Buying a 6-Unit Rental Property - DEAL ANALYSIS

Alright, so we got a real estate deal that we're looking at right now. I've been back and forth with the owners for a few weeks now. So let me show you the deal. It is a couple, three duplexes and it's about 10 minutes from where I live and it's pretty close to Augusta and all of that. So kind of a nice spot for location wise. I would not be managing them. I don't have the time for that. The reason for this is really for kind of parking the Money. With recently 2020, the stock market was able make some money doing that. And I'm not willing to pay taxes and wanting to put it in something where I can get some good tax deductions, which is real estate because of depreciation and things like that. So I do not want to have a massive tax bill in 2020. So we're trying to figure out where I can put this money and kind of park it. It's not going to be a great cash flow deal. So I want to run you through the deal and just show you some of the numbers and what we've offered, what we've encountered and what the cash flow would look like. And again, this is not like a slam dunk cash flow deal. It's not like a 2% return, like a 2% deal or a, you know, I'm not making like 20 cash on cash returns. There's nothing crazy. I'm not flipping these. These are not like in distress or in rehab. I just, I don't have the time to manage them. I don't have the time to get in and get in there and re, you know, gut them all. But it's more about getting a decent cash flow where I can write off the taxes and get some tax benefits. So let's run the numbers. This is the deal. Right now it's in ferndale. It's like 10 minutes from here. They, these are three duplexes that share a parking lot with a fourth building. I really want that fourth building. And in the future I'm going to contact the seller and try to buy it off market. But for now this is what we're working with. And these, these duplexes I'm going to open up this one, they were all built in 2008 and so it's not like they are falling apart. They're decently improved and I've been inside one of them already and they're all, all the duplexes are three bedrooms, two and a half bathrooms. Like families can live here. Couple different things that I look at when it comes to this. First of all, I'm not a huge fan of location. It's close to i5. Fortunately, there's a forest between here. I'll show you here. This is the map. So i5 is like the busiest highway in our county. Let's see here. Can I pull up a different gap? Yeah. This is i5 right here. This is Cedar street where the unit. And so not a big fan of that. There is a big forest here. So there's not like a lot of sound issues from the i5. It just in general you don't want to be like by massive roadways simply due to the fact that kids run out in road things like that. However, there is. That's not really an issue here because there is a big forest area. 532 is a bad price. There's a reason why this thing's been on the market for 291 days. If you see that almost always you can count on the fact that the price is overvalued and you can tell that that's the case as well. Because they started this off at 439 or sorry, 539 and they've slowly reduced the price. Now it's 532. So when I went in, I wanted to do a low ball offer simply due to the fact that.

You know, it's been on the market for so long, they know it's overpriced. They want to get moving on the deal. The fact is that the owners are an elderly couple that's going to move to Oregon. This is kind of the last thing holding them back because of COVID They were kind of the impression like, hey, let's keep the price the same. They're making dec amount of cash flow in this deal because they bought it when they built like they built these in 2009. So they're probably cash flowing like 30, 40% crazy goodness. Because they built it and so they are sitting on them. So I did a low ball offer. I did 483A pot, basically 1.5 million for all three. Because they're duplexes. I was able to do residential and just a standard loan, just conventional lending instead of doing a commercial loan where they're going to want 35 to 40% down. A regular residential conventional loan on a duplex can be a 25% down and a 30 year fixed mortgage instead of like a 10 year ARM adjusted rate mortgage on a commercial loan. So it makes it more palatable by Splitting these up and I was able to figure that out due to the fact that these are separate duplexes. It's not a six plex, they're three separate duplexes. So I'm going to do three separate loans in order to be able to get the 25% down and a fixed 30 year mortgage.

So I offered 483 on the 532. They're like not happening. The lowest will go is 520. I then countered back at 5 and they came back at 510. So it looks like we're gonna go forward with the deal. I'm gonna run you through some of the numbers right now. So this is the deal. Just in case you haven't seen it. Inside it's classic. Early 2000s. The flooring's not great. It looks good in this picture. It's not as good as it looks. Pretty rental grade.

Appliances can be upgraded. The outdoor paint colors is horrible. I know a good landscaping company. Happen to know one that can fix up a lot of these issues. It just doesn't look well kept for the current owners have been very hands off. So it just needs a little bit of love, a little bit of paint. We can probably raise the rents by about 50 bucks a month and that will help cover some of my costs for management. And I'm not going to manage these myself. All right, so let's run through the numbers. So let's do it on a. For all six. So all three duplexes. So if we're doing 510k per per duplex basically. See if I can spell. That'd basically be a $1.53 million for the deal.

All right, so we're gonna do 25% down on the deal. So let's do 25%.

See here 0.25 times 153000 boom. So down payment is going to be $382,500. That's going to be down payment. We're going to finance the rest. Again, 25% down. Conventional 30 year fixed rate mortgage. Right now. Rates are really good right now. The my. Let's see here. One second.

