First Multifamily Purchase! Good deal or bad?

Question

Hello All-

So I have an 8 unit under contract in Olympia, WA.  I would put the address / purchase price on here, but I believe that may not be legal since I haven't closed yet? Anyways, zip code is 98503.

Information is as follows:

• Total monthly income : $5545Five units at $725 / monthTwo units at $675 / monthOne unit at $595 / month
• Five units at $725 / month
• Two units at $675 / month
• One unit at $595 / month
• All units are 2 bed / 1 bath @800 square feet each
• Coin operated laundry (income from this is not included because it was not provided)
• Consists of two 4-units on one parcel
• Ann Tax: $4100
• Wtr/swr/grb: $5256
• Insurance: $2896
• 25% down payment with ~4.5% IR
• Assumptions: 5% vacancy, 10% for maintenance, 5% for Capex, 10% management fee. I am going to be managing the property, but I like to assume a management fee for safe measure.

• Five units at $725 / month
• Two units at $675 / month
• One unit at $595 / month

Why the property spikes my interest: Rents in the area for a 2/1 are $850-900.  From what I have gathered, the current owners aren't managing the property well and that's why the rents are so low (they done speak English so its hard to communicate).  With a little work I can easily increase rents to market value.

My main concern: Property is on septic.  From what I have gathered, the whole neighborhood is.  I am not seeing any sewer covers in the road.

Would anyone recommend this for the BRRR strategy? Thoughts / recommendations? This being my first multifamily deal, I am finding myself questioning my thinking.

Thanks in advance,

Hans

Curtis Bidwell · Answer

Simon Wold I assume these are the ones on Trailblazer for $650k?

Yes, these rents are considerably under market! You should get $895 from these.

I think the water/sewer is understated. You'll be closer to $7k/yr in Lacey.

Are managing from Seattle? That could be a bit of an issue, with lots of traffic issues. the closer you are the better.

As to septic, have a good evaluation and pumping done prior to closing. Then give specific instructions for use.

Glad to talk or meet if you have questions about the specific area.

Jeff Copeland · Answer

It's not possible to calculate the cap rate and other metrics without knowing the acquisition cost.

Using your numbers above, you're looking at annual income of $34,326.

• At a purchase price of $343k, it's a 10-cap.
• At a purchase price of $500k, it's a 7-cap (6.8%).
• At a purchase price of $750k, it's a 5-cap (4.5%).
• At a purchase price of an even million, it's a 3-cap (3.4%)

But without knowing what a competitive cap rate is for your market and the specific neighborhood, I can't tell you if any of these cap rates are good or bad.

One other thing to look out for in your numbers: Is the property tax estimate based on what the current owners have been paying? If so, will the property value be reassessed based on your purchase price, thus changing the tax basis?

Also, it's not at all uncommon to find a long-time landlord selling off a rental property with below-market rents, so don't let that scare you off just because it sounds too good to be true. Be realistic - it may take a year or so for you to turn over your tenants and get the property performing like it should/can - but trust your due diligence and have a plan. The gap between what it is now and what it can be in two years is where you make your money.

Marc Allen · Answer

Hi Hans - Hard to know if it is a good deal without the purchase price :)

Simon Wold · Answer

@Curtis Bidwell yes, it is located on Trailblazer. Thanks for the great market insight!

I will be managing from Seattle, which will be hard.  This is why I am running the numbers with a 10% management fee.  I have a feeling I will want to sub this out at some point.

The feedback is great.  Thanks for the posts!

Simon Wold · Answer

Sorry, purchase price of 635k.

Property tax estimate is based on what the current owners paid.  I assume this will increase when the property closes?

First Multifamily Purchase! Good deal or bad?

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