4-plex deal - razor thin or good enuf?

Question

I have an opportunity on a 4-plex. Actual current NOI (once the current vacant apt is rented) is 46,117. Debt service looks like it will be about $43,800. CAP rate is 6.6%. DSCR is 1.05. Seems pretty razor thin, but as long as it's fully rented, it does pay it's own way. If these numbers are not good, what would be better numbers for a buyable deal?

John Leavelle · Answer

@David De Luna

Your whole analysis is off.  Starting with your financing.  20% of $700K is $140K and not $125K for a Down payment.  Unless you live there you will more likely have a 25% Down payment required (Investment property).

You should also be considering the current rent to purchase price ratio ($5,300/$700K) is .75%.  Most investors want a minimum of 1%.  Maximum purchase price would need to be $530K to get you to 1%.

Next I would consider Cash Flow using the 50% Rule.  That means $5,300 Monthly Income x 50% = $2,650 Monthly Expenses.  $2,650 in your Monthly NOI.  If your minimum monthly Cash Flow criteria is $100 per unit subtract that from the NOI to see what your maximum P&I payment can be.  $2,650 - $400 = $2,250.  Even if you put 25% down your Mortgage payment is going to be around $2,800.  That puts you in negative Cash Flow.

The last thing is your 8.92% COCROI is below what I and many investors consider to be a good investment.  10% - 12% is more acceptable.

The bottom line is you have not provided any information to support this as a good deal.  I would not want you to waste such a large amount on a deal you are not sure of.

Rhonda Wilson · Answer

The numbers aren't really adding up for me. One problem is the the property tax and insurance are included in the mortgage payment but also included in the annual expenses. What are the terms of the loan?

Sam B. · Answer

Way too thin, IMO. That's a CoC of 1.6%.

One big bill wiping out your cash flow for years is often possible, but it hurts a lot less when you're $50K in vs $700K.

Jason Howell · Answer

The fact that experienced investors take the time to break this stuff down for those of us learning the ropes, and in such detail, AND with such grace, makes me continually realize just how awesome Bigger Pockets is time and time again. Thanks to all who pitched in for this education.

David de Luna · Answer

Thank you. Your counsel is eye-opening! Seriously. I'm soooo glad I ran by my first possible deal by you. I am grateful for your advice. Very sound. I'm passing on this deal and keeping my radar open for deals more closely aligned with your guidance.

David de Luna · Answer

I also see that there is an empty outside access room in the rear that I was told can have washers and dryers installed for additional income. I do not include that here because I have not seen the room yet and don't want to count it if I can't verify.

David de Luna · Answer

@John Leavelle,

You are correct, in my naivete, I neglected to add in CAPEx and vacancy. I did check the comps and it's within range. All the units were recently updated and and painted. They place actually looks pretty nice, even if old. I am right now in the process is getting approved for owner occupied so the downpayment may go way way down.

David de Luna · Answer

Thank you, @John Leavelle. This is the first deal that I'm considering. It is a 4-Plex - each unit approx 550-600 SF each; total of 2500 SF. The metrics seem to be in the range I've learned about, but it's my first deal and I'd sure appreciate far more experienced eyes to look at these numbers and tell me if you see something wrong. I hate to plunk down this much money not considering something I'm missing here. Much obliged to for taking a peek at these numbers.

Sell Price

700,000

Down Payment

125,000

Loan Amount

575,000

Rate

4.50%

Term

360

Monthly Debt Service

2,913

Annual Debt Service

34,961

NOI

46,117

Annual PreTax Cash Flow

11,156

Monthly PreTax Cash Flow

930

GRM

1.10%

CAP Rate

6.59%

DSCR

1.32

Cash on Cash ROI

8.92%

My original plan was to live in one of the units to get a good residential loan (I'm a first time homebuyer) but that would put a $1450 dent in cash flow, making me go negative, so I'm not sure yet until I see the diff between a commercial loan and a residential loan cost. I have yet to pursue that question. The unit happens to be empty right now but they have a half dozen tenant applications in hand right now in case I opt to not move in.

Please let me know if more info is needed. I didn't want to cram so much data, like the detail of expenses and such, but if you want to see them, I'm happy to post them. I'm not completely certain I'm looking at all that needs to be analyzed so I welcome the schooling. THANK YOU!

John Leavelle · Answer

Howdy @David De Luna

Still need more information.  Is the information you are providing coming from the Seller?  If so be very leary of the completeness of the data.  Stay conservative with your analysis.  They want to present the property in the best light possible and may leave certain things out (intentionally or unintentionally).  For instance you are not including anything for Vacancy even though you indicate it has a current vacancy.  You do not provide any indication of the property age or condition nor include any reserve holdings for CapEx.  At a minimum I would use 8.34% for Vacancy and 10% for CapEx until I have the property inspected.  The next thing I would need to know is what are Comps selling for in that area.  A 4-plex is typically appraised that way versus Cap Rate.  You need to know if $700K is a reasonable asking price.  Your financing does not look correct either.  20% of $700K is not $125K. It is $140K.  However, this is considered an investment property and more likely require 25% ($175K) down.  The interest rate will probably be closer to 5% (unless you already have a confirmed quote).

The bottom line for me is this is too thin for me using your numbers.

4-plex deal - razor thin or good enuf?

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