What do you think of this deal?

14 Replies

Attempt number two to get pictures to work. 8 bed/4 bath fourplex built in 1920 in Troy OH. We're currently working on getting into our first small multifamily, and the numbers look good on this one. Area is decent. Only thing we'll need to change is rehab costs I'm sure, as we've only seen one unit so far and I'm sure we'll need more than $10k total, but we plan to upgrade the units slowly as tenants move out. The first picture is the income statement sent to us from the listing agent. Thoughts on our analysis? It's only roughly $100 "per door", but our goal overall is total cash flow, so $350-$400 total after all expenses and saving for repairs seems good to us.

Typically you will require more than a 20% down payment for an investment property, unless you are planning to do owner occupied. I'd run the analysis using anywhere from 20-30% down.

Also, your vacancy is quite low. Only $88/month is only 4%, that is not realistic. Typically you'll want to set aside anywhere from 10-12%. Even if you plan to self manage, you should ALWAYS include the management fees in your analysis so your deals aren't dependent on self managing in order for the deal to work.

I see you've also set aside $260/mo for utilities. Are you sure these won't be included in the rent? Seems high to me.

You can't really make an accurate analysis until you know your total rehab costs and ARV. How do you plan to finance the rehab? If you've only seen 1 unit and estimate 10k worth in rehab costs, this could become 40k+ by the time you've seen everything and that could change the entire deal and will effect your cash on cash return drastically.

$2000/mo income on a 4 plex so rents are only $500? Either this is a pretty rough area or this property is in bad shape. Have you checked the median for the area? I recommend plugging the address into Rentomenter.com and seeing what the median is. If you plan to upgrade the units and can increase the rent a couple hundred dollars per unit it would make everything look a whole lot better.

Last piece of advice is plug these numbers in the Bigger Pockets rental property calculator so you can better manipulate the numbers and find out where it will work and where it wont.

From what I see here currently though, not a good deal.

10k does not go far at all in rehab....... and even less far in a fourplex built in 1920.

Another thing to consider is that typically a prop mgmt company charges fee for first mo/renewals of leases. That could be something like 50-75% (or more) of that month and then the 10% ea mo after. So really, spread over the year it's more than 10% or you gotta factor about 11 months of rent...

This doesn't seem like much of a deal though, you could make 350-400 on a single door.

Valid points guys, I should’ve added some more details to go along with the original post, so sorry for that. We’re approved for 20% down for non owner occupied investment property through a credit union. I have 12% vacancy put it as well.

This next part I wasn’t so sure about, property management. I intentionally accounted 5% to pay my sister $100 a month to manage it. She lives a couple streets down. The intent is she will be an in between to handle phone calls (we’re in a different time zone) and handing over keys etc. We still plan to do all marketing and vetting. She’ll have a power of attorney to sign on our behalf for legal things. My wife is currently working on her real estate license for when we move back to the states.

Originally posted by @Cory O'Dell :

$400 cash flow per door? I’d love to see that deal...

 That'll take some digging.... but till then

https://www.redfin.com/MO/Grandview/6068-E-129-St-...

do 25% down, get a better loan product say around 5% and figure something like 55/mo for insurance. That gets you to 575, and it's rented to long term tenant at 850. Skip prop mgmt, reduce cap ex since your already paying hoa (high, should be half that but whatever). 

Median rent for the area (through rentometer) is 900, average is 936.. 

So offer 60k, and raise the rents to 900...... and you're closer to 400 cashflow then you are w/ 4 doors of your other deal. This was 10 mins looking if that on redfin...

Oh and take that 10k you had for remodel and toss in reserves... then you don't need to worry as much about vacancy etc...

Pretty sure we’re calculating cash flow differently. I plugged that property into Dealcheck software and came out to $52. I also neglected to change property management to $0 since I do not live there to self manage (so changing to zero makes no sense??). I also didn’t just add in new loan terms when I have pre-approval ready to go for 20% at 5.4%. Otherwise, vacancy at 8%, property management at 10%, maintenance at 10% and cal ex at 3%. Plugged in HOA and taxes/insurance and came to $54. So yeah. Definitely no $400 a door.

Originally posted by @Cory O'Dell :

Valid points guys, I should’ve added some more details to go along with the original post, so sorry for that. We’re approved for 20% down for non owner occupied investment property through a credit union. I have 12% vacancy put it as well.

This next part I wasn’t so sure about, property management. I intentionally accounted 5% to pay my sister $100 a month to manage it. She lives a couple streets down. The intent is she will be an in between to handle phone calls (we’re in a different time zone) and handing over keys etc. We still plan to do all marketing and vetting. She’ll have a power of attorney to sign on our behalf for legal things. My wife is currently working on her real estate license for when we move back to the states.

Regarding the property management with your sister, I still don't think analyzing with only 5% is a good idea because as I said before, the second your sister decides she doesn't want to manage the property anymore then your cash flow looks a whole lot different. Plus paying her only $100/month to manage 4 units... yikes! Could make more working at McDonalds!