Oh sorry. My. If the lone lady calls me I'll just answer the phone and you can listen to that. She's just trying to wrap it up with me as well. But basically right now, assuming we get it for 510 and there's not anything that comes up in the inspection or whatever, basically our estimated payment per month is going to be 230. Approximate 2,332, but this is $2,330 per duplex.

Now we're going to times up by three because there's three duplexes. So basically our monthly payment, our mortgage is going to be 6,990. That's going to include principal interest, mortgage or not, mortgage insurance, principal interest, and our insurance on the deal. So that's going to be kind of like all our expenses there, 6990. Now, right now all of these units rent for $1500. So currently the rents are 1500 and we're going to multiply that by six units. So it's $9000 in cash flow. This is our cash flow each month. This is going to be our mortgage each month. So technically, if you look at this, the cash flowing, technically, $2,100. And that's not taking into account things like repairs and maintenance. However, I do feel that we can increase the rents by $50 right off the bat. And then what we will probably do is $30 per year will increase it just on a sliding scale. So, you know, in five, 10 years, this becomes a good deal from a cash flow perspective. Right now it's really not that attractive. But if right now we look at 1500 and we move that to 1550 and we multiply by six, now we're going to do an extra 300, so 950. So basically $9,300 in.

Gross rent. Sorry, not cash flow, gross rents per month. Now, I'm going to have a manager manage this property. So I'm going to take 10% off the top of gross rents to be managed. So right off the bat, I'm going to take away $900. So really, at the end of the day, personally to me, I'm going to be taking 8,400 in terms of after management. So this is management.

Management, blah, blah. And then 8400 I'd be collecting. I have a $6,900 mortgage coming off of that. So what is that, $1,000? 500. So like 1400, let's do the math here, right, 8400 minus $6,990. So yeah, $1400, that's going to be my actual cash flow right there. Again, this is not a cash flow, super heavy deal. That's $1,400, me not having to manage anything. And right now I'd rather have my $382,000 down payment in real estate. That's something that I feel is going to be a really good tax shelter than in stocks where I'm going to get beat up with taxes. So right now how I'm kind of looking at this deal is in terms of a multifamily deal. You want to look at gross rent multiplier. So gross rent multiplier, so how you do that is like currently if we take all the rents of the existing rents, it's $1500 per month times 6 equals $9000. We times that by 12, 12 months in the year at 9 times 12, looking at $108,000 currently in gross rents for the building. So we got gross rent for the year is $108,000. Now gross rent multiplier is how much more are you paying for the billing? So for example, I'm going to pay 15300. Boom boom. That's my, the price. So if I take 1,530,000 and I divide that by my gross rent.

14.17 is going to be my gross rent multiplier. All right? And typically like for a C level property, like in a really bad area, you know, if you go down south into some states, you might get a gross rent multiplier that's like 20. But traditionally that's going to be a very rough neighborhood. Less appreciation in those neighborhoods typically. Whereas, like if you're in a really upscaled class A building downtown, you're going to be like a gross rent multiplier of like maybe 9 or 10. So it's kind of in the middle. It's not the best area of town. I do feel Furrino is growing. So another thing I look at really quickly here, I don't want to make this too long for you, especially when it comes to.

When it comes to multifamily, I'm looking at population. So you can see Ferndale's growing in population and over the past 10 years they've almost doubled in their population. No, no, take that back. They've gone up like 20, 30%. So it's growing. And then if I look at, you know, that's a pretty small population, but if I look at Whatcom county population, which is the county it's in, again, it's still increasing pretty dramatically in comparison to even other counties in Washington state. So that's a good thing. Increasing population is going to drive the need for housing up, especially affordable housing. Like this is in a three bedroom, two bath scenario. And then the last thing I look at for when, if you're looking at like a multifamily deal is you do want to look at the poverty rate so the poverty rate in Whatcom county is a little bit higher.

The national average property rate in Whatcom County. Here we go. So you can see here Whatcom county, it's 15.3% is the poverty rate in Whatcom county. And that's a little bit higher than the average. But you can see the GROSS Household income, 56,000, which is above average in the area or in the nation. Median value of property. So this is a really good place to look for information in terms of population to see growth. 101.43% growth this year in the population. Things like this are really important when it comes to multifamily because if you have people moving away from the place, it's gonna put downward pressure in your prices. And if your poverty rate is high, you're also gonna have trouble typically with appreciation of the asset. And in terms of this deal, this deal is definitely not of the a huge money maker in terms of cash flow. Every month it's more of a tax savings. But I want to make sure that it's going to be an appreciating asset and not in a place where the poverty is so high that in 10 years it's only worth 1.7 or 1.8 million. You know, the goal with this property is to make a little bit of cash flow, but really by the time you include maintenance and repairs, it's going to be almost break even, maybe make a little bit. But over the course of 10 years, rents will go up in this area because of population going up and then the property as a whole will appreciate in value. And that's kind of the long term wealth building strategy. So hopefully that helps someone out there. Thanks so much. Have a good one.