Do these numbers sound right on the 4-plex?

Do these numbers sound right on the 4-plex?

Hi everyone! We're still waiting to hear back from the bank to see if they accepted our offer, but today I've been running new sets of numbers to bolster my confidence that the 4-plex will appraise high enough to make this work. (I've got a negative-sounding agent who won't be helping on the next deal, LOL, and I think she's been getting to me!!)

So, details are as follows:

4-plex apartment complex; 2 buildings, each 2-story. Each apt. is 988 sq. feet, 2bd/1ba each with it's own laundry room, patio or balcony accessed by sliding glass doors in both front room and master bedroom. Buildings are connected by breezeway, and there is a very large "landing" common area. History is that these have been low-life apartments for probably 15 years or more, however they're in very normal, nice residential neighborhood within 2 blocks of high school and middle school, and less than 1/2 mile from elementary school. Interior of apartments is currently very bad - holes in the drywall, some windows broken, no w/d in the laundry rooms, FILTHY, frig and stove YUCKY, vinyl and carpet dirty and very worn, and cracks in drywall from some old settling combined with poor drywall job.

In this condition, they have consistently rented out for $500 per month, with only vacancies due to eviction time, LOL.

We are going in as owner-occupied, on an FHA loan 96-1/2% at 5% (estimated - could even go down) interest.

Husband estimates minimum renovation costs at $4000 per apartment, to include new carpet/vinyl, new fixtures (like toilets, faucets, doorknobs, light fixtures, etc.), some new doors (both interior & exterior), drywall, paint, counters, some fix up of cabinets, and new appliances (frig, stove, and adding dishwashers, and w/d).

Hubby also has plans for outside renovations to include converting an existing garage into a rec room, and adding a children's play ground area, and a picnic / BBQ area, in addition to fencing around the entire lot (0.3 acres). Minimum cost for outside renovations would be $8,000.

We estimate increased rent after renovations to be minimum $600 per unit and maximum $675 per unit. We also estimate that we will locate and purchase a larger, nicer personal residence for us about 6-9 months after close of escrow, so at that point all 4 units will be rented out. We will do our own property mgmt for the foreseeable future.

So, my first concern is that the place will appraise high enough to get the FHA loan. Our real estate agent sounds worried that it might not appraise at $150,000. Our offer is $150,00 and they cover closing costs. It sold in 2006 for $245,000 and was foreclosed on in September of 2008 for $116,000. I don't have any sales data prior to the 2006 sale.

I found some info about total debt burden and about appraising using the Income Capitalization, which when you input your NOI and your desired rate of return with the bank loan interest rate, it spits out a figure for the maximum you should pay for the property to realize your desired rate of return.

Based on the worst-case scenario of $500/mo x 3 apts = NOI $10,560, then the total debt burden comes up to only $733 per month (1:25x ratio), which is less than what our mortgage pmt would be. But, if you calculate it based on the after-renovations, 4-apartments-rented figures, it's up to $1424/mo, which will be WAY more than we need. (Our mtg pmt, with taxes and insurance, is estimated at $850.)

The Maximum Purchase Price (cap rate) formula, based on $500x3, and a desired 10% rate of return for us comes up with $159,396. Is 10% a decent rate of return for our first deal? We'll only have about $5500 cash into it.

If we project the rent at $600x4, then the maximum purchase price goes up to $322,415 which is hilarious.


How much weight does an appraisor give to each of the 3 methods of appraisal? these places were built in the 70's, so I don't see cost method as being very applicable to them. Plus, they are currently vacant since being foreclosed on, so how would that impact the Income Capitalization method? Comparables in our area are non-existant - the most recent would be when these sold in 2006 - it's just a one-horse town, and there's only a couple of other 4-plex's here, and they haven't sold since the 80's.

Is 10% rate of return a decent rate for our first investment? this seems like a cashcow to us, but the agent seems so friggin doubtfull about everything.

how freaked out is an appraisor going to be by cracked drywall and some settling? It is like 35 yrs old, and built on a concrete slab with big trees right outside (=roots). are they going to massively downgrade the appraised value because of that?

How fussy are the FHA guidelines - will they refuse to loan because of the thrashed condition?

Anything else that I don't know enough to ask about, LOL??

THANKS! i'll keep this updated if I ever hear from the agent or bank!

Tracey R.