6 units for sale. Good deal or not?

General Real Estate Investing
1

So, there’s a duplex and a 4-plex that have been for sale for a couple of months in my area for around $300,000 for the 6 units. They are going to auction within a week and I was thinking of bidding on them.

This would be my first time doing any type of REI. I’ve been reading the forums, reading books, and trying to figure calculations. There is no active REI club in my area, otherwise I would have already joined. So I’m going to ask here.

I went and looked at the one vacant unit in the 4-plex yesterday. They were built in 1972 and the rooms all have wood paneling from top to bottom and everything is outdated, but other than that everything is in working order in that one unit. He couldn’t show me the insides of the other units because they were occupied and couldn’t really tell me for sure about much of anything pertaining to the other units.

In both the plexes, each unit is 2 bed 1 bath and around 820 square feet. He told me that the current rent was $400 per month from each unit. From what I saw and the pictures I took, the 4-plex and duplex for sale are definitely the nicest properties in this particular neighborhood. The other duplexes and houses in the neighborhood are in very poor condition, whereas the properties I looked at were very well kept on the outside, I only saw the one vacant unit on the inside. The properties are within 3/4 of a mile from the campus of the university.

My father is willing to pay the down payment and we have a letter of pre-approval from the bank for $180,000. I was thinking of bidding $200,000 max for the 6 units being auctioned. Then trying to sell the duplex to recoup the down payment plus some extra. Then keeping the 4-plexes and renting them. I’m pretty sure that a $450 per unit rent would be fairly easy to attain for any new tenants.

Would this be a reasonable deal and plan at $200,000? Or would it be a bad idea for a newbie to jump into such a big endeavor on their first go of things?

2

This is a HUGE LOSER! Run, don’t walk, from this one!!!

Mike

3

Are you paying you father back for the 20k he’s putting up? How much in repairs? If you use the 50/50 rule, it looks like you have $1200/mo. to spend on debt service and profit. If you use $100/mo./unit for profit, you only have $600/mo for debt service. A 30 yr.180k mortgage @ 7% will be $1197/mo. That puts you $597 in the hole each mo. That’s without paying your father and you have no rehab involved. RUN FOREST!! RUN!! Or at least offer a price that makes the numbers work.

4

I see what I did wrong now. I’m a little embarrassed. I actually messed up in a couple of places in my figures and was originally figuring a $500 per month cash flow after mortgage, taxes, insurance, and misc repairs. I’m glad I posted here and didn’t just go off my original figures.

Anyway, I appreciate the input. It’s probably pretty cut and dry when you’ve been doing it for awhile. I might try to figure what would be the proper top price to bid and go check it out. I’ve never been to a property auction and there are going to be over 20 properties up for auction. Maybe I can find some investors there.

5

There are a ton of floks here that can tell you “Deal/No Deal” literally in seconds given the right information…

Keith

6

Another way to look at this is to ask … what is the most you can afford to pay for this property?

If your gross rental income is $2400 per month,then your net operating income is $1200 using the 50% rule. To ensure that your property generates a sufficient cash flow to support the property, you want to limit the monthly loan payment to 80% of the net operating income.

Therefore, any loan you might get can’t have a monthly payment greater than $960 per month. If your interest rate is just 6%, then the largest loan this payment will support is $160K on a 30 year amortization. If the lender also wants you to have 20% down, then the most you can afford to pay for this 6 unit package is $200K.

If you are hoping to finance both properties with a single loan, then the lender will probably amortize the loan over 20 years (not 30) and the interest rate will be higher, say 6.5%. In this case, the maximum loan for this property will be $126760 which makes your maximum purchase price $160950.

At this level of debt service, your projected monthly cash flow is only $40 per unit. One major system replacement that costs $5000 will wipe out 10.5 years of cash flow.

If you can buy this 6 unit package for $100K or less, then you will have a fairly good deal provided there are no major surprises in the units you have not seen. Since the property was built before 1980, you may also have a lead paint risk to deal with.

