Author Topic: Multi family deal analysis  (Read 1930 times)

Archipelago

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Multi family deal analysis
« on: May 05, 2020, 10:58:25 AM »
4-unit apartment building off market.
(1) one bedroom unit
(1) two bedroom unit
(2) three bedroom units

Purchase price: $250k
25% downpayment = $62,500 @ 4.5% 30 year fixed
Closing costs: $5,000
Improvements: $40,000
ARV: $310,000

Monthly rent: $3350

P&I: $950
Taxes: $600
Insurance: $150
Management: $330
2.3% vacancy: $77
CapEx: $320
Utilities: $50
Lawn and snow: $100
Expenses total: $2577

Cashflow: $760/month
Cash on Cash Annualized ROI: 8.5%

Other factors:
There's an asbestos boiler and piping in the basement, as well as some lead paint on windows. Town has a rehab program which I could apply for funding as long as half the units are offered to low/moderate income tenants. Tenants in place already fall within the income thresholds. There's potential to receive anywhere from $5,000-$40,000 of the repair work done by the town at no cost. The property checks all of the right boxes to put together a competitive application.

The property is located a half mile from my other rental, making it possible to self-manage and pay myself the management fee.

If I were to put the units under the Section 8 program, the 3 bedrooms would produce $1500/month each. They are currently renting for $900/month.

After improvements and raising rents to market value at conservative levels:
Rent: $4,300
Expenses: $2577
Cashflow: $1593/month
Annual ROI: 17.8%

Please tear this deal apart and let me know what I'm missing. Thank you!
« Last Edit: May 05, 2020, 11:00:50 AM by Archipelago »

waltworks

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Re: Multi family deal analysis
« Reply #1 on: May 05, 2020, 10:08:12 PM »
It would look fine if there weren't a pandemic on. I wouldn't buy anything right now no matter what. Who knows who's going to be able to pay their rent in 6 months?

-W

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Re: Multi family deal analysis
« Reply #2 on: May 06, 2020, 02:40:22 AM »
I'd be looking at the prospects of the town as a whole, taking into account economic, social, environmental and covid-19 issues: it is going to be a thriving, or at least surviving at current population levels, place for the next 30 years (the length of your mortgage)?  What about the district it is in: is that going up or down and what are the risks?

A town rehab program is a positive - there is investment going into the town - but does also mean that the town is not currently attracting that sort of investment on its own account.

This is a long-term purchase, so I wouldn't necessarily stay away just for covid-19 issues if you think that they will be over and done with in a year or two, but it does add a current extra risk which I would hope is factored into the purchase price.

Archipelago

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Re: Multi family deal analysis
« Reply #3 on: May 06, 2020, 07:59:06 AM »
It would look fine if there weren't a pandemic on. I wouldn't buy anything right now no matter what. Who knows who's going to be able to pay their rent in 6 months?

-W

Would you still say it's risky, even putting the property under Section 8? This would mean 75% of rental payments are covered by the town/state.

waltworks

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Re: Multi family deal analysis
« Reply #4 on: May 06, 2020, 08:06:20 AM »
IMO, yes. I'd wait to see how things shake out a bit. If the town is doing poorly enough, even section 8 tenants will move away.

I personally think there is a decent chance of screaming deals out there in the next few years because of Covid19 (I hope I'm wrong). This isn't terrible, but it's not a screaming deal either - and I'd say your vacancy (2.3%?) and capex/maintenance numbers are way low.

-W

Papa bear

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Re: Multi family deal analysis
« Reply #5 on: May 06, 2020, 08:06:49 AM »
Hard to tear this apart.  Solid case study, looks like a solid place on paper.

I think taxes seem high. 7200 annual for a 250k purchase? Is that on par with the area or can you have those adjusted down after a purchase?

Any additional local laws associated with multi family like this? In our metro area, 3+ units have to pull permits for commercial, not residential, making any changes much more expensive. 

It sounds like youíre knowledgeable on section 8.  I donít have any of those properties, but they seem like a fair way to go as long as you can stay in compliance. 


