Help me analyze this 5-family deal!
Looking for input on this deal. This will be my first 5-family. I have a couple triplexes and a quad.
Here is the info
Price is 370000. Owner wants 25% down @ 6% for 20 years with a 7 year balloon.
I have only done coneventional financing before. Although the numbers make sense to me, the house is in good shape, and the location is premier, I'm having those nervous thoughts being a newer, young investor. Thank you for any input!
Rent roll:
Apt 1, 3 br paying $1200, tenant paying utilities (due for increase)
Apt 2 1 bedroom paying $1100 tenant pays heat and electric
Apt 3 1 Bedroom $1260, landlord paying utilities
Apt 4 Studio apartment w/alcove paying $1150, landlord pays heat and electric
Apt 5 2 BR w/office alcove. $1250 tenant pays utilities
There are 5 boilers for natural gas heat. The heat can be taken over by the tenants, however there is a
shared meter situation that makes it difficult for the tenants to take over electricity for apts 2 and 5.
There is room for rent increases, however, the owner has opted not to do so at this time due to Covid.
Total rent roll $71,520
Expenses (rounded off to nearest $100)
Insurance: $4,000
Taxes: $13,000
Pest control: $800
Water, sewer, trash removal: $4,800
Utilities (gas and electric) $4000
Reserves: $2,500
Total expenses: $29,100
NOI: $42,420,
NOI assumes self management. Apartments rent up very quickly with many applicants applying at
once. There have been no vacancies for the past three years, therefore vacancy factor may be
calculated at less than 3%.
@Bradley Miller, the rent-to-price ratio is strong and this deal definitely deserves to be considered. A few questions and things to keep in mind:
- Why are you going with owner financing? You can surely get better terms from a local bank or CU. Perhaps as low as 20% down and rates in the 4s.
- Those taxes and insurance are really high. Perhaps that's just your market and there's nothing to be done, but if you go forward with this deal shop around the insurance and see if you can challenge the taxes. For comparison, my partners and I recently offered on a 20-unit with a value ~$900k. Taxes were $13k and Insurance was $8k. That puts your taxes nearly 2.5X and your insurance ~20% higher. I understand this is apples to oranges, but perhaps there's an opportunity to lower expenses here.
- 3.5% is not nearly high enough for Repairs and Maintenance. A 5-unit will see some efficiencies of scale, but not a ton. I'd bump this to at least 6%. You probably want to figure 12-15% when combined with CapEx.
- What about lawn care, snow removal, and admin/professional costs?
- Be sure to include management in your underwriting. You want to understand the impact. Even if you go with owner financing, you'll have to refi in 7 years. At that point any lender is going to consider management as part of their underwriting.
- DSCR of 1.7 is very strong. That's good news.
- According to your numbers this is a 11% Cap Rate. How does that compare to other similar properties in your area? That's pretty high relatively speaking and usually points to a property in distress, a D-class property, a particularly difficult tenant base, or...all of the above.