Question about Multi-family Deal

[Mecheng]

I`m looking to buy my first property and I`m having some trouble determining if it`s a good deal or not.

It`s a 300K tri-plex (1 - 3 bdrm, 2 - 1 bdrm) in a good location.
Since I was looking at only putting down 10% the cash flow is a little tight.
It`s close to $200 positive cash flow per month which sounded good.
However, if I add a 5% vacancy and hedge the interest rate to 5.5% it`s negative $50.

As a first time investor it hard to judge a good deal when you see -$50 on your analysis sheet but know it`s really closer to +$200.
How much safety factor is enough and how much is too much? Especially when you’re best case and worst case tip the scale like this.

I would expect a multi-family to be a long term hold specifically for cash flow. So, if you’re spending the money on a multi-family and willing to deal with the additional "effort" they require is $200 cash flow good or should you expect a little more bang for your buck?

Maybe I`m just being over cautious but I though with today’s market there should be a little more cushion.

Any thoughts on this would be appreciated. Thanks.

 

[Thomas Beyer]

QUOTE (Mecheng @ Jul 3 2008, 07:16 PM) I`m looking to buy my first property and I`m having some trouble determining if it`s a good deal or not.

It`s a 300K tri-plex (1 - 3 bdrm, 2 - 1 bdrm) in a good location.
Since I was looking at only putting down 10% the cash flow is a little tight.
It`s close to $200 positive cash flow per month which sounded good.
However, if I add a 5% vacancy and hedge the interest rate to 5.5% it`s negative $50.

As a first time investor it hard to judge a good deal when you see -$50 on your analysis sheet but know it`s really closer to +$200.
How much safety factor is enough and how much is too much? Especially when you’re best case and worst case tip the scale like this.

I would expect a multi-family to be a long term hold specifically for cash flow. So, if you’re spending the money on a multi-family and willing to deal with the additional "effort" they require is $200 cash flow good or should you expect a little more bang for your buck?

Maybe I`m just being over cautious but I though with today’s market there should be a little more cushion.

Any thoughts on this would be appreciated. Thanks.
send more details please: price, location, province, leverage, rental upside ?, expense assumptions ..

 

[Mecheng]

It`s a 300K tri-plex (1-3 bdrm, 2-1 bdrm) and I`m looking at 10% down (using LOC for down payment).
It`s in Ontario and both the 1 bdrm tenants are leaving but rents were already at top market value.
Here is the income to expense breakdown, tenants pay electric and the units are metered separately.

Revenue
Rent 1 $10380.00 / Rent 2 $9000.00 / Rent 3 $9156.00
Total $28536.00

Expenses
Insurance $900.00
Property Tax $3200.00
Gas (all units) $1800.00
Water (all units) $600
Maintenance $900.00
Total $ 7400.00

Net Income $21136.00

I`m including the interest payment from the LOC I`m using for the down payment in the debt service.

Thanks

 

[Thomas Beyer]

QUOTE (Mecheng @ Jul 3 2008, 11:19 PM) It`s a 300K tri-plex (1-3 bdrm, 2-1 bdrm) and I`m looking at 10% down (using LOC for down payment).
It`s in Ontario and both the 1 bdrm tenants are leaving but rents were already at top market value.
Here is the income to expense breakdown, tenants pay electric and the units are metered separately.

Revenue
Rent 1 $10380.00 / Rent 2 $9000.00 / Rent 3 $9156.00
Total $28536.00

Expenses
Insurance $900.00
Property Tax $3200.00
Gas (all units) $1800.00
Water (all units) $600
Maintenance $900.00
Total $ 7400.00

Net Income $21136.00

I`m including the interest payment from the LOC I`m using for the down payment in the debt service.

Thanks
looks like an OK deal to me .. although rents look LOW .. not even $1000/month for a 3BR including utilities ? not even $800 for a 1BR ?

also add management fees .. and taxes may go up due to new sale price .. also have a reserve fund for vacancies, surprises or expected repairs like new fridge, new paint, ..

is this a LEGAL tri-plex ? or a single family house with 3 illegal suites ? check the zoning and the title ! with 3 illegal suites you run the risk of neighbors complaining and losing 2 incomes .. and that may be the reason why he is selling ! This is then a very risky purchase !

 

[invst4profit]

Although your numbers do not look too bad on the surface in reality they are incorrect.
If you intend to keep this property for an extended period of time you will discover your expences are closer to the 50% range-$14,000 per year not $7,000. It is not possible to manage a rental property with only a 25% expense budget.
Also my advice is to not own a property with utilities inclusive. Shift the utilities to the tenants ASAP if possable.

 

[Mecheng]

Tomas,
Thanks for the tip on the taxs increasing, it never crossed my mind.

Invest4profit,
What increse in expenses do you think should be adjusted.
I agree they seem low but if tennents are changed from inclusive it would only improve.
The only area I see possible increses is from maintainence and adding a property manager.
Is there something missing?

Thanks again for the advice it is much appreciated.

 

[Nir]

Mecheng,

I wouldn`t purchase this triplex based on the annual rent to purchase price alone (adding a factor due to "tenants pay electric") - around 10%. Based on a SUPERB saving time rule of thumb provided by Thomas and Greg that expenses are approximately 50% of rent, Cap rate is approximately 5-6% too low for me. other investors with different goals might be more interested though.

Regards,
Neil

 

[invst4profit]

What I see is increases in maintenance. You need to see the past record of expenses for this property from the present owner.
Expenses include: taxes, insurance, vacancies, advertising, utilities paid by owner during vacancies, management (even if performed by owner), maintenance, entity maintenance, legal fees, evictions, lawsuits etc. etc.

Here are the numbers as I would look at it:

Monthly income- $2378
Averaged monthly expenses (50% rule)- $1189
Cost of mortgage- (interest only @ 5.45%)- $1347/month

Monthly income-monthly expenses-monthly interest = cash flow

$2378-$1189-$1347= -$158/month plus you have to come up with your monthly principal payments on the mortgage ($335.)

Your numbers will be different based on mortgage specifics but you get the picture.

 

[Mecheng]

I did end up passing on this one, thanks for all your advice everyone.

 

[Mecheng]

QUOTE (Mecheng @ Jul 14 2008, 08:47 AM) I did end up passing on this one, thanks for all your advice everyone.

Does the 50% expense rule of thumb apply to all rental properties?
What about condo/townhouses or condominiums?

 

[Thomas Beyer]

QUOTE (Mecheng @ Jul 16 2008, 07:04 AM) Does the 50% expense rule of thumb apply to all rental properties?
What about condo/townhouses or condominiums?


yes, this is a good rule of thumb for condos or apartment buildings .. but is just a start .. analyze deeper once you have one that seems to fit

single family houses where the tenant pays utilities are a different story !