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Jon Bon

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Re: Multi family deal analysis
« Reply #6 on: May 06, 2020, 10:28:36 AM »
Deal looks fine to me.

But if you had to bet, would you think housing prices well be more or less in six months?

Are evictions and delinquent rent payments going to be higher or lower in six months?

I would wait a bit. No need to hurry.

waltworks

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Re: Multi family deal analysis
« Reply #7 on: May 06, 2020, 10:33:19 AM »
Prices are super sticky. I'd wait a year or two for best deals.

-W

Archipelago

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Re: Multi family deal analysis
« Reply #8 on: May 06, 2020, 01:28:09 PM »
How can we be certain that house prices are going to crash? If they do, how much will they crash? Then, how will multi family be affected compared to single family? If people start defaulting on their mortgages due to COVID, would we not expect rentals to increase in demand?

Deal looks fine to me.

But if you had to bet, would you think housing prices well be more or less in six months?

Are evictions and delinquent rent payments going to be higher or lower in six months?

I would wait a bit. No need to hurry.
Less, but I also am not one to say I can time the market. The analysis is based on cashflow. The equity capture is an added bonus, but not guaranteed.

Hard to tear this apart.  Solid case study, looks like a solid place on paper.

I think taxes seem high. 7200 annual for a 250k purchase? Is that on par with the area or can you have those adjusted down after a purchase?

Any additional local laws associated with multi family like this? In our metro area, 3+ units have to pull permits for commercial, not residential, making any changes much more expensive. 

It sounds like youíre knowledgeable on section 8.  I donít have any of those properties, but they seem like a fair way to go as long as you can stay in compliance. 


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Yes, taxes are very high in my area. And there are more social safety net programs as well.

IMO, yes. I'd wait to see how things shake out a bit. If the town is doing poorly enough, even section 8 tenants will move away.

I personally think there is a decent chance of screaming deals out there in the next few years because of Covid19 (I hope I'm wrong). This isn't terrible, but it's not a screaming deal either - and I'd say your vacancy (2.3%?) and capex/maintenance numbers are way low.

-W
The vacancy rate is based on 1 unit being vacant per year. This matches the performance of my other 4-family located 1 mile away, over a 3 year period. The CapEx budget also matches over the same history, assuming I put some money into short term repairs.

I would say this is a decent deal, but the prospect of getting up to $40k in repair costs paid for by the town is what makes it a good deal. My area is very difficult to find multi family at numbers that work. There are people (still, even with COVID) paying $220k for duplexes, in not so good sections of town. I have sent thousands of letters and looked at many properties. This would be a tough one to pass up.

If house prices do crash (and the stock market does as well), but this property still produces a 17% CoC return, isn't that pretty good?
« Last Edit: May 06, 2020, 01:34:50 PM by Archipelago »

waltworks

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Re: Multi family deal analysis
« Reply #9 on: May 06, 2020, 01:58:28 PM »
If residential RE prices crash, there's no guarantee that rental rates will hold up like they did last time around.

Again, the deal is fine. I still think you are going to see higher vacancy and maintenance costs but even so it's fine.

But there is a very good chance you can get a better deal in a year or two, and there's a nonzero chance that rental rates crater (what if every Airbnb gets turned back into long term housing? What if your city implements super strict rent controls as part of the pandemic response? What if everyone is allowed to put a tiny house/ADU in their backyard and the local housing supply goes way up?)

Around here all the working class/poor folks have moved in together. As in, 20 people in 1 apartment that used to live in 4 or 5. What would happen in your area if that became the new normal?

The uncertainty in the RE market is just nuts right now. Literally nobody knows what is going to happen. That's why despite the insane VIX numbers and stock market gyrations mortgage rates are still hovering in the mid-3's. Nobody wants to stick their neck out. Nobody is listing houses, nobody is selling houses, nobody is buying houses. How long will that go on? Nobody knows.

