I just finished @Brandon Turner 's How to Evaluate and Offer on Rental Properties webinar, so I wanted to apply that knowledge in the market that I'm interested in, Tacoma, WA. My goal is to cash flow $100 per unit per month and get a 10% cash-on-cash return.
The property that I'm evaluating is a fourplex consisting of four two bedroom, 1 bathroom units build in 1979. I found it on Redfin and the list price is $549,950. I evaluated this using a spreadsheet that I created after watching Brandon's 4 square method. I don't have pro, so I don't have access to the rental property evaluation tool. I used the rental prices from Redfin ($995, $1050, $950, $1050) as well as the expenses like taxes, insurance, etc. I assume 5% vacancy, 7% repair costs, and 7% capex. The listing says that the roof needs repair so I'm including $20,000 to fix it up ($10k for the roof, $10k for other repairs).
Without any modifications, this is not a good deal (Cash Flow: -272/mo, Cash-on-cash return: -2%)!
What if I raise the rent? According to myrentrates.com, average rent is $1,350. I'll assume that I can increase rents to $1100 on all four units. Still not a good deal (Cash Flow: -$16/mo, Cash-on-cash return: 0%)
What if I lower my down payment? My initial assumption was 25%. What if I can do 20%? That's even worse (Cash Flow: -$170/mo, Cash-on-cash return: -2%), which makes sense since my cash flow is worse
What if I lower the offer price? If I reduce the offer price to $422k, it's still not a good deal (Cash Flow: $403/mo, Cash-on-cash return: 5%), but meets my cash flow requirements.
What's the magic number? $340k (Cash Flow: $770/mo, Cash-on-cash return: 10%).
It seems incredibly unlikely to me that the seller would accept an offer over $200k below their asking price. Are there any other variables that I can change to make this more palatable? Maybe there is a variable to tune that reduces my cash flow but keeps my cash-on-cash return the same?
I took a quick look on this one. Rents shown on the listing reflect a rental increase. Notices have been sent. I don't know that you'd be able to raise them much more in this area. Initial cap rate looks good but I'd suggest making any offer subject to verification of rent (audit) and interior walk through - pretty standard.
@Megan Heffernan It's good to be practicing your analysis on some deals. I'll try to answer a few of your questions, but I am speaking from book knowledge (and evaluating a LOT of deals), not experience from operating them. Anyways, to your questions:
Raise rent? - be very careful to assume you will be able to raise rents. Many of the websites that give rental estimates are just averaging what is listed but don't look at amenities or property types. I have gotten rental estimates from Rentometer that were WAY off for a duplex, because it was averaging the rental rates for some very nice single family homes in the area (SFRs can rent for much more than a duplex in some areas) I would call your local property management company and ask them about the specific property you are evaluating. Usually they are extremely helpful and have a very good idea of what market rent would be for that place within $25 or so.
Lower down payment - this will almost never make a deal better. It will cashflow less and get you worse financing terms (typically). Remember, the bank is a partner in this investment and they are getting interest paid to them on whatever part they contribute (loan) to the deal. The more they put in, the more of the pie they get. The more you put in, the more you keep.
Lowering offer price? You nailed it. This is how you make most deals work. HOWEVER, at this point in time and in this market, most sellers won't accept ANY low-ball offers unless they are simply nuts, uneducated, or in a really distressed situation. They have a real estate agent (whose job it is to know what the property is worth) telling them to list it for a certain amount because they honestly think that is what the property is worth. There is the very rare case when a seller doesn't listen to the agent and lists it for WAY over what it is worth, but this doesn't happen often. Low-ball offers can be effective in limited circumstances - Off market ( which are typically uneducated/distressed), bank owned, and really weird properties. But, a 1979 4-plex in Tacoma probably doesn't meet any of these standards.
Other variables? This is where you need to look. Unfortunately, your cash-on-cash and cashflow are closely linked, so it's hard to raise or lower one independently of the other. However, there are sometimes ways to find things that can be done to increase rents like restructuring a 2/1 into a 3/1 if there is room. 3/1s rent out for considerably more than 2 bedrooms. But, it is usually not easy to convert a 2 into a 3. There is also the chance of offering covered parking at additional cost to tenants, storage, charging utilities back to them if they are not currently, etc.
Bottom line: You are looking for a diamond in the rough here in WA, AND you have have about 1000 other investors in the NW doing the exact same thing right now. Everyone (ok, not everyone, but a LOT of people) is looking for small multi-unit properties south of Seattle. You are going to have a very hard time finding a property in decent shape on the MLS that will cashflow between Centralia and Canada on I5. It can be done, but it's not easy!
Keep looking, keep running numbers, (and if you really plan to do much of this, you might want to use the BP calculators by becoming a pro member) I made my own spreadsheets for a long time, but the BP ones are so simple and fast.
If you do spot one that you would like to go look at, or are interested in making an offer on, let me know and I'd be happy to help you out. I have no problem putting in lots of low-ball offers, but I will be honest with you about the chances of them getting accepted. But remember, if there is a 95% chance a low-ball offer won't be accepted, that means that 1 in 20 sellers just might take it!
Good luck and let me know if there is anything I can help with!
I'm adding the spreadsheets that I used for analysis.
Without modifications: https://docs.google.com/spreadsheets/d/1K3pvB5h0Tf...
What if I raise the rent: https://docs.google.com/spreadsheets/d/1uib5QVH30O... (for this and remaining spreadsheets, somehow my math above was off a bit, but still negative cash flow with 0% cash on cash return.)
What if I lower my down payment: https://docs.google.com/spreadsheets/d/1d1qYFDdLq2...
What if I lower the offer price: https://docs.google.com/spreadsheets/d/1NTP0pVA9Np... (new number is $445k with 400 cash flow/mo, 4% cash on cash return)
What is the magic number: https://docs.google.com/spreadsheets/d/1A5d453sU3B... (new number is $335k with $862 cash flow/mo, 10% cash on cash return)
Have you listened to BP Podcast Show 276 w/ Bryce Stewart by chance?
@John Jackson Adams , I have listened to BP Podcast Show 276. "Vacuum the truck"
@Megan Heffernan Here is a link to the spread sheet system I was using before I jumped to the BP calculators. It's probably overly complex, which may cause analysis paralysis, but use it if it is at all helpful.
@Megan Heffernan The first thing that pops into my head is the utilities expense. @Justin Koehn gave you some great advice by suggesting you charge it back to tenants. You could look into sub-metering or if that is not possible doing RUBS (Ratio Utility Billing System). Or you could simply just include a flat fee in the rent and advertise the units having certain utilities paid for.
Offering below list price is difficult (but not impossible) in western WA, so you need to identify other value add opportunities that will decrease expenses or increase cash flow. You will not find anything turn-key that properly cashflows to your desired metrics/returns. I always double check my rent estimates with what is currently on the market (craigslist, trulia, hot pads) to get an idea of what amenities are being offered for that price. If you think you can get higher rents, then you might be able to make it work.
I highly recommend you look up taxes with the county assessor, NOT using what is listed on redfin. The calculators use estimates and the listing is not always updated to current year's taxes, depending on the listing agent. At the end of the day, once you find your offer price send in an offer and see if it sticks. Then use your inspection/walk-through to be able to confirm your estimates/needed repairs to make sure it will all work before you move forward.