I’m looking for some help in evaluating a deal that I looked at this last weekend in my home town of Richland, WA. After running the numbers, I don’t think this would be a good deal at the current price, but I want to run the numbers by you guys to make sure that my analysis is correct...and to also see if you all agree with the price that I believe would make it a good deal. I’m still learning and I think this would be the best way to learn and ensure that my property analysis muscles are tip top...
Property & Condition
The property is a 4-plex with (2)- 3/1’s and (2)- 2/1’s with covered parking for 4 cars. The overall square footage for the building is 4,300...but I did not get the footage on each of the units (still learning, right?). I would guess that the 2 bedrooms are 850 sq. ft. and the 3 bedrooms are 1050 sq. ft., with the remainder going to storage and shared laundry space. It was built in 1972, has central HVAC with separate heat pumps for each unit. Two of the heat pumps are updated and two of them are original (need to be replaced within 3 years). Each unit is metered separately for electric, but water is paid by the owner. Overall the property is in great condition with 2 of the units having been remodeled, while the other 2 have newish carpet. This is a “turn-key” building that would not need remodeling, and could be updated as vacancies come up.
Rental History
The property currently is fully occupied on month-to-month rents with no contracts, with the history for the past several years showing very limited vacancy rates (sub 4%). That being said, there are 2 brand new apartment complexes built within the last 2 years in Richland (one within a mile, the other is across town). Because of the increase in available units, our vacancy rates are currently sitting at 8% as of August 2014. I do believe that rate will go down or normalize with Kennewick and Pasco (the other 2 cities that make up our Tri-City area), which are currently sitting at 6% and 4% vacancy rates respectively. Our entire area was at 2% vacancy about 3 years ago. The property is within walking distance (1-2 miles) from the major engineering hub of our area where approx. 3,500 people work, and is also 2 blocks off the highway that another approx. 8K people take to jobs on the Hanford Nuclear Reservation. I do believe, given these factors I can figure on a vacancy rate of 5% or lower.
3/1 Rents for 700, which is at least 200 under market value.
2/1 Rents for 675, which is at least 100 under market value.
The Numbers (Annual)
All numbers are verified unless noted as being pro forma. Also, I did not figure in property management as this would be self-managed:
Tax Assessed Value is 285,000
Purchase Price is 300,000
33,000 –Gross Rent
1,200 –Coin Laundry Revenue
(2,702) –Utilities
(970) –Garbage
(3,456) –Taxes
(1,200) –Insurance (pro forma number from my ins. Agent)
(1,500) –Maintenance (pro forma)
(200) –Advertising (pro forma)
24,172 –NOI
13,800 –Debt Service (Pro Forma -20% down, with 4% interest)
10,372 –Cash Flow
8% -Cap Rate
17.3% -COC Return
The Results
While the numbers don’t look horrible...cash flow at $200 per door per month, I do not think this is a good deal. I will have to bring on an investing partner for any deal I do, and this purchase price is topped out. At this price, I don’t believe the building will appreciate enough to make it worth it for an investing partner. We can add value by raising the rents, but 4-plexes in this area are not marketed like commercial. I’ve also been told (but I don’t know for sure) that 4-plexes in this area do not appreciate as much as SFRs.
My thoughts are that to make this worth it for me and an investing partner, I would need the purchase price to be at 275,000. That would leave more room for appreciation. At that price the numbers would be:
24,172 –NOI
12,600 –Debt Service (Pro Forma -20% down, with 4% interest)
11,571 –Cash Flow
8.8% -Cap Rate
21% -COC Return
Value Added Improvements
If I purchased this property there are a couple of things that I would do in order to provide more value to both myself, my (future) partner and the tenants:
- Transfer all tenants onto 12-month leases with rents that are at market value. I would need to work through how to accomplish this...maybe through a lease with escalating rents over 12 months or just biting the bullet and shocking the tenants.
- Sub-meter the water and transfer that cost to the tenant. Not sure how much value this would add, as the Utilities number does not break down between water and electric that the owner is currently paying. Sub-metering would cost me about $1,500 upfront.
- Outfit all units with low-flow shower heads and aerators to reduce water usage. These are provided free of charge by the City of Richland.
What do you guys think? Do you agree with my assessment? Have I missed anything in my numbers? I didn't include closing costs, because those would be paid by the seller. I think that would only affect the COC Return number in the assessment, right?
