Is this 8-plex worth the risk?

General Real Estate Investing
1

Hey all,

I found an 8-plex thru my realtor (also an investor) that I have been working with on my REI. This 8-plex is about 25 minutes away from me in a smaller city. As it sits this deal looks pretty crummy.

Sales price is 229.9K
5 out of 8 units are rented
Rents total $2285.00
Mortgage payment at 30 yr fixed at 8% with zero down is 1614.28
Insurance is $85 a month
Taxes are $350.00 a month
Total net right now is $235.72
This does not include any vacany, maintenance, and whatever else you would like to factor in.

This property is totally mismanaged. The previous owner (20 yrs owned) sold it to his son who has not done anything but collect checks. He’s had it for a year. The property itself is in good shape with a brand new roof a few weeks back thanks to some storms that passed thru. My realtor also said that this guy needs OUT now. He won’t carry a second so that’s out of the question.

If I can get those 3 units that are vacant rented for $420 a pop (very doable) then my net cash flow would be alot better. This property will appraise at 285-290K which would put me well within my LTV ratio so I can get into this deal with nothing down. I’m buying an 8-plex here in town and it should appraise in the $330-$340K range which I got for $263K.

The property is made of brick and tenants pay utilities. There also an adjacent lot that comes with the property. Not sure on the size of that as I’m working on those details. Could be nice to sell off or do whatever with. The property also has coin-ops that come with the property. If the building is filled it will make about 100 bucks a month. Right now its barely squeezing out $65 a month. The coin-ops come with the place. All units are 2 bed, 1 bath, and in decent shape. Minor things to be done as tenants come and go. Nothing major.

So with all this said what can offer for suggestions or if this is even a viable deal. I can answer more question that you have so blast away. Looking forward to your replies,

Nate-WI

2
  • Do you believe that the vacancies (currently 37.5%) are a factor of the noted ‘total mismanagement’? What is the rental outlook there? If I had 2/1 apartments at $500 a month here, I’d have a line at the door waiting for a vacancy (and this is Louisiana!)!

It’s a slight PCF with three vanacies. With rent raises and full occupancy, this will make money…probably at least $1500-2000 a month.

I think it’s worth the risk…if you can swing the money. It comes out to less than $30K per unit so you should be able to cashflow at $300 a month per unit average. Will he take less than asking?

“Deal, ‘Howie’…”…(hit the red button in the Lucite box now)

Keith

3

Its my belief that its been mismanaged. It was mostly full from when his old man had it. The rental outlook is ok. I’m gonna have to run ads in neighboring cities but the rents are on the mark. I think with the rents all at 420 or above it would be a nice pick up. Again it might take me a couple of months of getting it squared away if I work very hard at the property. I can swing the money. It’s the banks money :wink:

He will have to take less than what he is asking if I’m going to buy and he will also pay for some of my closing costs if I were to buy it. I’m thinking in the 215-220K range with him kicking in for closing costs as well. BTW…what is PCF mean ???

Nate-WI

4

I can’t wait to hear how this deal comes out Nate.

I think PCF is Positive Cash Flow.

1 1/2 hour away from you, and $420 is quite a good rate for a 2/1 here. We know a lady that just rented a nice roomy 2/1 with single garage for $475 and I thought she got a good deal. The place is in good condition except for the fixtures / cabinets being a bit dated. She is also 1/2 hour away from the capitol which brings a premium.

Good luck.

Jeff

Jeff

5

Hey Jeff,

I will keep ya posted. I’m buying an 8-plex here in Appleton and I’m paying 262K for it. This is about 30 minutes from Appleton and its cheaper and the taxes alone are 3K cheaper. Interesting how the market is. Also closing on my first duplex this coming Thursday. All with none of my money. Sweet!

