Multi Family Deal? Need Advice Please!!! - Posted by Greg B

Posted by Tim (Atlanta) on December 16, 1999 at 06:38:09:

I notice from your expense figures that you have not included anything for maintenance/repairs on the building. Personally, I put about 20% of rent aside for repairs and maintenance. In your case that would be $220. Now add that to your bottom line as is, and you get a negative cash flow of $120. You also did not add in any vacancy rate. I typically use 10% on these types of properties. That is another $110. So now you have a negative $230 per month.

If you look at the potential of $1475 rent per month fully occupied, you get :
Your expenses 1000
Maintenance 295
Vacancy 147
Total Expenses 1442

Therefore a cash flow of 1475 - 1442 = 33

Considering the bad neighborhood, and the poor cash flow, I would pass on this one. It sounded like such a good deal when you mentioned the sale price of $40,000 for 4 units.

Multi Family Deal? Need Advice Please!!! - Posted by Greg B

Posted by Greg B on December 16, 1999 at 24:55:31:

Here’s the deal.
4-Plex property: 4- 2/1 units, 750SqFt each. Located in a low income part of town. FairPark Area of Dallas. I did a thorough walk-thru inspection and also had a termite inspection performed. No termites. The property needs paint and some new roof shingles on a couple of sides costing approx $2500 for all (unit has flat roof). Paint and carpet in (1) one vacant unit: $400.
2 units up and 2 downstairs.

3 units are occupied
Rents 2 @ $375
1 @ $350
1 vacant
Total $1100 current monthly rents.
or $1475 with vacancy filled @ $375.

Sales Price: 40K with 4K down and seller carry 10% note with 20yr amortization with an 18 month balloon.

Debt Service: $348/mo
Water $100
Gas $ 85
Elec $350
Insurance $ 66
Garbage $ 50
Total Exp $651 (High)
Monthly Expenses: $1000

Net Cashflow:
Current $1100
Minus $1000
Equals $ 100

With Zero Vaccancy $1475
Minus $1000
Equals $ 475

Several new Habitat for Humanity homes have gone up in the area.
Current occupants have lived in the complex for 2 yrs, 1 yr, and 6 months consecutively.

Downside: Still many boarded up houses in the area. Wife doesn’t like area/clientele.

Please advise…

Thank you in advance for your direction and guidance!!

Re: Multi Family Deal? Need Advice Please!!! - Posted by ray@lcorn

Posted by ray@lcorn on December 16, 1999 at 10:54:31:


The two Tims have summed up the deal pretty well, but I would like to add a couple of comments.

First, when I see a deal with very easy entry, e.g. 10% down, 10% seller financing, my red alert alarm goes off. There are a few principles that are always true in real estate, regardless of type, location, price or situation:

One- The current owner will always know more about the property than the prospective buyer.

Two- In every deal except a distress sale, NO ONE; not the owner, the buyer, an RE agent, the lender or the attorney (or closing agent); sits down at a closing table unless they believe that they will be better off when they get up. Each party to a deal must believe they will be better off in some way for doing the deal or they won’t do it.

Three- You never go into a property without knowing how you’re going to get out.

So looking at this deal with those principles in mind, you can see that this owner thinks he would be better off getting your four grand plus some payments than continuing the path he is on. And after seeing the numbers, I don’t blame him. I’d take that deal too. And remember, he knows more about the property than you do.

The problem is that he isn’t leaving room for the next guy, you. In fact, he isn’t even going to let you out on too long of a leash, because of the 18 month balloon. That’s a guaranteed repo. You HAVE to refi, and are you familiar with the finance programs available for this type of property? Since the price you are paying is all the cash flow will support IF everything goes right (and it won’t), and you didn’t mention increasing the rents as an upside item, then there is no out other than to hold the property for whatever appreciation may accrue in a neighborhood that may or may not continue to clean up. Be aware that even with 100% occupancy, you will likely not receive 100% of the scheduled rent, due to collection losses, turnover, etc. Also, it sounds like you have estimated numbers on the rents and expenses. That’s a really BIG no-no in my book. I wouldn’t go one step further without seeing actual operating income and expenses.

Having said all that, there still could be some ways to make this into a deal. Trades, split notes, deferred payments, performance mortgages, etc. But there is one more factor that may mean this would not be a deal for you at any price or terms. That is your wife… if she has a bad feeling about this property, and you intend to stay married, then you better pay attention. Not because she knows any more or less than you do about real estate, but because there usually will come a time in the ownership of any property that you will need the support and help from your spouse, and if she was against the deal from the get-go, that support is going to be hard to get when the time comes. If the property doesn’t perform financially, then it is going to cause some tensions between you that have nothing to do with real estate. Trust me on this… intuition can be an asset when you look at a deal, yours and hers. You obviously will be involved in the deal together, or you would not have mentioned her opinion. When you find a property that both of you like, then you both will be able to move mountains to get done what needs doing.

Good luck!


Re: Multi Family Deal? Need Advice Please!!! - Posted by Tim Randle

Posted by Tim Randle on December 16, 1999 at 08:26:08:

If your numbers are all good, then I agree with Tim-Atl. The units are not separately metered for utilities? Can you not give the cost of utilities to the tenants? This seems to be where you’re getting killed. Also, are your rent figures acccurate? Will you be able to pay the balloon? You have an insurance figure separate from the debt service number, so where are the property taxes? Are you going to manage it yourself? These are just some of the additional factors that need to be considered which are not included in the information provided. Good investing…