Good Deal On This 4-Unit?
Hi Everyone,
I ran some numbers and am sure this is a decent deal for a first time REI purchase but I am wanting your opinions and thoughts on those who have done this before. I have looked into many 3-4 unit multi family homes but this one seems to be the only one in which I can net positve income which is pretty good. Here are the numbers, please let me know your opinions whether the deal stinks, is decent or what I am missing:
This is based off a worst case scenario, full purchase price of $215,000. The home rehabbed is worth around $240,000 - $250,000. Im looking to buy at asking price but receive a $20k credit at close so I can rehab the place, new roof, electrical work, wood stariways need replaced, and carpeting.
Unit 1 rents for $625/mo + $125 for garage = $750/mo.
Unit 2 rents for $500
Unit 3 rents for $625
Unit 4 rents for $500
I am getting an 80/20 loan and combining both my monthly notes will be $1875/mo, bringing in a little over $500/mo profit. I will be looking to put a coin operated washer/dryer in basement for added income also. I heard that I should take rents and multiply by 72 to get to the purchase price of the home, but the seller will not go that low. Any insight on this possible purchase would be gratefull. Thanks and happy Friday to all. :-?
[addsig]
I hate buying retail, and it seems that is what you are planning to do even with seller financing. Granted, seller financing improves the value, but I think you can do better. See if you can get him to give you a counter offer to your initial offer. Just as a guide, I like to get more than $200 per unit net net net. So for your property, I would like to see a minimum of $800 if it were me.
How much are you calculating for vacancies, repairs, advertising, legal fees, etc. $500 a month before all of these required calcs is not enough to make me do it. It's close though. Depending on your area you should calc 5-20% for vacancies and at least 5% for repairs.
The 72 thing is your rent multiplier. Rent x 12 months x 6 years = Max possible purchase price. Which in this case if you were getting it for 171k, that would be a slam dunk deal.
Thanks B-Norton and Ray for your posts. I know $500/mo profit is not much and I should get more but the owner wont go much lower, if he goes for $200k then he will not offer a credit at close and I need the money to do rehabbing to the property. I am calculating 5% for vacancies and 2% a yr for maintenance. Im thinking I can raise rents when thier existing contracts are up to up the profit per month. Maybe I should let this property go since the seller isnt willing to come down to make it more profitable for me but im having a hard time finding motivated sellers that will come down a bit in price. Wish I knew of a way to attact motivated sellers of multi-family homes. Thanks again for your responses.
Don't forget property taxes in your calculations.
The first real-estate deal I did 3 years ago was something of this nature, but in my case, I was the seller. The buyer was getting $500 monthly net. I would say practically that would be around $375-$425/ per month. He took the seller concession I gave him, around 12K, made some cosmetic changes to the house and after a year sold it for a handsome 30K profit. But at that time, luckily for him, real estate prices were increasing every month. $400 - $500 is pocket money in rental cash flow because, if you have big repair, all those will be wiped away. Cash flow makes more sense in multi unit buildings (10 unit +) . In your particular case, it makes sense to take the seller concession, do the necessary repairs and try to resell it for FMV. If you can make 20K in profit in 3-4 months, its much better than the $500 cash flow.
My 2 cents...
Your calculations make sense, and this could work given your expectations and interests. Remember, though to fall in love with the deal and not the property. Falling in love with the property--which need not kill the deal--can confuse your nose-for-profit perceptions.
I agree with much of what's been said so far. It really sounds like too high of a price to pay for what I'd do. I would consider leaving it alone, if you can't talk the seller lower. You need a little more margin to make this one work. Maybe you're in a high growth area - I don't know IL that well. If you're not in an area that's appreciating a lot, however... you may want to work for a better deal.
-Jeff
In Illinois you can build a new 4-plex for that amount, less if you Owner build and find the right subs
Quote:
On 2004-09-17 16:11, tzachari wrote:
The first real-estate deal I did 3 years ago was something of this nature, but in my case, I was the seller. The buyer was getting $500 monthly net. I would say practically that would be around $375-$425/ per month. He took the seller concession I gave him, around 12K, made some cosmetic changes to the house and after a year sold it for a handsome 30K profit. But at that time, luckily for him, real estate prices were increasing every month. $400 - $500 is pocket money in rental cash flow because, if you have big repair, all those will be wiped away. Cash flow makes more sense in multi unit buildings (10 unit +) . In your particular case, it makes sense to take the seller concession, do the necessary repairs and try to resell it for FMV. If you can make 20K in profit in 3-4 months, its much better than the $500 cash flow.
My 2 cents...
>>> Good point! So if we buy a small multi-unit with some cashflow, it's best to speculate on appreciation and resell it. Essentially it seems that resell is only way versus holding it with possible major repair whiping your cashflow.
The only problem with speculating for appreciation is that it is just that -- gambling. Now, that isn't always bad, but I wouldn't build a business on it. The only appreciation that you have any control over is a rehab. Then you are creating the appreciation.
Or possible major depreciation to wipe out this strategy. With holding longterm if you have bought a good deal with good cashflow you do not worry about speculation. Market goes down? Your rents stay the same or go up with the demand. Flipping will make you rich where cashflow will make you wealthy (passive income every month you hold)
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>>> Good point! So if we buy a small multi-unit with some cashflow, it's best to speculate on appreciation and resell it. Essentially it seems that resell is only way versus holding it with possible major repair whiping your cashflow.
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Thank you everyone for your comments and knowledgable insight on this 4-unit. I would like a good steady cashflow each month but since the seller isnt that negotiable I might have to walk away from this deal. I wish I could find something cheaper with the same amount of rents where the seller is motivated. Guess Im having more of a difficult finding the motivated sellers than the properties. In my case Im in a dillemma because I have nothing to put downe except $1000 so I have to get this whole loan financed with an 80/20 loan and the units must be fully rented or the bank will not give me the loan. So I have to find something that will make me enough passive income after paying the note, taxes, insurance, maintenance, etc. Thanks again for everyones help.
Sean
Sean,
Sometimes it is better just to walk away. You have a healthy attitude that will take you far. There are motivated sellers, and there is always another deal. In fact, often you can find motivated landlords in rent court (hint hint). Don't get discouraged. It is just a matter of marketing and networking. Make sure you are going to your local REIAs.
Thanks bnorton, I appreciate your words of courage and you brought up a good idea also to go to rent court to find motivated landlords which can turn into motivated sellers - very creative. I will find that ideal property soon, just wish I could find it now
Thanks
You are welcome. Be patient, and strike only when it is right.
Good Luck.