Nate-WI

6

Nate,

I have a different opinion on this property than the others. The deal does sound good the way you presented it, but that’s because you left out a lot of the expenses. Here’s how I see this deal:

Gross rent (fully occupied) $3,545

Taxes - $350
Insurance - $125 (I think you $85 number is wrong or the insurance is garbage)
Maintenance - $400
Vacancy - $180
Mortgage Payment - $1,687 ($229,900, 30 yr, 8%)

Positive Cash Flow $803

HOWEVER, these numbers only include the late night TV guru style numbers, which are bogus. In the real world, there are a LOT of additional expenses that you WILL be paying. Here are a few of the expenses that you’ve ommitted: evictions, legal fees, utilities paid by owner during vacancies, exterminations, damage caused by tenants, lost rent during evictions, capital improvements, entity maintenance, fuel for driving to/from property, etc. Without the capital improvements and counting on few evictions and properties rarely damaged by tenants, I’d allow AT LEAST another $400 per month for these expenses.

Therefore, with semi real-world numbers, your positive cash flow would be about $400 per month or $50 per unit. Factor in the capital improvements, and you really have no positive cash flow. In my opinion, that’s not worth doing.

I’d only do this deal if I could get a SUBSTANTIALLY lower price.

Mike

7

Property Manager,

The insurance is a legit and its not a crappy coverage. Its thru American Family Insurance. I just got insurance on my other 8-plex for $1180.00 for over what I paid for it. The $85 number is at $1020.00 for the year. It’s a solid number.

Again I’ve said this before but vacancy rates is strictly a management issue. If you market and are not a slug for an owner and get someone in there asap then vacancy should not be that big of an issue. Again I know this will happen as with everything else you said. Its all part of the game. I have seen your posts before and I have yet to see you tell folks that its a good deal. I’m not looking for everyone here to say great deal, good find, way to go Nate. I want YOU to post what YOU invest in and the typical deals that you do so we can all learn. Care to share?

Nate-WI

8

Nate,

You are correct, I haven’t seen many posted deals that I like. My guess is that the reason for that is that the posted “deals” are almost entirely posted by newbies that are paying way too much and not considering all the expenses. I’ll bet that I would definitely like deals that some of the experienced investors have done. There are investors here in my area that get deals with consistency that I think are GREAT! The reason that I keep posting about the hidden costs for landlording is that these are expenses that you WILL incur and the gurus don’t teach it. I found out through experience.

Here is one of my actual deals. I’d consider it to be only FAIR - it certainly is NOT GREAT.

I bought a 6 unit building last year. Here are the actual numbers:

Purchase price $88,500

Gross Rents $2,196
Taxes - $86
Insurance - $126
Water/Sewer/Trash - $150
Maintenance - $300
Mortgage (20 yr, 7%, $88,500) - $700
Vacancy - $107

Positive Cash Flow - $827

You will note that this 6 unit building has a higher cash flow from only 6 units that your building has from 8 units, using the same “guru” numbers. With only these numbers, this building is getting 2.5% of the purchase price per month in gross rents - pretty good. Your deal is getting only 1.5% per month. My deal has a positive cash flow of $138 per month per unit which is bad - I would not do this deal again. Your deal has a positive cash flow of $100 per month per unit which is worse.

So, you may not agree with my assessment of a minimum amount of cash flow to make a “deal” worthwhile. After all, my 6 unit building still theoretically makes $9,924 per year and yours makes $9,636 per year. However, when we move out of fantasy land and into the real world, here are the other real expenses that I had on this property last year in the 6 months that I owned it.

Maintenance - $2,620 (this was an unexpected expense that occurred due to the gas company changing their policy on venting for water heaters and furnaces in our area. We had to either put liners in several chimneys and change ducting to double walled pipe or change the entire building to 200 amp electric. Lining the chimneys proved to be the cheapest way to go).

Evictions and Legal Fees - $744 (contrary to your post, evictions and vacancies can not be eliminated by good management. Every successful landlord that I know has evictions and vacancies.)

Office Supplies - $26

Fuel - $84 (driving to and from property)

Bank Charges $138 (ordered checks and misc.)

Advertising - $300

Grand Total Non-Guru Expenses - $3,912

Now, consider that this property didn’t have any abnormal damage caused by tenants; didn’t have any lawsuits; no exterminations; no capital improvements; no major vacancy episodes, etc. This was just the average day to day “extra” expenses that happen in real life. In other buildings that I own, we didn’t have the one-time maintenance expense, but had exterminations, more evictions, etc. These things happen on a routine basis and to ignore them is foolish. Also, realize that I managed this property myself and did all maintenance myself (except lining the chimneys). If I had paid management and paid maintenance, this property would have barely been profitable.

