Author Topic: Rental Analysis - 4 plex  (Read 2239 times)

ncornilsen

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Rental Analysis - 4 plex
« on: March 21, 2014, 08:04:39 AM »
I happened to find an off-market 4 plex in my neighborhood that the owner is considering selling.

Sale price, including closing and transaction costs:
$275,000

Current rental income: $2500/month
Market Rent: $2800/month.  current owner has kept rent well below market since she hates turn-over. all tenants have been there 4+ years.

Rent after vacancy rate applied and rent prices adjusted: $32200/yr

I want to look at the mortgage 2 ways: (6% apr)
-The 'right' way (25% down) and the only way I could do it right now: $10,000 down.
That means P&I is either $1237 or $1588/mo respectively. (14844 or 19056/yr)

Property tax: $4100/yr
Insurance: $1000/yr
Maintenance: $3500/yr
Misc expenses: $1000
OE: $9600
My management 'paycheck: $1800/yr
NOI: $20800

Cashflow: +5956 OR +1744 per year (25% down versus $10,000 down). I expect, in year one, I will be replacing the tenants due to rate shock from adjusting rates to market. I may modify my approach and accept lower rents, but increase them slowly over a couple years.

Any thoughts?

I don't have nearly enough money to pursue conventional financing at this point. I was going to write up a proposal and pitch this to a well-to-do individual I know who said he was looking for investments (I'd say hey, you finance this thing...)  OR, I would investigate whether the seller would want to owner-carry. They're selling this since they're nearing retirement, so I'm not sure they're up for it, but who knows?  I'd save like a banshee for the next few years hoping to re-fi with 25% down, to improve the cashflow, in either case.


« Last Edit: March 21, 2014, 08:07:27 AM by ncornilsen »

arebelspy

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Re: Rental Analysis - 4 plex
« Reply #1 on: March 21, 2014, 08:28:22 AM »
The numbers as-is don't interest me personally, but it may still be workable depending on a few factors.

If you deal with vacancies to get to market rent you're just above the 1% rule with the hassles of multifamily.  I don't know what rents are in your area, but that typically is in the lower ends of rents (625-700/mo) for most areas, meaning not great tenant quality, not great neighborhood, etc.  (Those are MASSIVE assumptions on my part due to lack of information, so please correct where necessary.)  It's a fairly low return (maybe break even at your higher rents with 10% down, so at 25% down, forcing some cash flow, you'll have a fairly low return), so you'll need to count on appreciation or increasing rents.

I wouldn't bump everyone's rents at once, but slowly raise them, like you mention, which again cuts into the return.

Your management expenses are low (5%ish?).  You have no vacancy expense.  Are there any utilities?  How old is the property? Any deferred maintenance?  How flexible is the owner re: price and terms?  Why are they selling?  What's your exit strategy (strategies)?  How do you envision the investor being involved? 

What are your investing goals in general, and with this property in particular?

There's a lot of questions that need to be answered.
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ncornilsen

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Re: Rental Analysis - 4 plex
« Reply #2 on: March 21, 2014, 10:19:11 AM »
Thanks for the input.

Rents in my area would put that above the slum-lord status, so maybe mid-low range. The units do appear dated, and I'd figure on updating them as people turn over, and asking a higher rent accordingly. The neighborhood is an OK one, close to good employment, adjacent properties are a mix of 1950's units and new construction. The expense of areas closer to Portland is pushing people down into this area.

I figure on managing it myself for that 5%. I'd manage someone else's four-plex for that, at this point, for the experience in doing so. After re-financing in 3-5 year timeframe, my 'management' fee would go up accordingly.

My investing goals aren't to retire for another 15 years. (42 years old.) I want to have cash-flowing properties that I can put in up to 15 hours a week (average) of time managing, that can support me, while leaving my other investments alone until later in life.

Exit strategies are as follows:
-Use this unit to learn the ins/outs of multi-family renting.
-If the RE market continues to appreciate, and I end up with so much equity in this thing that my IRR drops below 4%, I'll sell the unit and look for better returns elsewhere.
-If the RE market stays flat or falls, I'll hold onto it, and hopefully be able to take advantage of a down market to acquire another unit.

Portland has a vacancy rate of less than 4%. I figured that into the 32200 number, by multiplying the $2800/month rent figure by .96 to get 32200.
No utilities as far as I know, she said they all have separate water meters. I'm not sure how flexible they are with price and terms. I do not know why they're considering selling, other than because they're getting older and may want their money to play with.

deferred maintenance is also another wildcard I need to investigate.

The investor's involvement would be either to loan the money to acquire the unit.  I haven't the foggiest on how they could be involved as a silent partner.
I understand there's some more legwork needing to be done here, I was mainly trying to see if it looked good enough on the surface to explore further.

arebelspy

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Re: Rental Analysis - 4 plex
« Reply #3 on: March 21, 2014, 10:28:25 AM »
Worth exploring, sure.  Whether or not you can turn it into a deal remains to be seen. The key will be the current owners - find out why they're selling, how motivated they are, and how flexible on price/terms.
« Last Edit: March 21, 2014, 10:30:44 AM by arebelspy »
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ncornilsen

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Re: Rental Analysis - 4 plex
« Reply #4 on: March 21, 2014, 11:02:30 AM »
Just spoke with the owner's agent.

It's being sold to fund another business they want to get into, so no chance of owner carry. 

There are 4 other offers on the table right now, apparently it's been advertised through some other channels that I didn't know about. apparently  they have been trying to sell it for 1.5 years, but the realtor kept deflecting when I asked what has kept it on the market for so long. It was initially listed at 330K,two years ago... but relisted 1.5 years ago for 279,000. He did say the owner would not consider any offers until they have satisfied the requirement for a 1031 exchange. I cannot inspect the property until after they've accepted an offer. 

I'm not sure what to make of this... on one hand, it may have been on the market for so long because  the terms for financing a unit are onerous enough to keep amateurs away, while not being a big enough project to bring in those with the means. It may also be that he's accepted offers before, and people withdrew once they inspected it since there are things wrong with it.

I'm thinking at this point, I need to talk to my investor friend, and see what he thinks. If I can get him interested at a lower purchase price, AND the property is still available, maybe I'll make an offer then contingent on an inspection.

Is it reasonable to ask the seller to see maintenance expense records? I'd be able to get a good idea of how much he has or hasn't done on the unit and it's operating costs, recurring problems, etc. I did get some pics emailed to me, the unit looks dated, but in good condition. some paint and newer flooring would make a huge difference.

Even as the units are, I could reasonably increase rents to a total of $2900 a month. With updates, 3200 seem reasonable based on comps around the area.

If I offered $250,000, even with $2800 rent, here's where I'm at with $10,000 down.

-Maint, Prop tax, Insurance, Management, Vacancy is $13750/year.
-Debt Service, P&I, are $16353

-Net: ~3500/yr

A 30% return on equity. does not include cash flow bonus of depreciation.