4-plex Calc Analysis - This can't be right... is it?

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My capital expenditures seems quite a bit low. I did a calculation and ended up coming up with something like $600/mo which seems quite a bit high, so I lowered it to 6% just because there is no way my math was right on that. Even after lowering the capex it seems like this property is just not fit for a rental with my low down payment. Am I missing something in my calculations? From what I'm gathering, this 4-plex would only make sense at around $300k. Is it true that it is overpriced $150k? Or am I just being a total newb in some area? :) Thank you BP for your amazing knowledge and willingness to pour into other people's life!

John Leavelle · Answer

Howdy @Derek Meehan

This is not a good deal.  It would not even get close to passing my Initial 5 minute analysis.

Does it meet at least the 1% Rule?  No

Does it meet the 50% rule for Cash Flow  (minimum $100 per unit)?  No

Does it meet minimum COCROI?  No

Definitely pass.

Derek Sperzel · Answer

It appears to me that you are being excessively conservative in your time periods per capital expense.  I am all for erring on the conservative side regarding REI, but it looks like you've killed your deal on paper.  For example:

ROOF - Asphalt shingles should last 20-25 years.

HVAC - I usually plan for a lifespan of 15-20 years, but your dollar amount looks accurate.  I usually pay $4k for all new HVAC on my SFR.

PLUMBING - $12,000 seems quite high to me. I would need more info regarding the property, but you likely wouldn't need that much saved up for plumbing unless you anticipate complete failure of that system.

STRUCTURE - If you think you need to invest that much in foundation and structure, you may want to rethink purchasing this property.

I would recommend you speak with some local contractors to dial in your expected costs, and life expectancies of the respective home systems.  Best of luck!

Ryan Murdock · Answer

He may already be 10-15 years into a 25 year roof so you have to calculate based on remaining life. Same with HVAC.

Plumbing & Structure - I agree entirely. Doesn't make sense to me.

Ryan Murdock · Answer

@Allan Smith He's taking what it's going to cost him for individual cap ex items and dividing it by the period of time until that expense will be realized. That's the right way to do it. I'm not saying the numbers are necessarily accurate but the method is.

If you have a $100,000 capital expense coming 10 years from now if you put away $833.33/mo for 10 years you'll have saved enough to pay that $100k when the time comes.

I don't know many people that actually save money in different little buckets like that every month but you should at least be aware of what's looming and have a plan in place to deal with it.

Derek Meehan · Answer

@Allan Smith Thank you for your feedback! Perhaps I don't understand capex, but from the podcasts I've listened to I thought it was to represent what is going to need to be replaced within the years column to be prepared for expenses down the road. To answer your question of local appreciation... It has been going up 15% for the past couple years. https://www.weknowboise.com/blog/real-estate-market-trends/ That's not to say I want to 'bet' on appreciation, because I do not want to be playing that game. From all the properties in the area that I've been looking at, rents appear to be about 0.65%-0.75% of the price of the property. I'm thinking I may just have to spend some time driving around and finding distressed units so I can try a 203k loan. Why not get that monster out of the way on my first purchase eh? :)  My goal is to live in one of the units, if possible. Thank you again Allan!

Allan Smith · Answer

People talk on here a lot about the 1% rule. In other words, rent should be at least 1% of the price of the property plus rehab costs. This deal is easily $150k+ over priced in my opinion (and that's with 15 seconds of calculations in my head). Unless it's in an area with 15%+ annual appreciation.

Also, that capex calculation is wild. Are those costs you list needed right away? It needs a $15k structure repair right now? If so, why is that a cost per month? That's just initial money needed that will dillute your ROI. If that is supposed to be your maintenance budget, it's not capex, it's maintenance. And you don't need $15k structure or plumbing repairs on the regular. I'm confused on all that.

4-plex Calc Analysis - This can't be right... is it?

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