All Forum Posts by: Nick L.

@Account Closed On reflection, I think we're saying the same thing and getting tripped up over terms. I agree 100% that the cap rate is set by the market and is independent of any individual property. I am just commenting that the actual calculation of NOI/price will change over time for an individual property. I have always heard that called the "operating cap rate" but perhaps there is some better term for it.

@Bayo Badejo

I agree with @Federico Gutierrez that FHA is out for sure. But I disagree that owner occupancy is a negative. I think banks would view it as a net positive since it shows skin in the game. As such it should make it easier to get the loan, even if you can't get more favorable terms.

How feasible would it be to separate out the electricity? And to either submeter the water or split the cost among the tenants?

@Account Closed I agree that occupancy doesn't change a pro forma cap rate at sale. But it absolutely changes an operating cap rate - in other words, actual NOI / original purchase price.

@Nicholas Armstrong

I like them both from your descriptions but I'm with @Michael Boyer that the duplex seems like a better fit. It has a better chance of appreciating in capital value which you can use to fund your next house hack. 

I am skeptical about using cash flow from the quad to fund your next downpayment, because:

1. C/D properties are often more expensive to maintain than you think

2. You would not be able to depreciate the building fast enough to offset cash flow, so income taxes would end up taking a bite.

Another factor is that you are a first timer and will be living on the property. So the duplex will be easier to manage.

@Dan D.

Assuming the 26% cap is accurate, there are lots of off-balance-sheet problems that could be lurking. For example:

- High paying tenant about to leave and no replacement is likely

- Major structural issues

The seller is obviously pricing in a major discount for some reason. Only a sucker would buy the property without figuring out why.

@Sean O'Gorman

You are right on both counts. If the contract says that the securty deposits are to be provided and the rent is to be prorated, then that is what should happen. Regardless of whether rent was received.

However, as a practical matter you probably have very little recourse. The seller's bank has agreed to a specific payoff amount which most likely doesn't include the security deposits. And if the seller refuses to provide the prorated rent, your only realistic option is to terminate the contract.

If the deal is a good one, you should just chalk up the loss to the cost of getting a short sale. If it's not good enough for you to want to continue, you're probably better off out of it anyway.

@Tiffany Bishop

That location is C at best, more likely D. High grief factor. Probably a decent cash flow deal if you know what you're getting into but it hasn't been B for 50+ years.

What are your numbers for:

- Property taxes (around 3% of city assessed value)

- Grass and snow

- Heat 

- Water

- Other utilities if landlord pays

I agree with your 10% each for maintenance, management and vacancy. I might even bump maintenance higher due to a rougher tenant base.

@Bruce Myers That is right near the new Apple campus, no wonder it's going nuts! If I could predict where Apple/Google was going to build its next campus, I'd be buying everything in sight too. Unfortunately I'm fresh out of crystal balls...

@Carl Dean

> The last thing you want is to own a C class 4-plex, TRUST ME

What if you can turn that C class 4-plex into a B and get rents of $900+?

@Jarred Sleeth Maybe the current owners would consider giving you in a master lease + option. In this model you would run the property, pay them a fixed amount each month and keep any profits that you generate above that level. The option would give you the opportunity to buy them out completely in the future. 

This would tie in well with @Shane H.'s line of thinking. Maybe you could secure the master lease and then separately approach the land owner to get a sale. If the math makes sense, you can close on both the land and the improvements at the same time. If not, you can just chug along with your master lease.

There are a lot of ways you can play out this scenario. You have three powerful factors on your side: motivated sellers, a lot of goodwill and limited competition. You just have to figure out how to convert those into a good deal.