factor average cost of water and build that into your rent (but also not go above market rent price for similar units offering similar or no one will rent from you for being too costly). In some areas, you can even look at a property's water bills online!

Hope this helps!

Another thing I just thought of... where did you get the rental amount? Whenever I see a listing that includes the rental price, I assume it's usually an inflated price. For example, they say each unit is renting for $750, but in reality, they might be renting for $700 each. But if you got that number by looking up nearby similar size rentals with similar features, then good! Craigslist, Zillow, and the like are a great place to start when looking up private landlord rental ads.

@Nicole A. - great points.  Yes I plugged in asking price as worst case scenario and would certainly hope for a lower price, but for the sake of practice I kept it as the asking.

That's a very good point.  I would not be able to live in one while renting the others - as this property is in another state from me.  So I will make the adjustment to 5% as you have suggested. (thanks!)

I budgeted $10,000 for cosmetic upgrades because I haven't seen the property in person and the pictures only tell part of the picture - just in my experience.  This may not be the case in reality, but I like to have some 'cushion' - if that's too much I can make that adjustment as well.

I didn't even consider water - which looking back was dumb... ;) 

The listing did not include the rental income, but I did research similar properties in that area and took the median price of those with same beds/baths. 

Thank you for such valuable feedback!  I appreciate your time!

You're welcome! To clarify, the 3.5% - 5% down that I mentioned was regarding the typical down payments for a primary residence mortgage. Because this would be an investment property from day 1, you will likely need 20% - 25% down.

To minimize your cash out of pocket, you can negotiate that the seller pay part or all of the closing costs. That way you don't have to come up with such a big down payment and still need more cash for closing costs.

The reason your CCR seems high is because you are using 3% down. There are FHA and conventional programs for owner occupants which can accommodate this, but on an investment property you are likely looking at 25% down, and points.

This is assuming all the rest of your numbers are good :)

Good luck!

Originally posted by @Ben Leybovich :

The reason your CCR seems high is because you are using 3% down. There are FHA and conventional programs for owner occupants which can accommodate this, but on an investment property you are likely looking at 25% down, and points.

This is assuming all the rest of your numbers are good :)

Good luck!

To avoid any confusion, by CCR, Ben really means "Cash on Cash Returns". I see that the acronym underlines and shows as standing for Conditions, Covenants, and Restrictions.

@Mellisa A Lantaya - Pay close attention to every part of the building. You need to make sure to know how much in capital improvements you're going to need to make to the building. You don't want to discover after the fact that you need to add more insulation, new gutters, remove concrete slabs, add new porch cap, etc. Great job analyzing deals! 

Keep taking action and results will follow!

I didn't read the whole tread, but yes your numbers look decent. If there is that much meat on the bone I would budget more for CapEx because that is what can kill you (new HVAC $10k). You COC return is through the roof because you are putting basically no money into the deal. If you run the same numbers with 20% down that will be much different. That being said, I am not afraid for getting in to deals with low money down but know that if push comes to shove and you have to sell, you may have to bring money to the closing table. It helps to get some more skin in the game because if the market goes into a recession again then you have some equity in the property that may help, if you plan on having this property till retirement then it doesn't matter and just hang out of the big cash flow and buy more non-depreciating assets!

Good luck and don't get stuck in analysis paralysis.