Author Topic: Is this a good Rental?  (Read 1857 times)

JJ saves

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Is this a good Rental?
« on: November 04, 2016, 02:13:14 PM »
Long time MMM reader, saver, investor.

New to Real Estate investing. Looking to purchase a rental in CA where i live and work.

5 plex- 10beds 5 baths- 5 units all, 2bed 1 bath. In a high rental, working class, poor neighborhood.

Asking price  379,000 ...been on the market for over 100 days. Price probably negotiable? Im thinking 325,000-350,000 range

Rent $3650      3 units 700x3= 2100  2 units 775x2=1550

I did two versions of buying this property. One at the asking price 379,000 and one at 350,000

Version A -379,000

Mortgage 30yr fixed 4 % -      1448
property taxes-                       479
Insurance-                              100
Total                                      2027

2027- 3650= 1623 monthly income  1623 divided by 2=811 (50 percent rule) 811x12months= 9,732$
9732 divided by 75,000 down payment = 12.9 cash on cash return   

I know at 379,000 it falls slightly under the 1 percent rule= 3,790
                                                                   Actual rent    3650

Version B 350,000

Mortgage 30yr fixed 4 percent  1337
property tax                             479
Insurance                                 100
Total                                       1916

1916- 3650= 1734 monthly income  1734 divided by 2= 867 (50 percent rule)
867x12= 10,404$

10,404 divided by 70,000 down payment = 14.8 percent cash on cash return


(1 percent rule) 350,000=  3500
  Actual rent income= 3650 meets 1 percent rule.

Seems like this property has potential. Am I missing something or is my math off?




J Boogie

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Re: Is this a good Rental?
« Reply #1 on: November 04, 2016, 03:22:18 PM »
Damn, that sounds like a very low price for a 5 unit property in CA.

Maybe it's been on the market this long because no one wants to deal with landlording a 5plex in that neighborhood. 

I've heard CA can be very tenant-friendly also. 

So I'd imagine there would be quite a few instances of late rent, no rent, property damage, illegal activities, and a very difficult eviction process.

But I don't know the neighborhood.  I'd say this one is heavily neighborhood dependent.  I'd do some analysis on crime and schools and income if you can obtain that data.  Good luck!




JJ saves

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Re: Is this a good Rental?
« Reply #2 on: November 04, 2016, 03:50:06 PM »
I work in the same area first hand, and know it is a poor neighborhood. Im sure there are some hard working people and some bad apples. It is located in the older portion of the city. From what i know all units are rented. Only one unit is under lease for a year. The other four units are month to month. I do not know what the turnover rate is. The owner also owns several other rental properties in the area, and is selling as well.

Another Reader

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Re: Is this a good Rental?
« Reply #3 on: November 04, 2016, 05:44:00 PM »
Your math is wrong.  The rule of thumb is to take 50 percent of the scheduled gross income for all expenses.  Using your leverage, this one would be a little cash flow positive, but you won't get a 4 percent 20 percent down mortgage on a 5 unit.  That requires a commercial loan and the terms are less favorable.  Might have trouble finding a bank to loan on this property.  5 units are also valued by gross rent multipliers.  $379,000/ ($3650 x 12) = 8.65.  That's a little high for a building in a bad area.  Cap rate at 50 percent expenses is 5.8 percent.  At 40 percent expenses, cap rate is 6.9 percent.  No thanks!

What's intriguing is the owner wants to sell the portfolio.  Probably tired of wearing his bullet proof vest to collect rents.  However, he might be persuaded to owner finance the whole portfolio on favorable terms.  Might be worth calling the owner (not the agent) to see what he is trying to accomplish. Just make sure he includes the bullet proof vest as part of the package.

clarkfan1979

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Re: Is this a good Rental?
« Reply #4 on: November 05, 2016, 01:03:20 PM »
Loans for rentals are typically .5% higher than owner occupied. Within the past few months, I have seen rates as low as 4% for a rental house.

On average you want to be closer to 2% for a 5-plex. The 1% rule is more applicable for a single family home.

Overall, it doesn't seem like a great deal. However, investing is also about finding the right "fit." If you think it's the right "fit", it wouldn't be a horrible investment.

Another Reader

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Re: Is this a good Rental?
« Reply #5 on: November 05, 2016, 05:40:57 PM »
This is a five unit property. Conventional mortgage terms apply for 1-4 units.  A five unit property requires a commercial loan.

JJ saves

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Re: Is this a good Rental?
« Reply #6 on: November 05, 2016, 05:54:59 PM »
Thanks for the information guys. After looking at the numbers again. It would have to be cheaper, and I doubt the seller will go 300,000 or less. Also I forgot about 5-plex being commercial, and dealing with getting a loan for that. My other big concern is that four of the units are month to month rent. Seems like that would be a very high turnover rate. Possibly a lot of headaches.

J Boogie

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Re: Is this a good Rental?
« Reply #7 on: November 07, 2016, 07:38:32 AM »
Thanks for the information guys. After looking at the numbers again. It would have to be cheaper, and I doubt the seller will go 300,000 or less. Also I forgot about 5-plex being commercial, and dealing with getting a loan for that. My other big concern is that four of the units are month to month rent. Seems like that would be a very high turnover rate. Possibly a lot of headaches.

I have a feeling the landlord has chosen month to month to save him the trouble of terminating leases with problem tenants. 

clarkfan1979

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Re: Is this a good Rental?
« Reply #8 on: November 13, 2016, 10:41:58 PM »
This is a five unit property. Conventional mortgage terms apply for 1-4 units.  A five unit property requires a commercial loan.

Two months ago, residential rates were 3.5% and I got a quote for a 4% refi on one of my rental properties (commercial loan). I think rates are currently up .25% from two months ago. However, it is possible to get a 4% commercial loan.