Originally posted by @Cory O'Dell :

Pretty sure we're calculating cash flow differently. I plugged that property into Dealcheck software and came out to $52. I also neglected to change property management to $0 since I do not live there to self manage (so changing to zero makes no sense??). I also didn't just add in new loan terms when I have pre-approval ready to go for 20% at 5.4%. Otherwise, vacancy at 8%, property management at 10%, maintenance at 10% and cal ex at 3%. Plugged in HOA and taxes/insurance and came to $54. So yeah. Definitely no $400 a door.

Look at the deal for what it is, not for what the software tells you.
PM= 0 because it's a existing long term tenant. Assuming they paid rent on time, you really wouldn't need a PM since a) it's already rented and b) the HOA will take care of most issues for you.
Loan Terms= Approvals doesn't matter, you can shop a better rate if you wanted. I have 2 30 yrs from last year at like 4.4/4.6 granted it's gone up recently but no idea if it's been a full point.

Vacancy- Sure take 8%, but again that's kind of a generic number. You already have a long term tenant, it'd make more sense to find the average length of vacancy and apply that number.  Say it's two months, then set aside that amount, take it out monthly if you want, but you don't need a flat %.

Maint/Cap ex= you already have this taken care of through the HOA for the most part. If you wanted to, figure out the useful life of stuff and budget from there... but again flat % isn't going to be the most efficient way to do that.

Now don't get me wrong, you want reserves... that's the entire point of the % for the set aside. But you have 10k saved up for a remodel that you aren't doing... use that. That needs to be considered and adjust your rates accordingly. If you dumped that 10k into this place then your capex/maintenance shouldn't be 20% since almost everything would be new/reconditioned.

60k purchase

15k down payment (25%)

5.4% interest

555 per month

253 P&I, 215 HOA, 36 tax, 51 insurance,

900 rent

Leaves you with 345 mo, and 10k in the bank for reserves which is = to about 39 mos of set asides (20% maint/cap, 8% vacancy).

If you get your loan to 5% vs 5.4 you're at 490 per mo and that gets you 410 left over.

I should also point out, this was a random example that took me longer to break down than to find.... and doesn't require you paying utilities on a 4plex that's almost a 100 years old (which i'd assume will be more than 260 mo).

Originally posted by @Daniel Caraway:
Originally posted by @Cory O'Dell:

Valid points guys, I should’ve added some more details to go along with the original post, so sorry for that. We’re approved for 20% down for non owner occupied investment property through a credit union. I have 12% vacancy put it as well.

This next part I wasn’t so sure about, property management. I intentionally accounted 5% to pay my sister $100 a month to manage it. She lives a couple streets down. The intent is she will be an in between to handle phone calls (we’re in a different time zone) and handing over keys etc. We still plan to do all marketing and vetting. She’ll have a power of attorney to sign on our behalf for legal things. My wife is currently working on her real estate license for when we move back to the states.

Regarding the property management with your sister, I still don't think analyzing with only 5% is a good idea because as I said before, the second your sister decides she doesn't want to manage the property anymore then your cash flow looks a whole lot different. Plus paying her only $100/month to manage 4 units... yikes! Could make more working at McDonalds!

Valid points. Thanks for your insight!

Originally posted by @Matt K. :
Originally posted by @Cory O'Dell:

Pretty sure we're calculating cash flow differently. I plugged that property into Dealcheck software and came out to $52. I also neglected to change property management to $0 since I do not live there to self manage (so changing to zero makes no sense??). I also didn't just add in new loan terms when I have pre-approval ready to go for 20% at 5.4%. Otherwise, vacancy at 8%, property management at 10%, maintenance at 10% and cal ex at 3%. Plugged in HOA and taxes/insurance and came to $54. So yeah. Definitely no $400 a door.

Look at the deal for what it is, not for what the software tells you.
PM= 0 because it's a existing long term tenant. Assuming they paid rent on time, you really wouldn't need a PM since a) it's already rented and b) the HOA will take care of most issues for you.
Loan Terms= Approvals doesn't matter, you can shop a better rate if you wanted. I have 2 30 yrs from last year at like 4.4/4.6 granted it's gone up recently but no idea if it's been a full point.

Vacancy- Sure take 8%, but again that's kind of a generic number. You already have a long term tenant, it'd make more sense to find the average length of vacancy and apply that number.  Say it's two months, then set aside that amount, take it out monthly if you want, but you don't need a flat %.

Maint/Cap ex= you already have this taken care of through the HOA for the most part. If you wanted to, figure out the useful life of stuff and budget from there... but again flat % isn't going to be the most efficient way to do that.

Now don't get me wrong, you want reserves... that's the entire point of the % for the set aside. But you have 10k saved up for a remodel that you aren't doing... use that. That needs to be considered and adjust your rates accordingly. If you dumped that 10k into this place then your capex/maintenance shouldn't be 20% since almost everything would be new/reconditioned.