-W


Archipelago

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Re: Multi family deal analysis
« Reply #10 on: May 13, 2020, 07:37:46 PM »
Following up...I'm going through with the deal. I agree with the general sentiment of the responders in this thread, but there are some major factors prompting the decision to move forward:

1. I'm 25 years old, so I'm able to weather the market dips
2. This property is located a half mile away from my other rental, which means it's significantly easier to manage (plus economies of scale).
3. I spoke with the owner and a plan is already in place to have 1 seamless tenant turnover, along with a rent increase.
4. I'm getting a good deal to refinance my current house plus buy the new property. Excellent interest rates.

I'm not sure if this is the best decision, but it's a calculated one.

affordablehousing

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Re: Multi family deal analysis
« Reply #11 on: May 14, 2020, 04:03:01 PM »
Seems like a good deal to me. I'd say do it. Poor people will always need a place to live and have little ability to move away. Get it to Section 8 and it should be a cashcow.

SndcxxJ

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Re: Multi family deal analysis
« Reply #12 on: May 15, 2020, 07:38:28 AM »
I wouldn't have a problem buying in the pandemic, but obtaining a loan might be a slower process than normal.  I don't expect real estate prices to drop in the near or midterm, it is looking like prices are going to rise over the next year in my area of the Bay Area of CA.  The rent prices are a bit of a different story as we might see those declining a bit.  2.3% vacancy is a bit low compared to general historical norms, a 5% is a rule of thumb, but I too have been running about 2% or a little less for the last few years but that's not typical.  If it is a good deal for the area, and you have the cash to make it happen, and if you have the time to self manage, and you have some experience in real estate, and you are slightly conservative with your financial analysis, then it is going to be hard for anyone to tear it apart and you should move forward.

lilbenny34

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Re: Multi family deal analysis
« Reply #13 on: May 19, 2020, 09:44:17 PM »
It sounds like you are moving forward. Good for you and we wish you the best. You are young and I applaud you for your hustle. You are very familiar with the area so that's huge plus.

Are you sure 40k is the only cost to get it up to par? How would you feel if you don't get reimbursed for the 40k of work? Would you say this is a C or lower neighborhood. Are you sure that the current tenants are even paying rent? Do you know why the current owner is selling? 

Have you dealt with section 8? I love section 8 (especially during COVID). However, with section 8 tenants, please up the CAPEX significantly (I would say your vacancy is too low as well). 3 bedroom units most likely mean families and not a gentle single grandma. Also, make sure you ask how much the tenant's portion of rent is before accepting them. Lastly, section 8 does not always pay max rent advertised. Are you sure that your units will be able to charge $1500?

Also, what is your income and reserves like? Assuming those two are good, you should be just fine!

Cheers!
« Last Edit: May 19, 2020, 09:51:10 PM by lilbenny34 »

Archipelago

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Re: Multi family deal analysis
« Reply #14 on: May 23, 2020, 03:13:58 PM »
It sounds like you are moving forward. Good for you and we wish you the best. You are young and I applaud you for your hustle. You are very familiar with the area so that's huge plus.

Are you sure 40k is the only cost to get it up to par? How would you feel if you don't get reimbursed for the 40k of work? Would you say this is a C or lower neighborhood. Are you sure that the current tenants are even paying rent? Do you know why the current owner is selling? 

Have you dealt with section 8? I love section 8 (especially during COVID). However, with section 8 tenants, please up the CAPEX significantly (I would say your vacancy is too low as well). 3 bedroom units most likely mean families and not a gentle single grandma. Also, make sure you ask how much the tenant's portion of rent is before accepting them. Lastly, section 8 does not always pay max rent advertised. Are you sure that your units will be able to charge $1500?

Also, what is your income and reserves like? Assuming those two are good, you should be just fine!

Cheers!

Thank you. This is a Class B neighborhood. The owner is selling because he has had the place for 15 years and doesn't want to deal with it anymore. He's one of the most honest people I've ever met. He's even found a new tenant for higher rent to replace a tenant moving out in the next month. Met the new tenant, qualified with flying colors and has good character. He's actually best friends with another tenant that lives downstairs, and the other tenant is a model tenant.

