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I am a first-time multi-family investor, and would love to get some more eyes on this deal that I've zeroed in on with my realtor. I wasn't exactly planning on going for so many units on my first multi-family, but this looks like a pretty great deal to me. Wanted to make sure I am not missing something though...
It is a 6-plex, all units are 1-bed/1-bath. Rents are currently at $650/month, but my property manager says we can easily get $700/month. The units are in great shape - hardwood floors, tile in bathroom, windows look good. Opportunity to upgrade kitchen/bathroom fixtures down the road for some added value.
Landlord currently pays utilities, but there are separate electric meters, and (6) separate furnaces. Opportunity to add submeters to the furnaces to convert to tenant-paid utilities, and add some value to the property. There also is an accessible basement that is currently not used - so there is an opportunity to add tenant storage and coin-operated laundry. There is currently no laundry in the building.
The building is quite old (actually is in a historic district), and my team is recommending about $2,000 in exterior rehab on the decks and stairs due to deferred maintenance.
I have a quote from several lenders, and I am looking at putting 15% down for a 5-year ARM (2% max increase per year, 5% max total increase), 30-year amortization, 5.375% interest rate. My offer will be $350K, which is just slightly under asking. My strategy would be to do some work to add value, and either sell or refinance after 5-years once I put more equity into it.
This deal looks great to me, but I'm worried that it is too good to be true. What do you guys think? Thanks for your help!
looks way too thin for me. especially when lots of work needs done. I know a lot of people don't like the 2% rule but 4 years ago we bought an 8 plex. Two bedroom units. Exterior in decent to good condition, interiors a little weak but not terrible. Have stayed rented with average tenant turnover. We put 10% down. Probably a C or C- area
We paid $30,000/unit. they were rented for $550/month so almost 2%
@Arlan Potter that's a good call, I could add in some more contingency for repairs. I included $5K rehab plus 5% maintenance and 5% CapEx... maybe I should increase the rehab to $10K.
How did it go with your 2% property? What was your experience with maintenance?
@Alyssa Weber It has been a great rental for us. We have a 20 year note. It just seems to me that your rents are way to low for the price of the property. I don't want to say its a bad investment, but I am a cheap house buyer. I like properties to make at least 1.5%/month rent to cost. I have some that make 3-4%, In fact the first rental I bought 16 years ago has the same tenant for the last 14 and it makes about 3.333%/month. Its basically paid for itself 5 times in 15 years.
I think your returns look decent (20%). Are your expenses low? I didn't see utilities in there (I might have missed it). My recommendation is to run your analysis with the current numbers and run another one with the projected values (post value-add and rent increases) to get an idea of the interim ROI until it's stabilized.
Are those the current taxes for the current owner? They'll probably increase once you buy it.
@Jovon Itwaru thank you for taking a look! That is a good idea to run it with utilities as well. I was assuming that we would convert over to tenant paid utilities, but maybe that’s not realistic on day 1.
@Jovon Itwaru also yes, I am using last year’s tax data I found on Zillow. The expenses are low, and I think that’s what is feeling a little concerning to me. I am going to add in what the landlord currently pays for utilities and maybe increase my maintenance. What do you usually use for maintenance calculations? I am using 5% but since this is an older property, maybe I should go higher?
I use 5% for repairs. I estimate 5%-10% for capex depending on age of property. For example, you might have several water leak issues and this might add up to lots of *repairs* and exceed the 5% for repairs. However, this would be indicative of a larger system issue (e.g., water pipes or plumbing) and you'll need to use 8% or more for your capex.
Way too thin of margins. I don't know what your assumptions are for capex, property management and utilities but for a historic complex I would recheck those numbers and check the cost of windows
and other things as they may be much more costly as they are in a historic area and may have to meet those requirements.
@Charles Kao I was using 5% maintenance, 5% capex, 10% management. Per previous advice, I increased capex to 8%. I also increased property taxes, and increased my rehab costs.
I was running it assuming tenant-paid utilities, but that may not be realistic on day 1, so I re-ran it with owner-paid utilities and current rent income. I then copied it and did a separate report with the future rent increases and tenant-paid utilities.
The new "day 1" report show a cash flow of about $300/month and 5.55% cash on cash return.
The "future" report shows a cash flow of about $850/month and a 16.5% cash on cash return.
...so that being said, what do you guys think about this deal? My team in the area thinks its a great deal with big upside. I very much trust my realtor (highly recommended by close friends and other investors), and she is also an investor herself who owns 140 units in the area.
Thank you all so much for your help!
Most cases banks assume 10 percent on a deal that small. If you did a full renovation of all units then yes maybe or if you had 200 units then you could get economies of scale to get that low. Also at best you are valuing this property at its ARV and even that pushing it. It should be valued as a value add.
@Alyssa Weber Sorry I was going back up top fo reread and phone crashed but I did not see a vacancy calculation. The difficult thing about 5-8 plexes if they are not big enough to get mich economies of scale yet you still habe to get commercial financing so I personally would prefer a 4plex. Is there a way you can get bridge financing to convert into a 4 plex (provided numbers make sense) so you can get a 30 year amortization and lower debt service?
@Charles Kao I am just now running into this with the lenders I am working with. I didn’t initially realize that 4-plex is the maximum for standard mortgage financing, and that I’d need to get a commercial loan. This is good advice, thank you.
Regarding utilities.... I recently bought a 27 plex. 1 meter so landlord was paying all heat and water/sewer. First day after I closed I put it on "even payment plan" with utility then calculated even amount out among average occupancy %. I sent notice to everyone not in a current lease, that in 90 days they will start paying heat/water/sewer at a fixed monthly rate of $78/month. Only had 1 say they would move because of new bill.... they still live there