The bottom line was this property only made $6,012 (on an annualized basis), which was $84 per month per unit. It was better than losing money, but certainly not what the gurus would have you believe. In addition, this building has better numbers in every way that your proposed “deal”.

Fortunately, I have other properties that have a better return than this one. However, none of them has the types of returns that the gurus would have you believe.

Good Luck,

Mike

9

Nate,

There is another, simpler way to look at this expense issue. According to the Institute of Real Estate Management and the National Apartment Association, the operating expenses (everything but mortgage) runs 45% (+/- 2%) for residential rental property throughout the entire United States. (Note that these numbers aren’t coming from someone who is trying to sell you a course or otherwise fleece newbies). So, to evaluate your real expenses, multiply your gross rents by .45 to get the real operating expenses. Take your gross rents, subtract the operating expenses and then your mortgage payment and you will have your real cash flow.

For your deal, here are the numbers:

Gross rents $3,545
Operating Expenses (.45 X 3,545) = $1,595
Mortgage Payment $1,687 ($229,900, 30 yr, 8%)

Your Positive Cash Flow $263 per month

For my building, here are the numbers:

Gross Rents: $2,196
Operating Expenses: $988
Mortgage Payment: (20 yr, 7%, $88,500) - $700

My Positive Cash Flow $508 per month or $6,096 per year

You will note that this is almost exactly what I had using the ACTUAL EXPENSES for my property last year.

Something to think about.

Mike

10

Very good stuff. Now that’s what I’m talking about! So tell me…based on what we have talked about what you “give” for this property to make you feel more comfortable.

Nate-WI

11

Nate,

The short answer is that if you paid $156, 726, that would get your positive cash flow all the way up to $100 per month per unit- YUK! I don’t like your deal or my deal either!!!

Mike

12

So why did you buy yours then? Mine are loaded with equity but that doesn’t mean to much. How bout you?

Nate-WI

13

I bought mine because I thought it had a $1,200 per month positive cash flow - using some of the guru numbers. Mine does have a cap rate of 16%, although I thought it was 22%, when I bought it. Yours, on the other hand only has a cap rate of 10% at a purchase price of $229,900. The appraised value of mine is $135,000 which is about the average sales price for our area (plenty of newbies). However, since I bought mine from a disgruntled landlord, I was able to get it at a 66% of market value, with $46,500 equity (which means nothing).

The entire point of my posts is that you don’t have to repeat my mistakes. In your original post, you asked what people thought of your “deal”. I gave you my honest opinion based on my experience and what I have learned are the real numbers. I have learned to buy right or not at all. I have also learned to use the real numbers and forget all that guru nonsense, which has no place in the real world.

The big eye-opener came for me when we started doing monthly cash flow projections. Until then, I really had not taken a close enough look at the “real” numbers to see what was actually happening. I thought that the lower than expected cash flow was just growing pains, and that is partly true. However, much of the cash flow issue is that the guru numbers are just a fantasy (that I had bought into). Now, I know that to reach my goal, I don’t need 50 units as I first thought, I need more like 100 units. Looks like the work has just begun!

Mike

14

Good stuff. Your opinions are valuable. One thing I want to ask is this. If you have good equity in a property and can cash flow with none of your money into the deal it would seem that it would be something to consider. For this deal if I put nothing into it, have 60K in equity (actually legit) and still cashflow say 500 bucks I wonder if its still worth it? I think the equity in my opinion is nice cause I can pull some of it (not all) out and invest in my other REI and yet still cashflow some. I also buy foreclosure SFR’s, rentals, and my bread and butter is mobile homes so the money would be nice to have. You got my mind thinking and that’s what I need.

Nate-WI

15

I understand about the re-fi or heloc raising mortgages. Some local lenders here will do loans on appraised value versus purchase price. I will have exactly nothing into this deal. Also since the seller is kicking in 8K in closing with my rent credits and tax credits I just might walk away some money ;D

Nate-WI