Most of the repairs are in the form of boiler upgrades. They don't need to be replaced right away, but they're coming up to the end of their useful lives. Other than that, it's cosmetic work on the interior.

Re: Section 8 - yes my CapEx and repair budget is much too low. Section 8 pays for 75% of the rental payment, and the tenant pays the remainder. Section 8 rent estimates are what I'm using based on the geographic estimate (which is posted on the town website).

2.3% vacancy is 1 of the 4 units vacant for 1 month out of the year. This is what my other 4 family has been over 3 years, but I think bumping it up to 4.6% is a good idea to be conservative.

Income is approximately $120k/year. About $100k in reserves.

rmorris50

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Re: Multi family deal analysis
« Reply #15 on: May 24, 2020, 09:08:18 AM »
As a newbie to real estate, I am researching if getting into being a landlord is something for me. So I found this thread very informative.

Question on duplexes - how often do you find them to be way overpriced or just out of wack with the market? I found a 3100 SQ duplex property that has 4 small units, each a 2/1 and 775 SF. Each unit from what I can tell is renting for about $900. Seems about right given my market research. However, the property is for sale for $739,000! My analysis says I should pay half that. The property is recently updated and probably mostly turnkey, but newly renovated 1400 SF houses in the area are renting for $1400 a month. So again the rental prices seems about right.

My question is how common is it for duplexes or other rentals for sale to be out of whack like this? Or what am I missing?

I've definitely bookmarked the property because I'll be curious to if/how much the price comes down before it sells. Especially with the repercussions of pandemic going on.

Archipelago

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Re: Multi family deal analysis
« Reply #16 on: May 26, 2020, 01:26:50 PM »
As a newbie to real estate, I am researching if getting into being a landlord is something for me. So I found this thread very informative.

Question on duplexes - how often do you find them to be way overpriced or just out of wack with the market? I found a 3100 SQ duplex property that has 4 small units, each a 2/1 and 775 SF. Each unit from what I can tell is renting for about $900. Seems about right given my market research. However, the property is for sale for $739,000! My analysis says I should pay half that. The property is recently updated and probably mostly turnkey, but newly renovated 1400 SF houses in the area are renting for $1400 a month. So again the rental prices seems about right.

My question is how common is it for duplexes or other rentals for sale to be out of whack like this? Or what am I missing?

I've definitely bookmarked the property because I'll be curious to if/how much the price comes down before it sells. Especially with the repercussions of pandemic going on.

Hi rmorris50,

[Incoming biased opinion, so take with a grain of salt]

All the time! There are duplexes in the same county as the property in this thread listed for $400-450k that gross $2800/month in rent with $10k annual tax bills. Those properties lose money. The people buying them are essentially losing money each month and banking on appreciation. To that I say, let others make bad deals and when the next recession rolls around (which cannot be predicted, much like the stock market, case in point COVID-19), we'll be the ones buying those same properties at a deep discount.

Finding good properties very much follows the 80-20 rule. Most properties are average or below average performing. The top performing properties tend to be just a handful. And those properties tend not to hit the market. Why not? Because most owners don't just around selling great properties. Can they will be found on the market? Sure. But you'd better have an all cash offer ready to go, and good luck bidding against the next dozen cash buyers.

Some case study metrics in case you're interested. There are approximately 1800 multi family properties in my town. I sent 500 letters in only the areas I'm interested in. Roughly 3% response rate, looked at 6 properties in person, and I'm buying 1 of them.


Feel free to PM me if you have any other questions or want to chat.
« Last Edit: May 26, 2020, 01:30:43 PM by Archipelago »

BicycleB

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Re: Multi family deal analysis
« Reply #17 on: May 28, 2020, 08:13:59 PM »
Good luck with your new apartments, @Archipelago!

I was going to say the same thing as lilbenny34, but he already told you and you are moving ahead. Posting in case of updates.

Archipelago

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Re: Multi family deal analysis
« Reply #18 on: May 28, 2020, 08:53:28 PM »
Thank you! Looking like a 90-120 day closing for now. Seller is willing to wait as long as needed. I'll post updates.

