I will admit that I don’t know the first thing about multifamily units, but what I believe I do know is that you need to figure in a factor of 40% of monthly revenue for things like vacancy, hot water heaters, new roofing and other general maintenance issues. If you figure debt service of $1800 (using the 1% rule)per month on your $180k financing and then add $720 (40%) to it you get $2520. You are only clearing $2500 per month in rent. Like I said, I really don’t know anything about this type of deal, but I don’t see that there is any cashflow here to make this worthwhile. I don’t see the deal here. I could be all wet so, please, wait for others to reply.
As I was calling on my 3 inch stack of possible deals, I found one that looks interesting. I need to know how to proceed…
This is a 4 unit apartment in a suburb of Atlanta. They are asking $180K. Their other deal is falling thru as the buyer cannot get their funds together. The rents as of July will be $625 per unit ($2500 gross). The math seems pretty good. What do you all think?
Yikes! I can’t believe the previous posts haven’t talked about the different methods of valuation, you need to know them for this kind of stuff! The three most common are, the comparables approach; the income approach; and the cost approach. The first two are the most common, comps mostly used in residential r.e., and income in commercial r.e. Whether or not a fourplex is residential or commercial is a gray area, so you should probably use both of those two methods here. In addition, the cost approach is often used as a supporting mechanism on a URAR (Uniform Residential Appraisal Report) which will be required in order for you to get financing. You can only get residential loans on up to 4 units; after that, it’s commercial financing, and a lot more down.
Charity, this is all pretty basic stuff. Don’t take this wrong, but I’ve seen many of your posts and you’re a newbie and that’s ok. But you need to get some education here, or you are going to get burned. This is a serious game, with a lot of money at stake. I strongly recommend Investing in Real Estate, by McLean, it will cover all that I have mentioned here, and so much more. It is a paperback book that costs about $15 and is at your local bookstore, and on Amazon.com. It is also at the library for free. In the meantime, I think there is an article called “crash course in commercial real estate” on this site which touches on this as well. In commercial real estate, the name of the game is due diligence - verify, verify, verify. At first blush, your numbers would generate a 10% cap rate at 40% annual vacancies and expense loss, which is not bad. But you need to gather more information before you know for sure.
If you have Carleton Sheets course, he explains how to do a cash flow analysis. I suspect the others are right about it being a slim deal, but can you raise rents? That could make a marginal deal a good one.
Regarding financing, you have four basic options:
If you have good credit and a 20% down payment you can always go to a conventional lender and get a loan.
You can get the seller to finance, but you will have to come up with whatever down payment you can agree on (or have a partner come up with it)
You can get a partner to arrange for the financing or finance it themselves.
You could get the seller to finance, create a note, and sell the note to generate the cash to pay off the seller. This is more complicated, but its a good way to avoid you having to go to the bank, yet the seller gets their cash.
Charity, you say “the math looks pretty good”. So you have done some. What is it? Walk me thru just what you are looking at. Jason is not wrong, but if you do yourself a little spread sheet of expenses (with pencil and paper at least), you can see it in black and white.
Take all of your expenses, taxes, insurance, lawn, pest control, utilities, licences, an estimated figure for ‘routine’ maintenance per unit, a figure for reserves (how’s the roof, wiring, etc?), vacancy, management and/or profit.
Subtract that from your income. The rest is what you can afford to pay for debt service.
Don’t make the figures lie to you. Don’t fudge. If the deal is really good, the money can be found. My guess is that this one will not measure up to your expectations, unless your seller is willing to hold paper with great terms, or unless you have a note which you have purchased at a deep discount that he would accept in lieu of a note on his property… but that’s another story.