small MFH in SF bay area - how can this possibly make money?

Question

Hello,

This is my 1st time posting (guess i should head over and introduce myself...), so sorry if I leave anything important out below.

I've been thinking about small MFH for the past few weeks, and came across this near me -

https://www.realtor.com/realestateandhomes-detail/...

Its a 4 unit MFH. units are 3/1, 2/1 and 2 x 1/1, being sold for 1.5M$I've guestimated the rents at 2700 2100 and 2 x 1800 by looking at similar neighbouring assets on hotpads.

Place seems to be freshly renovated, but no AC (which i think would be the biggest value add).

My problem is that however I try running the numbers it wont cash flow. Am I missing something or is the seller just completely off in their valuation?

Monthly income (only rents) - 8500 (the listing seems to indicate only a single unit is currently occupied, and at below-market rate).

Monthly expenses:

property taxes: 1500 assuming this will be 1.2% of the deal value of 1.5M. current assessment is ~330k -

https://www.sccassessor.org/index.php/all-situs-se...

management: 850. thats 10% of rent, not taking into account placement fees

vacancies: 425. this is assuming a 5% vacancy rate (may even be lower, market is hot) but doesnt take mgmt company placement fees.

water & sewer: ~415. thats according to city sewer rates and avg water bill. no details in the listing. listing says this is not metered per-tenant.

insurance: 375. zillow estimate. I didnt not verify.

garbage: 70$ (rough estimate looking at city rates)

TOTAL: 3635 (with mgmt company, assuming i do placement?). 2785 without management company.

If i take a standard mortgage (20% down, 30y term) the P&I is 6187, which means this property will lose money.

If i just plop down 1.5M in cash I get back 4% ROI with mgmt company, 4.5% without. probably worse as i have not budgeted for maintenance above (how do I do that)?

Depreciation - assuming the entire 1.5M is depreciated over 27.5 years means ~4500$/month that I can deduct from my income for federal tax purposes - so would need to multiply by my federal tax % to get an actual $ saved value (im a little hazy on these things, so please correct me if im wrong). doing so doesnt make this a cash-flowing deal with a mortgage, and still wont crack 5% ROI if i buy in cash.

finally, here's a link to the biggerpockets calculator for this -

https://www.biggerpockets.com/buy_and_hold_results...

So, is this a very unattractive deal or am I missing something here?

Chris Mason · Answer

It's in San Jose. Any SJ buyer is factoring appreciation into their math, even if you don't. Seven decades of consistent Bay Area and Silicon Valley appreciation data is why it will go for more than $1.5m. Remember that market value isn't determined by calculators or formulas, it's determined by what the highest bidder is willing to pay.

A lot of the older BP content & calculators was made by folks who got started in the Midwest about a decade ago, specifically in Colorado. And there's nothing 'wrong' with that, but it's worth acknowledging. The Bay Area in 2018 is not the Midwest a decade ago. I'll save you some time: Nothing on the MLS in San Jose will cashflow at it's final sales price (which is not the same as the asking price). So if you believe that cashflow is king and seven decades of consistent appreciation data is irrelevant, the Bay Area isn't where you should be looking.

Matt K. · Answer

1031 in.... and 1031 out into something bigger.

Chad Hale · Answer

@Radai R. Looks like you've covered all the numbers pretty well. I offer the small pricing tweaks and info for your consideration.

I would increase your property tax estimate to 1.25%. There are always special assessments and new ones being added.

I think your insurance is a little high at $4500 year. You should be able to find insurance for that building less than $3k / year.

You can find good PM's for 8% and no placement fees or other hidden fees.

Also worth knowing the multi-family market in San Jose is softening right now. Also don't forget about rent control limiting rent increases to 5% / year if you are looking at units with under market rents. It'll take a (long) while to catch up .

If you can purchase all cash, you can find some rehab/fixer-up/ value-add deals. Takes a lot of work and you have to be able to pull the trigger fast, like less than 24hours.

Personally, I would not buy right now in the San Jose market based upon appreciation alone. Work hard and persevere to find a cash flow neutral or better deal with some margin.

Radai R. · Answer

Thank you Bryan. After monitoring the market for a few weeks around me I see stuff being closed on left and right, and was wondering if there's something I'm missing.

Radai R. · Answer

for purposes of determining "attractiveness" I'm assuming money shoved into ETFs makes ~6%/year (inflation adjusted) and is significantly less hassle.

Bryan Devitt · Answer

They probably saw what a SFH was going for per sq ft and rounded to a nice number. You're not missing anything that I can see. I would have laughed at this listing and scrolled past it

small MFH in SF bay area - how can this possibly make money?

small MFH in SF bay area - how can this possibly make money?

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