Steeze

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Re: Multi family deal analysis
« Reply #19 on: May 31, 2020, 11:37:25 AM »
Ptf - let us know how this performs. Interested in the renovations too.

rothwem

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Re: Multi family deal analysis
« Reply #20 on: June 02, 2020, 05:38:42 PM »
Your numbers sound good and I donít want to be a Negative Nancy, but if youíre getting Section 8 tenants, youíre not in Class B. Plan accordingly.

Archipelago

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Re: Multi family deal analysis
« Reply #21 on: June 02, 2020, 08:39:28 PM »
Your numbers sound good and I donít want to be a Negative Nancy, but if youíre getting Section 8 tenants, youíre not in Class B. Plan accordingly.

I'm not committed to getting Section 8 tenants. Neither is the town rehab program contingent on renting to Section 8 tenants, just 50% of the units provided for low to moderate income households (threshold is around $72k for a family of 4). Section 8 is just a streamlined method of meeting the income requirements if I decided to move forward with the rehab project and have it paid for by the town.

rothwem

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Re: Multi family deal analysis
« Reply #22 on: June 03, 2020, 06:13:48 AM »
Your numbers sound good and I donít want to be a Negative Nancy, but if youíre getting Section 8 tenants, youíre not in Class B. Plan accordingly.

I'm not committed to getting Section 8 tenants. Neither is the town rehab program contingent on renting to Section 8 tenants, just 50% of the units provided for low to moderate income households (threshold is around $72k for a family of 4). Section 8 is just a streamlined method of meeting the income requirements if I decided to move forward with the rehab project and have it paid for by the town.

I guess I didn't state clearly enough what I meant.  Basically, if 100% section 8 FMR will cover the market rent of your units, you're likely not in a class B neighborhood.  This is based off of my experience in Raleigh, NC.  Your state may be different. 

Archipelago

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Re: Multi family deal analysis
« Reply #23 on: June 09, 2020, 08:15:51 PM »
Your numbers sound good and I donít want to be a Negative Nancy, but if youíre getting Section 8 tenants, youíre not in Class B. Plan accordingly.

I'm not committed to getting Section 8 tenants. Neither is the town rehab program contingent on renting to Section 8 tenants, just 50% of the units provided for low to moderate income households (threshold is around $72k for a family of 4). Section 8 is just a streamlined method of meeting the income requirements if I decided to move forward with the rehab project and have it paid for by the town.

I guess I didn't state clearly enough what I meant.  Basically, if 100% section 8 FMR will cover the market rent of your units, you're likely not in a class B neighborhood.  This is based off of my experience in Raleigh, NC.  Your state may be different.

I see what you mean now. Section 8 in my area covers 75% of FMR. On $1500, that's $1125. Tenant is responsible for the rest.

Archipelago

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Re: Multi family deal analysis
« Reply #24 on: September 09, 2020, 09:10:29 PM »
A little update here. Deal was delayed because of a falling out with a mortgage broker. Expected to close late September. The appraisal came in at $277k. So there is some immediate equity.

I did decide to move forward with the town funding rehab application. It would be silly not to at least try.

Original numbers are largely the same. 3.5% down, 1 point, around $7k in closing costs. Same tenants and rent roll.

« Last Edit: September 09, 2020, 09:12:21 PM by Archipelago »

Archipelago

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Re: Multi family deal analysis
« Reply #25 on: September 09, 2020, 09:21:02 PM »
Interestingly enough, the market in my area has blown up with people from nearby major northeast cities coming to the state. Hot seller's market at the moment. Not what I would've expected, but here we are. *shrugs*

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Re: Multi family deal analysis
« Reply #26 on: September 09, 2020, 09:43:18 PM »
This still looks like a good deal.  Even if half of your tenants don't pay, you should be able to float this for a long time. Just be sure you have plenty of reserves in the bank for the when/if the sh1t hits the fan.  We all keep waiting for the rents to stop coming in but for me and the landlords i know, that hasn't happened yet...