Is this a good deal?
It seems there are a lot of questions about analyzing deals and how do you know if a property is “good”? Although...good is a relative term because what is considered a good property for one person may not be for another. Ultimately, the decision will come down to your business plan and objectives.
For any new investors or folks already in some area of real estate today like house flipping that want to get into your first multi-family property, let’s skip ahead to a quick property analysis on our case study property.
We’ll come back to the business plan in future posts.
Case Study Analysis
Our case study property is a 4-plex for $219,000 in Phoenix that will require a $54,750 down payment as of today… just a quick note, I saw this Fannie Mae update about lenders easing on credit standards due to a reduced demand and competition. Perhaps down payment requirements for residential mortgages on a 4-plex might change again at some point as well?
Back to the property… the listing agent has already included a brief summary of some information that we can use to do a quick analysis of the property. I’ve recorded a video here:
https://www.useloom.com/share/7acf24e4e3244cdf88fea3e7a31dbefc
What are some key takeaways?
There are some pros about this property including:
Mix of different types of units so that a diverse set of tenants would be interested in renting. Contrast this with all one-bedroom units which rules out families and reduces the potential market for tenants.
Age of the property. This may be dependent on the local market but we try to stay with properties built at least in 1980 and up. The reason for this is due to things like asbestos in older buildings and higher maintenance costs.
Utilities are paid by the tenants. This is one of those expenses that varies greatly and can significantly impact your bottom line. Having the tenant pay for these removes a burden from you as the property owner. As an example, if you are buying the property in a new LLC without an established history with the utility company, most companies will require a deposit per unit. This increases your out of pocket initial costs. In our experience these deposits range from $200-$300 per unit. You can get back the deposits after a time period of showing that you've successfully paid on time, but ultimately, it's ideal to be in a situation where the tenant pays utilities
Some cons so far:
HOA. This is an expensive monthly cost that you can't control. You won't have the ability to reduce this expense and you could potentially pay more. The HOA could assess all community property owners for things like community center or pool repairs, resurfacing the parking lot or exterior maintenance such as painting and roof replacement. Unless you own the majority of the property in an HOA community, you'll have little say in these expenses or any increases in HOA fees.
Limited upside in rent based on market rents. A quick search on the various market rent sites and we can see that this property is almost at market rates. This means you’ll have limited opportunity to increase your revenue in the short term.
Areas for further due diligence include:
Any known up-coming HOA assessments (pool, parking lot, exterior improvements, etc.) It's possible these have already been communicated to the community property owners. If so, you'll need to understand what these costs are. Historical information about any last assessments and what they were for would be helpful as well.
How long have the tenants been in the property? You’re looking to understand stability of the property. Did the tenants just sign a lease two weeks before the property was listed? Or, have they been living in the property for a longer time period? You will also want to know the length of the leases in place and when they expire. And finally, how are the current tenants about paying rent on time?
What are the actual rents for 2016 and 2015? You are looking for the rent roll and historical performance. When a listing agent puts together a “pro forma” analysis of the property, this is a picture of the possibilities if all things were perfect. The reality isn’t pro forma so you’ll need to have real data and understand gaps in rental income.
What are the actual expenses for 2016 and 2015? Just like rental income, expenses can also be represented in a scenario where all things work out exactly as you had hoped. Having the actual expenses will enable you to determine either opportunities where you think you can improve or big “gotchas” that will eat into your profitability.
Before continuing on, what are your thoughts on the property so far? And, what would you do next?
