Tri Plex in Tucson, AZ Help me analyze this deal

10 Replies

I have run this report a few different times and always end up with a negative cash flow.  I can see the problem is mainly with the insurance that I would have to have on the property.  Most insurance companies I've talked with and through looking at the various insurance estimates on the county assessors page, insurance will be somewhere between $1200 - $1500/ month.  i realize that the monthly income is $1665 and that the insurance eats up most of that.  Add in all the other precautionary deductions and I'd have to pay for the priviledge of owning this property. Even if this property was given to me in perfect condition, I would end up owing at the end of every month.

The current tenents have been there for a couple years. I have only seen pics of the outside of the property and it looks nice.  Unfortunately, or fortunately, it's located right around the corner from my current residence and I've seen the outside in person.  I wouldn't say that it's trashed but there is definitely a lot of clean up that could be done to make it look much nicer.  My personal experience has been that if the outside is trashed, the inside isn't going to be much nicer.  I wouldn't have a problem ending their current leases and starting at a higher rent.  I think that going this route might end with all three units being empty right from the begining.  Would it be better to start new leases and step up the rent until it is at $2100/ month?

What is it that I'm missing?  Is this just a bad deal and most likely the reason that the current owner is trying to sell?  Have I over estimated something that shouldn't be as high as I think?  Is there something else that can be done to make this a good deal?

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*This link comes directly from our calculators, based on information input by the member who posted.

So I changed the rent on this deal to $2150( total of what I think I could get) per month and left everything else the same.  With the new numbers I'm still at -$650ish per month.  This just looks like a bad deal all around.  What else could possibly be done to make this work?

Originally posted by @Geordy Rostad :

@Alex Verdugo

Are you planning to move in? If not, it's going to be tough to get a loan with $5k down.

You mean $1200-$1500/yr on insurance, not per month, right? I think that's the problem with your math.

 I'm an idiot.  I thought that it was the yearly rent.  Now it makes much more sense.  Thank you.

This deal happens to be a 6-plex: two identical triplexes sold together for $235-250k. Not sure if they'd be willing to sell them separately, but they chose to list it as such to appear in the residential multifamily section of the MLS. Try running the numbers again with a gross rent of $3285 and you'll likely find more room.

That said, the agent mentioned they have an accepted offer on it; late last night or early this morning. Accepting backups, but it seems it's already off market.

So far as insurance, that can be very expensive for companies who don't insure a lot of rental property. Will PM you a couple options for REI-specific products (the mods prefer we not do so in the forums, lest they start getting cluttered with a bunch of "fan club" vendor recs) that will likely fit your needs better

Hi, I'm a newbie to all this and wanted to chime in... with some thoughts and questions. I also thought that the insurance amount (1500/month) was astronomically high and probably an annual fee rather than a monthly fee. I'm glad to hear that its actually more like $125/month for the insurance.

The property does meet the 1% rule, although very low end (1.11%). The property also meets the 50% rule but barely with only $56 of projected cash flow with 50% rule. Based on my calculations (considering that insurance is $125/month), the cash on cash return is only about 2.9%. Is this a good return? Seems low to me but better than negative and the property would gain equity as the tenets pay it off. 

Further analysis projects that the cash flow would be about $153/month total, which sounds low for a triplex. I recall learning on bigger pockets podcast that at least $100/unit is decent (is this correct), thus shouldn't the monthly cash flow be more like $300 to be a good deal?

I also recall learning on bigger pockets podcast that properties of 5+ units are considered commercial and have higher loan costs and you might want to consider that into your estimates.

All-in-all, I don't think I would do this deal unless you can either increase the rent to what you suggested, which would result in closer to $566 of monthly cash flow. However, as Alex mentioned, increasing the rent that much of the start would probably lead to vacancies. I would suggest perhaps dividing the increase into 2-3 years and increase the rent every year by $80/unit for 2 years or $53/unit each year for 3 years. What do you all think? Is this a good strategy to increase the rent or is Alex better of increasing the full amount from start?

Thanks and I hope to learn as well from this deal.

Originally posted by @Yoendry Torres :

Hi, I'm a newbie to all this and wanted to chime in... with some thoughts and questions. I also thought that the insurance amount (1500/month) was astronomically high and probably an annual fee rather than a monthly fee. I'm glad to hear that its actually more like $125/month for the insurance.

The property does meet the 1% rule, although very low end (1.11%). The property also meets the 50% rule but barely with only $56 of projected cash flow with 50% rule. Based on my calculations (considering that insurance is $125/month), the cash on cash return is only about 2.9%. Is this a good return? Seems low to me but better than negative and the property would gain equity as the tenets pay it off. 

Further analysis projects that the cash flow would be about $153/month total, which sounds low for a triplex. I recall learning on bigger pockets podcast that at least $100/unit is decent (is this correct), thus shouldn't the monthly cash flow be more like $300 to be a good deal?

I also recall learning on bigger pockets podcast that properties of 5+ units are considered commercial and have higher loan costs and you might want to consider that into your estimates.

All-in-all, I don't think I would do this deal unless you can either increase the rent to what you suggested, which would result in closer to $566 of monthly cash flow. However, as Alex mentioned, increasing the rent that much of the start would probably lead to vacancies. I would suggest perhaps dividing the increase into 2-3 years and increase the rent every year by $80/unit for 2 years or $53/unit each year for 3 years. What do you all think? Is this a good strategy to increase the rent or is Alex better of increasing the full amount from start?

Thanks and I hope to learn as well from this deal.

i think that increasing the rent over the course of a couple years is a good idea if I want to keep the tenants but Im sure that no matter what I'll end up loosing some of them just because there's an increase. Some people only want to pay a certain amount no matter where they live.  Like Patrick said, it's probably set up as 2 triplexs so that it can still be listed as residential.   

@Alex Verdugo

Hey Alex, I am a Tucson native and I am wondering what triplex rents out for $600 a unit? Where is this deal? I have rented units all over Tucson and since I am interested in real estate I check rents and duplex triplex sales all the time, that being said if it rents for $600 a unit it’s probably on the really rough side of town. I will try to look it up by the mls but you and I both know it’s better to save your money than buy a dump and try to nurse it back. Tucson is wonderful (except the heat) but there are a lot of areas of town with serious drug/ gang / theft problems, and the rents usually reflect that!

@Joe H Watson

Hi Joe, what do you think about investing in NW Tucson or Oro Valley? Oro Valley seems to have stronger annual income than Tucson according to census data. Do you have any tips for analyzing city demographics? Besides city population growth, income, edu level, family make up and age... anything you look for? Thanks in advance.

Originally posted by @Joe H Watson :

@Alex Verdugo

Hey Alex, I am a Tucson native and I am wondering what triplex rents out for $600 a unit? Where is this deal? I have rented units all over Tucson and since I am interested in real estate I check rents and duplex triplex sales all the time, that being said if it rents for $600 a unit it’s probably on the really rough side of town. I will try to look it up by the mls but you and I both know it’s better to save your money than buy a dump and try to nurse it back. Tucson is wonderful (except the heat) but there are a lot of areas of town with serious drug/ gang / theft problems, and the rents usually reflect that!

 The current owner has the rent at $550 and I figure I can raise it at least $50. Its located near speedway and swan, so not a bad part of town but not the best either.

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