Input please - first multi unit

Rehabbing, Fix and Flip, Rental Properties
1

This is my first serious look at a rental unit. Any input is welcomed. The specs are:

Old home on huge lot converted into a 4 unit. 3 of the 4 units are rented. quiet, older neighbrhood. property is in great condition. Area is appreciating well. Owner is sick and wants what she owes on the property which is $180,000.00.

Unit 1 rent: $830
Unit 2 rent: $800
Unit 3 rent: $530
Unit 4 rent: $475 (currently vacant)

All renters are currently month to month.
3 car garage rents separately.

It seems that this property would cash flow fairly well even after hiring a property manager.

All feedback welcome.

Thank you

2

Well, there are a lot of missing pieces to your puzzle (like how much rent does the separately rented garage pull, how much are the taxes, how much for insurance, etc.) but on the surface, I concur that there is no reason that this should not cashflow realtively well…

How is the rental market in this area? Will you have trouble renting the vacant unit for the price indicated?

Also keep in mind when you are doing your cashflow analysis:

Older property = higher maintenance $$$

Keith

3

Thanks Kieth

I know the info is general right now - I am waiting to get some more info and look at the property this weekend. I do know it is a good area for renters. I will find out more regarding the amounts the garage brings in.

Do you have a cheklist you review to help you make buying decisions on rentals?

Thank you

4

one key factor with big old homes, is do you have to pay for heat??? this can dramactically change the cash flow

as for checklist, you need to figure ALL expenses—taxes, insurance, water, sewer, trash, heating, yard care, prop. mgmt, etc, etc. There is no one list becuase different areas, properties have different expenses.

5

I disagree that this property will cash flow properly. Throughout the United States, total real world operating expenses (including capital expenses) run about 50% of the gross rent. Therefore, expenses in this case would be $1,315. This leaves $1,315 with which to pay the mortgage. A 30 yr, 8% mortgage on $180,000 will result in a loan payment of $1,320 per month. This is a loser!

Mike

6

thats what I needed to hear mike, thank you.

I will ask some more specifics on this and take a last hard look at the numbers .

any more input is welcomed.

7

First off, the “huge lot” thing you think is a great deal will end up costing you a lot as land is not a depreciable commodity, only the structure itself. Use the city assessor to break out the land value. While you’re using the assessor make sure their aren’t any junior liens, mechanics liens, back taxes, or any other judgements against the property. (You may need a title company to find the liens and title encumberances, but the assessor will definitely have the tax information).

Also, you said that the unit was “converted” into a 4 unit? What was it converted from? Are there four seperate electrical boxes and heating units? Are the utilities included, or are the tenants responsible for them? (That one is major).

The property is generally considered too small, but if you wish you can do a COCR (Cash On Cash Return) or a ROI (Return On Investment) analysis. You can even figure out the properties cap rate (Capitalization Rate). I generally start using those methods of analysis on bigger properties (8 units and up), but it wouldn’t hurt you to learn about it early on.

For the simpleton or novice investor just use the 1% Rule. If you don’t know that rule I am going to make you look it up.

Personally, I aim for at least $100 profit from each unit I own a month. This profit does not include property appreciation and can be in the form of cash flow or principal paydown or a combination of the two. If you’re a newer, smaller investor your margins may have to be slightly inflated, say, $200 a unit.

So with that all being said, hell yes you have a good deal on your hands, all things equal. If you can make $2500 a month (this is the amount you’ll be looking at if you rent out the garage at a reasonable rate and factor in a 10% vacancy rate, which is really only 5% right now in my area and will get lower as the interest rates continue to rise)… go for it! If you pay the investment property recommended 20% down at the current 6.875 fixed 30 conforming rate your monthly payments will be $945. Property taxes probably in the $300-400 a month range, insurance, water bill, blah blah blah…

It’s a great deal, assuming the property isn’t going to fall down anytime soon. Go! Seal the deal! Else someone like me is going to move in and take it away from you!

(I know I am joking around, but it really is a good deal. You should easily cash $200 a unit each month, not even including equity buildup.)

8

Thank you, VU!

I will definately look up the 1% rule. Great advice. I will get to work.