Opinions on this deal (Check my numbers)???

General Real Estate Investing
1

Any thoughts on this property???

Possible 4/5 family. 1 unit does not have heat source, realtor says that b/c of this financing could possibly be for 4 family and not commercial….any thoughts on the veracity of this statement? How should I position it with the lender?

Assuming 4 family works out the numbers would look like this?

Purchase price - $270,000
With 10% down - $27,000
Finance (7.75% estimate) - $243,000
PITI – appx - $1800 per month
(seller will credit $4000 in closing costs)

Of the 4 units – 2 are currently rented:

Unit 1 – 2/1 (not rented) =$600
Unit 2 – 4/1 (rented) = $900
Unit 3 – 4/1/ (not rented) = $850/$900
Unit 4 – 3/1 (rented) = $800

Estimated Gross Rent = $3100
If section 8 tenants = $3962

Expenses = $7782 (ins $1500, taxes $2900, mgmt fee $2232, main $250, electric $300, water/sewer $600).

Vacancy loss factor = $3100

NOI = $26,318

Cash flow after interst expense, taxes & expenses = $5713

Pro’s of the property –
Units are in excellent condition (best I have seen) everything is new….the units are huge.
The units are all deleaded.
The 5th unit needs a heating source, stove and refridge and would then be worth an additional $600 a month.
All the utilities are separate, the roof is new, the house is vinyl sided, the windows are new, the stairs and porches are new.

Con’s of the property –
THERE is no parking and no way to add a parking lot. It is on a main road that does allow parking, but not in the winter. There is a bus system but there is not a close bus stop. The property has been on the market for a while…which makes me a little nervous. It is price well for the area. Worried about resale…because of the parking situation.

Any thoughts would be welcome and appreciated…

2

Capitilization rate = noi/ purchase price

Most investors I have met on here buy around 12% cap rate because it insures cash flow profits even if something comes up. I cant answer as to whether the lack of heat will be a deciding factor on whether they will consider this a commercial property or not. I would think they would assume that adding heat to that unit are just some repair expenses, so probably they will.
Your numbers didnt include repairs or reserves for repairs that will come up.

No parking can be a HUGE problem, no bus stop close by. I would be weary of this deal.

3

Thanks for the reply…

2 follow up questions -

Does cap rate = return on investment (i.e. 12% return)?

Is there a general rule of thumb for repair reserves?

4

Mackie,

You should go to the zonig/assessors office and see whether it is currently zoned/appraissed as a 4 unit or a 5 unit.

While you are there, ask if there is a difference to them if it is a 5-plex. Sometimes, the zoning will not allow it. If the one unit has no heat and you are in an area that gets cold (you must be if there is no street parking in the winter - e.g., plowing), then without heat the unit is not inhabitable…

Where do the current renters park?

Keith

5
6

the fact that one of the “units” is not heated probably means it is not rentable at this time (per local/state laws). Most localities have habitility requirements in order to rent (heat can be, but is not always a requirement). Thus at this time, it mostly would be classified as storage. I ran intot his issue a few years ago when I looked a building in the same situation. The lender is going to look at what the building is currently (not what it might or could be). I am assuming one of the four units you listed is not this unheated space.

I would look very closely at the rent roll. I am guess you have a lot of turnover becuase people get tired of the parking situation and move. I wold be very cautious gievn the fact that 2 units are empty (how long have they been empty?)

Also just guess but you will have several thousand in repair cost as well so this property shold be cash positive (maybe $300/mn), but I think your allowance vacancy could be too low.

As for cap rate, I don’t use this too much. Another poster suggested 12%, but this is extremely difficult if not impossible to find in many parts of the country (unless you are buying at a discount/motivated seller/preforeclosure, etc). Sure there are folks who have double digit cap rate after owning a prop. for 5 yrs , but very difficult to do at the time of purchase (from my experience in looking at various places across the country).

This parking situation sounds pretty serious and could creat an on-going problem with respect to turnover keeping th place full. Might be better to keep looking unless you can come up with a creative solution.