Is this a good deal

General Real Estate Investing
1

Guys,
I need your help in my first multiunit deal. Here are the details, please give me your experienced comments if this is a good deal or not

Asking price for a 4 plex : $199,000
Rate of Int with 25% down is 6.7% (Wells fargo is willing to give me that rate)
Bank loan will be : $149,250

Rental income per month(if full) : $2,800
50% Expenses : …- $1,400
Debt Service : …- $ 963
Potential Cashflow : … $ 437

Does this seem right ?
There are couple of things : The driveway needs little work, its cracked and could be a liability issue. Also, two of the units are empty right now.
One risk that I am seeing is although subdivision is really nice, it is all rental and two blocks that I drove thru, there were 5 more units that had For Rent sign. This just shows supply is more than demand.

The retail value of the property is more than $250k. But I am looking for is a cashflow.

Your input will be very helpful.

Thanks
RK

2

RKV,

The true cash flow is more like $115 when you consider the cost of the downpayment. Any property will “cash flow” if you put enough down and there is certainly a cost to that downpayment. With a true cash flow of only $115 (or $29 per unit per month), I would say that this property is overpriced. The right price would be around $150,000.

Good Luck,

Mike

3

Here is how I see your numbers. I am more pessimistic than propertymanager.

[tr][td][/td] [td]Monthly[/td][td] Annual[/td][/tr]
[tr][td]Rent[/td] [td] 2800[/td] [td] 33600[/td][/tr]
[tr][td]Vacancy (25%)[/td] [td] -700[/td] [td] -8400[/td][/tr]
[tr][td]Insurance [/td] [td] -100[/td] [td] -1200[/td][/tr]
[tr][td]Taxes[/td] [td] -200[/td] [td] -2400[/td][/tr]
[tr][td]Maintenance [/td] [td] -200[/td] [td] -2400[/td][/tr]
[tr][td]Legal[/td] [td] -25[/td] [td] -300[/td][/tr]
[tr][td]Management[/td] [td] -210[/td] [td] -2520[/td][/tr]
[tr][td]Utilities [/td] [td] -50[/td] [td] -600[/td][/tr]
[tr][td]Repairs [/td] [td] -200[/td] [td] -2400[/td][/tr]
[tr][td]Rental Loss (10%)[/td] [td] -280[/td] [td] -3360[/td][/tr]
[tr][td][/td][/tr]
[tr][td]NOI [/td] [td] 835[/td] [td] 10020[/td][/tr]
[tr][td]Debt Service[/td] [td] -963[/td] [td]-11556[/td][/tr]
[tr][td][/td][/tr]
[tr][td]Cash Flow[/td] [td] -128[/td] [td] -1536[/td][/tr]

And this does not contribute anything toward a reserve fund for major systems replacement. You said the property is only 50% occupied now and is located in an area of high density rentals. Expect your vacancy factor to be a lot higher than just one month per unit.

You say the property has some deferred maintenance evidenced by the driveway. What else is there that will increase your maintenance and repair expense?

Property taxes and hazard insurance should be easy numbers to nail down. They may be higher (or lower) than my estimate

You don’t tell us the age of the property so I guessed at 15 to 20 years old. As property ages, it becomes more maintenance intensive. Maintenance also includes lawn service, landscaping, trash removal, common area cleaning and the preventive maintenance things you do every year such as fire extinguisher check, smoke detector battery replacement, HVAC service, and anything else you can think of.

Legal expense include the attorney review of your leases each year to insure they are compliant with any changes in your landlord-tenant law, process service, and court costs for evictions

You have utilities for the common area as well as a utilities expense when a unit is vacant. Rental loss happens when the tenant does not pay his last month’s rent and the repair damage is greater than his security deposit. The property is not vacant, but there is no rental income for the month.

Even if you manage the property yourself, you will have out of pocket expenses to show the property, advertise your vacancies, conduct property inspections, collect rents, and to supervise contractors who work in your property. Depending upon how far you have to travel, just the gas for your car at $4 per gallon could get quite expensive if you have to visit the property three or more times per month.

I see this as a negative cash flow property. You will have to get more accurate expense estimates before making a purchase decision.
[tr][td]

4

I was getting excited and thought it is a good deal. I think I am making progress, this is the best deal I have found so far. Need to do better. Thanks propertyManager and Dave for your inputs. Dave, I thought your numbers seem to be very conservative at first, but giving it a little thought I realized that you may be correct. I never thought of higher vacancy and that makes sense considering the fact that it is in high density rental area. Thanks again for your input.

RK

5

is it zoned a 4 plex

6

RKV,

I have to wonder if the retail value is $250K, why is the seller offering a 20% discount? Could it be that the owner has a negative cash flow property and the owner sees no hope of turning it around in the near future?

Don’t be too quick to take on someone else’s problems. Ask the seller for a copy of his last two years Schedule E. If he agrees to give them to you, you will get a clearer picture of the cash flow situation.

7

Great thread and comments guys!!

There are a lot of distressed properties and tremendous cashflow deals out there. Where I invest, I can find duplexes that will rent for around $1000 and I am only in max 30K. I imagine the seller is distressed if 2 units are vacant. I suggest creating criteria and a formula to figure out what a property is worth to you. For instance, I take ((After Repair Value/2) - rehab) and that is the max I will pay only if that will provide tremendous cashflow and multiple exit strategies. 50% LTV, tremendous cashflow and multiple exits for backup plans and any surprises.