Help me analyze this deal on a fourplex

6 Replies

@David Lewis how did you arrive at a 4% capex. I use 10%. Floors brand new before you move. assume 1000 sf per unit. Cost me $6 sf to replace. 10 year life span. 4000*$6=$24000/10/12 months in a year=$200 per month for one item. You haven,t budgeted for appliances and hot water heater 12 year life span, roof 25 year life span, hvac 20 year life span, kitchen and bath remodel 15 year life span, etc. I don't see any utilities being paid by the landlord. Are they all separately metered. Closing costs seem low. i also use 8% vacancy. I assume you are running the analysis as fully rented.

Hey Tim,

Thank you so much for the response. It looks like I definitely need to make some adjustments for capex. I arrived at 4% because the roofs were replaced in 2005 (with 30 year shingles) and 3/4 units have been completely renovated, however, I didn't take into account the lifespan of everything you mentioned. All units are metered separately and all utilities are paid by tenants. Honestly, I wasn't exactly sure what percentage to use for vacancy. I will confirm closing costs with title company. Thank you again! This is exactly why I posted. Great feedback!

Unless this is a turnkey or ground-up construction, this is not a good deal. Vacancies, CapEx, repair cost are too low. one eviction and you're done for. The only way you get that interest rate and low down payment is with government loan programs, which means you have to live there. Are you gonna pay yourself rent or will 3 units pull in $4600 apart from the owner-occupied portion?

Hey Jermaine,  this is a turnkey deal.  Built in 1980.  Roofs replaced in 2005 with 30 year shingles and all but one unit has been renovated.  3 units bring in 3600.  I'm thinking down the road after moving out, 4 units will put me at 4600 - 4800/month.  

A broker owns it currently and has taken very good care of it. I'm not sure how best to get him to come down on price? Perhaps show him the BP PDF? I would think he knows most investors would want a higher cap rate especially since he's marketing it to owner-occupied investors... thoughts?

> I'm not sure how best to get him to come down on price? Perhaps show him the BP PDF?

@David Lewis I was listening to episode 349 of the BiggerPockets podcast today, and the guest said something related to your question above which really resonated with me. He was able to make an offer on a large apartment building which was over $1 million less than asking price, and that offer was accepted within 30 minutes.  He said that, if you're going to cut someone on the purchase price and cut them deep, your odds of success increase greatly if you can back up your relatively low offer with ample evidence (i.e. hard numbers, backed up by research) on why the low offer is appropriate.

This could be any number of things.  I'm just spit-balling here, but some examples are: your inspection tells you that the grade of a property drains water toward the foundation rather than away from it, and this is causing cracks in the  concrete which are serious enough to require a structural engineer's intervention which will cost $X.  Or your preliminary zoning search with the county assessor's office has determined that the property's setback doesn't meet zoning requirements, and fixing this zoning issue would cost $Y.  Or that the upcoming winter weather will cause delays in the exterior portion of your rehab, increasing your anticipated holding costs by $Z dollars per month, and this deal's numbers don't make sense unless the purchase price takes those delays into account.  Obviously you have to be telling the truth when itemizing these costs (i.e. obviously don't say an inspector mentioned the foundation if they never did so), but this is a situation where it pays to be as pessimistic and conservative as possible.

This strategy may or may not work on this property with this specific seller, but it could well work on similar properties in the area.  Speaking of which, it may make sense to take into account the seller's industry experience (and likely large information advantage) when deciding whether to move forward with the deal.  Presumably, if the property is a good investment, the seller's experience allows them to discern this fact and would tell them to hang on to it.  So I'd be sure to get a convincing answer to why they're now looking to part with it.  As they say in poker, if you're at a card table and you can't tell who the sucker is within the first 30 minutes, you're the sucker.

@Richie Thomas thanks so much for the response!  Completely agree on providing information as to why I'm making the offer I am.  I was told the broker selling the property is getting ready to retire and moving closer to his daughter in San Antonio. Thank you again!