7

Well, I attended the property auction this morning. It was held at a local country club. The properties I mentioned above sold for $245,000. I didn’t even bid on them because they never went low enough for me to feel comfortable bidding. I was thinking of bidding up to $160k but they basically started at $175k and never went lower.

Something that Dave T said confused me a bit. Shouldn’t the 50% operating expense be able to take care of things such as a $5000 system replacement.
At the above mentioned amount of $2400 per month for 6 units, with 50%, or $1200 per month being designated for operating expenses.

Gross rent per month= $2400
Operating expenses per month = $1200
NOI = $1200

Debt Services = ?

                taxes &           
                insurance        vacancy

OE: $1200 - $450 = $750 - $200 = $550 x 12 months = $6,600 per year

Figuring that the tenants would be in charge of paying their own gas, electric, water, and trash each month. The $6600 figure above would be used for various expenses on the units such as lawn mowing, small repairs, as well as worn out dish washers, refrigerators, washers, dryers, etc.

Appliances aren’t always breaking and the owner would probably only have to replace at most, 3 major appliances a year for a six unit duplex I’ll take away $1500 for appliance replacement, and another $1200 per year for miscellaneous small repairs, $600 for lawn maintenance, and $400 for termite inspections.

                                                                                           pest
OE    appliances             misc.                   lawn                 control

$6,600 - $1500 = $5100 - $1200 = $3900 - $600 = $3300 - $400 = $2900

So if there was a major system replacement every other year at a cost of $5000, the $2900 per year should be able to cover that type of circumstance without having to dip into the NOI unless I’m failing to figure some extras into the equation.

8

Well you have to look at it like this. I think I mentioned it earlier. The $1200 you speak of is what’s left for debt service AND profit. The only way to ensure you make a monthly profit is to budget for it in your offer price. Basically you want to make at least $100/unit/mo. In this case, you want $600/mo. profit. That leaves you with $600/mo. for just the mortgage pmt. P&I only. The taxes & insurance come from the expenses (the other 50%). You’ll need some reserves to start with before you can build them up from the rental income.

9

Descender,

The 50% rule should cover everything over time including those appliances that need to be replaced. BTW, I certainly would NOT spend $1,500 for only three appliances for a rental! I buy all used appliances. I usually pay $65 for a stove and $80 for a refrigerator (cheaper when I can find them). Tenants don’t need expensive stuff to tear up!!! If you’re going to be a landlord, you’ve got to learn to be a cheapskate!

Good Luck,

Mike

10

Yes it should, but might not right away. Let’s say in your operating expenses, you allocate $25 per unit per month for maintenance and repair, and another $50 per month per unit for a replacement reserve.

If you need $5000 HVAC replacement or a $10K roof replacement in the second month of your ownership, your operating expenses will not have built up your replacement reserve fund enough to pay the bill. In this case, your cash flow will suffer for awhile.

When you are itemizing your operating expenses, there is more than just taxes, insurance and a vacancy allowance. Don’t overlook advertising, legal fees, leasing fees, cleaning, yard maintenance, and common area maintenance. Do you have outdoor lighting for the building and parking areas? If so, then you have to pay the electric bill. How about trash removal and snow removal.

With a quadplex, I am guessing there is a dumpster that also comes with a monthly rental. Parking areas need to be cleaned on a regular schedule, too. Does the duplex share the dumpster or have its own?

You don’t mention property management. Will you manage yourself or hire a property manager? No matter which, there is still a management cost. Does your municipal district have a rental licensing fee for each unit?

You seem to be allowing one month vacancy for each unit. This is fair, but when there is a vacancy you also have to pay the utilities. Even if there is no water usage, there is still a monthly base charge.

I know you did not win the bid for this property, but I just wanted to show you that the 50% rule of thumb may not leave as much left over at the end of the average month as you may be thinking.

11

I appreciate the input. I now see a few of those extras I didn’t factor in. I am still looking for some good buys in my area. I don’t want to be the guy that comes back here in a few years with all the knowledge in the world about how to make a deal work, but never having done it, but then again, I don’t want horrible problems on my first deal because of a lack of foresight. So I’ll keep looking and dropping in here to ask questions. :smile