I am a newbie who is looking to make my first deal on a 4 plex.
The property is a bank repo and there are currently no tenants because they bank kicked them out when they took over the property.
Asking price: $108,000
Potential Rent per unit: $600 (this is per the listing agent)
Rehab cost: ? (dont know this yet because i haven’t looked inside the property yet)
Here is my question. Assuming the rehab cost is low ($5K), what do you think about this deal?
It seems to be to be a no brainer, but if it’s a no brainer why hasn’t another investor picked it up?
The “potential rent” is also called “pro-forma” numbers. These are usually best case scenario numbers. NEVER EVER trust numbers from the seller. What are rents in your area for comparable units? You could be in for a surprise when you get inside. The tenants may have been pissed by getting booted out and may have taken it out on the property.
Something you must determine about this property is what utilities you will be paying as the owner. Is the building separately metered for water, electric, and gas (if there’s gas there)? Are there common area utilities? Do you pay for a trash dumpster? If you pay all utilities, any profit can be eaten up by tenants not caring about how much water/electric/gas they use.
Also check to see if each unit controls their own HVAC independently of the other units. I’ve heard of some small multi-unit properties where one unit had the thermostat controls, but the control was for more than one unit.
There’s much more info we need in order to tell you if this is a good deal or not.
i checked the rents around the area and the $600 seems legit.
tenants pay utilities.
I haven’t been inside yet. the outside looks ok though.
I will let you know more as i find out.
600 x 4=2400 max income less 10 % vac
-60
-1200 =50% expense rule of thumb
1140/ month available for debt service
108,000 @ 6.0% / 20 yrs=773.75
1140
-774
366 cash flow/mo
IS it worth 366 dollars/ mo to you to manage it when it is up and running and this is what you will get only if it is in great condition. You will have a month or two to fill it and the repair costs to add into the calculations and reduce the cash flow.
redhawk
So the 50% expense rule doesn’t cover vacancy?
The 50% rule simply states that over time you will average about 50% of your gross rents on operating costs. The other 50% is for your debt service and cash flow each month. Operating costs include everything you can think of and then anything else that pops up that you didn’t think of.
We also generally see the debt service calculated at a rate of 7% for 30 yrs.
Let’s look at it for this deal:
Gross rent - 2400/mo
NOI - 1200/mo
Debt service - 108K @ 7% for 30 yrs - 718.53/mo
1200 - 718.53 = 481.47/mo total cash flow
481.47/4 = 120.37/mo cash flow per unit
Just make sure you check known expenses like insurance and property taxes aren’t abnormally high. The numbers seem to look really good on this deal for the rent you’ve listed. Let us know what you find out on the inside when you see how much work the place will need to get 600/mo per unit.
Assuming 5K of rehab is accurate this is a pretty decent deal.
I’d go commercial if I where you asap. Anything above 30 units. I’ll send you a link if your interested, its a lot more profit and less headache with management.
So is your ADVICE on an REI board used for educating other people that a newbie should buy a 30+ unit complex for his first deal? Or is this just something else you’re trying to sell on here like the other thread about your contracts?
Doesn’t everyone get their start in large apartment buildings? :smile
Yeah, I hear banks are just throwing hundreds of thousands of dollars to newbies to buy apt. complexes these days. Oh and everyone always makes money at REI too…
I would offer 72K minus repairs and any costs associated with splitting the electricity and or gas. Rent x 30 = $72,000 as long as the rent has been confirmed via the local paper and Craigslist.
So the 50% expense rule doesn't cover vacancy?
Yes, the 50% Rule does include vacancies.
Mike
Just make sure you check known expenses like insurance and property taxes aren’t abnormally high. The numbers seem to look really good on this deal for the rent you’ve listed. Let us know what you find out on the inside when you see how much work the place will need to get 600/mo per unit.