Should I avoid this property due to high monthly maintenance fee?

Question

Hello,

Hope you are doing great.

Quick Introduction about me: I am newbie Investor with 3 SFR positive cash flowing properties - all are Buy and Hold Rental properties - I am able to Traditional finance for 30 years fixed up to 100% of purchase price (by executing 'Buy-Rehab-Rent-Refinance' strategy).

My new venture: Seller accepted the offer of 95K that I made on a fourplex property located in Houston,TX and I like to find out the next steps on this.

Details about the property:

Good

-This building got all 4 units rented (525 … 565 … 550 … 550) with total monthly rent of 2190.

-Tenants staying there since (24 months, 14 months, 6 months, 6 months)

-Leases are going to expire in (24 months, 6 months, 6 months, 6 months)

-Security deposit (295, 295, 295, 125)

Bad

- Year of construction: 1981

Ugly

(This fee is supposed to be a deal killer but I think the risk is worth taking - I am seeking your expert opinion on this subject).

- Monthly Maintenance Fee of 760$ - Seller is claiming that this fee cover pretty much everything except inside the property… the insurance on thru HOA is enough for most banks… also cable/trash/grounds/day-night security…

I prepared 2 Reports using Bigger Pocket’s Rental property calculator a) With 100% mortgage b) With 75% mortgage.

During the preparation of these Reports, I considered the potential future expenses by having the following assumptions.

-Vacancy Rate of 10%

-Repairs and Maintenance 5%

-Capital Expenditures 10%

For the sake of simplicity, I assumed the following to be 0%

-Property Management Fees

-Future Income Increases (rent increase)

-Future Property Value Increases (property tax increase)

-Future Expenses Increases (Maintenance fee increase)

On paper, this property is cash flowing at $167 (0% down) and $295 (25% down) - I am hoping to leverage as much as possible on this property through refinance in future & I believe based on the rental income, this property can support leverage.

I would like to know your thoughts around this and if you think this deal is one that we should proceed. Thanks so much in advance!!!

Austin Stanton · Answer

Bhanu P.

Thats definitely a good idea. Get an exact breakdown of what the expenses are month by month. Good luck :)

Austin Stanton · Answer

Bhanu P.

To be honest, based off of the fees, it looks like you may be cutting it close with this one. A $167 cash flowing property is good if its one property, but you're going to be dealing with 4 tenants for the small amount of cash flow, potentially. In addition, Capex will creep up with a property from the 80's, and as the seller states, its already happening. In addition, I would recommend getting an exact breakdown of what this outrageous fee is. Is it things like deferred maintenance which could be a big problem, or landscaping, painting, electricity etc? Knowing these things will help you adjust to the price and see if you can potentially reduce the expense.

Just some food for thought.

Daria B. · Answer

You should still account for property management, you never know what will happen. If you don't use it then you pocket that money. But if you have to get a PM and you don't account for it then it's eating into your ROI.

You can't assume that property taxes will not increase.

What is future expense increase maintenance fee? Is this the HOA or the property maintenance?

In my opinion the HOA will never go down so you might want to factor in % increases. Good idea on contacting the Association they can give you details on what they cover.

What are you setting your expected monthly ROI to be? What do you want to see? That's how I typically look at the prospect property. Not the only thing but it's on my short list.

Bhanu P. · Answer

760$ fee covers 'only' Home insurance, cable, trash pickup, lawn. I still need to call HOA to understand much better picture on this expense. Thanks for your message.