Is this a good deal? 4 plex with flat roof, Two 3/2 and two 2/2, rents are a total of $2,265 a month for a total of $31,500 per year. Taxes are $2,750, landlord pays no utilities except water and trash $2,100. Asking price is $149,900. Doesn’t need anything. It’s been on the market for over a year and I think I can get it for about $130,00 it’s REO. All the units are full and usually stay full. I’m figuringa cash flow of around $16,000. I’m I way off or am I on track??? ANy help will be greatly appreciated. I have the bank on board for financing with 20 percent down at 6.5 amoritized for 20 years with a five year contract or balloon payment.
Hi,
Rule of thumb for apartments is the 50 / 50 rule, which is 50% to expenses and 50% to debt service and positive cash flow.
Which makes your available net income about $15,750 per month, but lets adjust that to $14,490 for a 8% vacancy factor. (Always include a vacancy factor)
Now if your able to buy at $130k with a new 1st TD of $104k on a 20 year mortgage at 6.5% your payment will be about $775.40 per month!
So your total principle and interest will be $9,304.80 per year!
Now if you figure your money (Estimated at $29,250 including closing cost’s) will earn 8% per year for a reimbersement payment of $244.66 to your self for a cash on cash return per month, or $2,935.92 per year. (Ammortized)
So your net positive cash flow should be $187.44 per month or a great $2,249.22 per year.
This property makes a great investment and alloting 50% of income to expenses includes your management, long and short term repairs, insurance, property taxes, landscape upkeep, common utilities, legal (As needed), advertising and general business expense.
Being a 4 unit property you should be able to get a 20 to 30 year loan, I don’t think it is a good idea to take a loan with a balloon on a 4 unit (Residential) property as you would probable own it longer than 5 years and interest rates may be huge in 5 years, shop around!!!
A 5 (Five) unit property or larger is considered commercial property and a balloon is common, but a 4 unit should get a 20 or 30 year loan from the start.
Good luck,
GR
based on your numbers, if total rents are $2265 per month that’s $27,180 (you accidentally jumbled the numbers). This will be your Gross Income. Let’s factor in Gold River’s 8% vacancy allowance ($2174) which will give you an Effective Gross Income (EGI) of $25,006. (I don’t know your area, speak to your bank to find out what vacancy allowance they’re comfortable with, maybe its 5%. Also speak to a Realtor to find out this number).
Now subtract your expenses: Taxes, water, trash, insurance, management (even if you’re self managing, look to pay yourself). Let’s say your total expenses is $7500. EGI of $25,006 - $7500 expenses = $17,506 Net Operating Income.
If you’re target return is 10% (Cap Rate), NOI of $17,506/.10 = $175,060 the estimated value based on the income approach.
At the bank’s asking price of $149,900, Cap Rate is 11.67%. If you get it for $130K, your Cap Rate is 13.46%. If your expenses are lower than $7500 the better;
If you buy it for $149,900 and put down 20% ($29,980) and based on your loan terms, your monthly debt service is $894.09 ($10,729.08/yr; 1.63 DCR (debt coverage ratio) which is very good. This means the income is 1.63 times higher than the loan amount.
NOI of $17,506 - $10,729.08 = $6776.92 Net Cash Flow after Debt Service; $564.74/mo.; $141.18 per unit per month.
Cash on cash return is 22.6% ($6776.92 / $29,980 cash down payment) which is a heck of a return.
This is a good deal.