4-plex, Good Deal? I think so! - Posted by Adam Olson


#1

Posted by phil fernandez on December 23, 1998 at 11:09:37:

A couple of reasons for securing the 15 year mortgage. By obligating yourself to the 15 year mortgage, it will make you a sharper manager of the property knowing that you HAVE to make the payment.

You will not have to constantly check with the bank to make sure the extra $100 is being applied to the principle. And as you mentioned that the 15 year mortgage will be at a lower interest rate than the 30 year mortgage.


#2

4-plex, Good Deal? I think so! - Posted by Adam Olson

Posted by Adam Olson on December 21, 1998 at 23:30:03:

4 plex, 10 years old. Good shape.
2 bed/1 bath/garage per unit.
rent $440 for 2 units and $450 for the other 2 units

Is this a good deal, I think so!

Reason I want to buy: to live in for a few months then rent all units and keep as an asset!

4-plex listed price $140,000.00
Out of pocket (OP) $3,500.00
Rents and Dep. $3,500.00
Rents, Dep. and OP = 5% down payment

Gross Rent: $21,360.00
Minus 5% vacancy $20,292.00

34% operating expense (includes tax) $6,974.00
Net Operating Income $13,318.00
Less Annual Debt Service $10,620.00
7% at $133,000, 30 yr, $885/mo
Cash Flow/year $2,698.00
Cash Flow/month $224.80

Does this sound like a good deal to everyone?
Listing price is actually $142,000 but I was going to initially offer $127,800. However, even if the seller only goes down to $140,00 from my calculations above, it seems to be a go on my end.

Adam


#3

Have APOD in excel 97 to package deal. - Posted by Harvey Carroll, Jr.

Posted by Harvey Carroll, Jr. on December 23, 1998 at 20:00:54:

I have spreadsheets that will help analyze the deal if you have excel 97. I would do it for you but I am busy. If you have any real estate stuff to trade me I would appreciate it…


#4

Here’s more info on the 4-plex - Posted by Adam

Posted by Adam on December 22, 1998 at 14:34:56:

Comps for other 4-plexs of same age and rent are at $157-160,000. The broker herself bought 4 plex the week before at $160,000 and her’s did not have a garage.

This unit was priced at $142,000. Broker said she wanted to list it at $155,000 however owner said he didn’t want to deal with negotiating so he priced it to sell. I wrote an offer today for $132,000.

Rents are average possibly I could get $25 more per month. All units are rented.

Seller has provided all expenses for the past year. I figured in all expenses. I figure I can live in 1 unit and the rent from the other 3 units will cover the expenses for the most part. I may have to pay $50-100 per month in the worst case.

Not bad, to live for only $50-100 per month and build equity. It sure beats renting at $450 per month (throwing money in the garbage).

Adam


#5

Re: 4-plex, Good Deal? I think so! - Posted by Cesar

Posted by Cesar on December 22, 1998 at 11:04:19:

First of all, what are the comps for a 4plex in the area? Without this information, you may not know if it’s a good deal or not. Let’s assume that the comps are around where the asking price is:

1)How are the rents as compared to the rest of the area? Are they low or are they about right? Can they be raised and still keep them rented?

2)What kind of repairs do you foresee coming up? Has the roof been inspected? Have you spoken to the tenants about any problems they may have had? How are the appliances? Plumbing? Remember there are ALWAYS going to be repairs that have to be made on an ongoing basis. Are you prepared to come out of pocket for those, with the income being so low?

3)What happens if you get a vacany? How is that going to get paid for? As a general rule for fourplexes, I make sure that 3 units rented cover all expenses, or I won’t do it (but that’s just me…)

4)Can you wait the 4 years or more that, I believe it was John who mentioned, it would take to get any real return, or would you be better off finding another deal until then. This deal would be good if you paid about $120-125,000, in my opinion.

Just my .02 cents worth. Good Luck


#6

Re: 4-plex, Good Deal? I think so! - Posted by John(NH)

Posted by John(NH) on December 22, 1998 at 09:21:34:

Adam,
If your goal is cash flow, I would pass on this deal.
I don’t see where you factored in closing costs and
prepaids. Let’s assume they’re only $4500. That and
your out-of-pocket total $8000. If everything goes
perfect and you do clear $2700 a year, it will take
three years to get your capital out. In real life™,
things happen that require you to shell out for
unexpected repairs. It may take four years to get
your capital back. While this 4-plex may make you
money, I think your capital can be invested better
elsewhere.
-John


#7

Re: 4-plex, Good Deal? I think so! - Posted by Robert McNeely

Posted by Robert McNeely on December 22, 1998 at 08:42:23:

This sounds good to me. I have a 4 unit that I bought in 1991 under similar numbers. It has proven to be one of my best properties. My units are now 25 years old aand I have just recently put new water heaters and a roof on. He should however come down more than $2,000. Good Luck.


#8

Re: 4-plex, Good Deal? I think so! - Posted by phil fernandez

Posted by phil fernandez on December 22, 1998 at 07:43:32:

Adam,

In your 34% operating expenses have you included a figure for reserves for replacement.

You will someday need to relace appliances, put on a new roof, paint and recarpet the interiors, paint the exterior etc etc. Where will that money come from. It should come from the cash flow not out of your pocket.

Make sure you plug in a number as an expense for your reserves for replacement.


#9

Re: Here’s more info on the 4-plex - Posted by SCook85

Posted by SCook85 on December 23, 1998 at 08:42:26:

Adam,
I’m not much into rentals and seeing the numbers that you discussed I understand why.
I am replying for 2 reasons, 1) you did not mention closing costs, they have to come out of pocket unless you have the seller pay them. If the seller has not already accepted your offer I would go back and amend your offer to have them pay the bulk of your closing. 2) With rates as low as they are now I would give consideration to a 15 year mortgage. I have seen advertised rates as low as 5.5% fixed for 15 year mortgages with paying 3 points. Your equity will build much faster this way. A 30 year mortgage will take an awful long time to build equity.

SCook85


#10

Re: 4-plex, Good Deal? I think so! - Posted by Richard Castleberry

Posted by Richard Castleberry on December 22, 1998 at 12:20:37:

Here in California (and elsewhere I’m sure) when
lenders are looking at my debt to income ratio
here is what they do…the income on my rentals
if figured by taking the gross rents and then
subtracting 25% to cover expences, vacancy, etc.
At first I thought this was way too much, but
after 14 years of being a landlord/investor
I am seeing it is a fairly accurate number.
By VERY PICKY with what you buy!
And good luck, Richard


#11

Re: Here’s more info on the 4-plex - Posted by Reif

Posted by Reif on December 23, 1998 at 10:30:54:

Can you explain why one would take a 15 year mortgage ot build equity? It would seem to me the more prudent way would be to pay the exta 1/2 percent on the loan for the 30 year, and just pay extra each month so it looks like a 15 year loan.

I can see your point on making equity grow faster, and not making a deal unless it makes sense with a 15 year mortgage.

But it seems imprudent to put yourself on that hook if you don’t have to. If rents go down or you have an extended vacancy, it will be nice not to have to pay that extra hundred bucks a month that you would if you were obligated for a 15 year am.

Reif


#12

Re: 4-plex, Good Deal? I think so! - Posted by Skip (CA)

Posted by Skip (CA) on December 22, 1998 at 14:46:45:

Richard:
I was under the impression that the 25% was for
vacancy only, not including expenses. With the V.A.
on my last loan they only deducted 10% from my rental
income. A nice surprise.
Skip