60k purchase

15k down payment (25%)

5.4% interest

555 per month

253 P&I, 215 HOA, 36 tax, 51 insurance,

900 rent

Leaves you with 345 mo, and 10k in the bank for reserves which is = to about 39 mos of set asides (20% maint/cap, 8% vacancy).

If you get your loan to 5% vs 5.4 you're at 490 per mo and that gets you 410 left over.

Crazy to me you'd recommend a stranger assume 0% for PM (because HOA), 0% vacancy (because tenant will never leave), 0% maintenance/capex (because HOA), no rehab (but increase the rent), put more money down, and just hold onto $10k instead for reserves...all to make your fantasy cash-flow numbers work. Assume the numbers I just mentioned (0% everything, 60k purchase price, $500 year for taxes, $600 year for insurance, $215/mo HOA, 25% down and 5% interest rate, $900 rent), and your cash flow per month is still only $351, with a lot of bold assumptions in to make it work. Would it work for a year? Maybe. Two? Possibly. But it's certainly not good long-term advice. You can alter whatever numbers you want to make a random cash-flow number, that doesn't mean it makes sense or is smart. I could just put my vacancy to 0 on this fourplex and man, the cash flow let me tell you! It's great!

Is it really though? C'mon man. Hell, even as it sits with this fourplex with no rental increases, accounting for PM, maintenance, Cap-ex, etc etc it cash flows $350 per month. I'm not saying this is the best deal ever, but it's at least realistic over the long-term.

Originally posted by @Matt K. :

I should also point out, this was a random example that took me longer to break down than to find.... and doesn't require you paying utilities on a 4plex that's almost a 100 years old (which i'd assume will be more than 260 mo).

 I took the utility expenses over last 3 years on this property, averaged it out, and broke it down monthly to include it in my expenses.

Also congrats on finding that fantastic deal so quickly! You can have it though.

Originally posted by @Cory O'Dell :
Originally posted by @Matt K.:
Originally posted by @Cory O'Dell:

Pretty sure we're calculating cash flow differently. I plugged that property into Dealcheck software and came out to $52. I also neglected to change property management to $0 since I do not live there to self manage (so changing to zero makes no sense??). I also didn't just add in new loan terms when I have pre-approval ready to go for 20% at 5.4%. Otherwise, vacancy at 8%, property management at 10%, maintenance at 10% and cal ex at 3%. Plugged in HOA and taxes/insurance and came to $54. So yeah. Definitely no $400 a door.

Look at the deal for what it is, not for what the software tells you.
PM= 0 because it's a existing long term tenant. Assuming they paid rent on time, you really wouldn't need a PM since a) it's already rented and b) the HOA will take care of most issues for you.
Loan Terms= Approvals doesn't matter, you can shop a better rate if you wanted. I have 2 30 yrs from last year at like 4.4/4.6 granted it's gone up recently but no idea if it's been a full point.

Vacancy- Sure take 8%, but again that's kind of a generic number. You already have a long term tenant, it'd make more sense to find the average length of vacancy and apply that number.  Say it's two months, then set aside that amount, take it out monthly if you want, but you don't need a flat %.

Maint/Cap ex= you already have this taken care of through the HOA for the most part. If you wanted to, figure out the useful life of stuff and budget from there... but again flat % isn't going to be the most efficient way to do that.

Now don't get me wrong, you want reserves... that's the entire point of the % for the set aside. But you have 10k saved up for a remodel that you aren't doing... use that. That needs to be considered and adjust your rates accordingly. If you dumped that 10k into this place then your capex/maintenance shouldn't be 20% since almost everything would be new/reconditioned.

60k purchase

15k down payment (25%)

5.4% interest

555 per month

253 P&I, 215 HOA, 36 tax, 51 insurance,

900 rent

Leaves you with 345 mo, and 10k in the bank for reserves which is = to about 39 mos of set asides (20% maint/cap, 8% vacancy).

If you get your loan to 5% vs 5.4 you're at 490 per mo and that gets you 410 left over.

Crazy to me you'd recommend a stranger assume 0% for PM (because HOA), 0% vacancy (because tenant will never leave), 0% maintenance/capex (because HOA), no rehab (but increase the rent), put more money down, and just hold onto $10k instead for reserves...all to make your fantasy cash-flow numbers work. Assume the numbers I just mentioned (0% everything, 60k purchase price, $500 year for taxes, $600 year for insurance, $215/mo HOA, 25% down and 5% interest rate, $900 rent), and your cash flow per month is still only $351, with a lot of bold assumptions in to make it work. Would it work for a year? Maybe. Two? Possibly. But it's certainly not good long-term advice. You can alter whatever numbers you want to make a random cash-flow number, that doesn't mean it makes sense or is smart. I could just put my vacancy to 0 on this fourplex and man, the cash flow let me tell you! It's great!

Is it really though? C'mon man. Hell, even as it sits with this fourplex with no rental increases, accounting for PM, maintenance, Cap-ex, etc etc it cash flows $350 per month. I'm not saying this is the best deal ever, but it's at least realistic over the long-term.

Exactly right

It is crazy to figure 0 for PM and 0 for vacancies