Hello everyone. This is Juan Carlos Gastelum. I am a real estate investor in Texas. We recently visited a 4-plex listed on the MLS for $325,000 in Edinburg, Tx. It is a 2002 built and the listing says it’s been fully renovated. There are three apartments rented and one vacant. We talked to the broker and got a P&L (profit and loss statement). When we visited the property we only went inside the vacant unit. According to the showing agent, the others were inaccessible due to Covid 19. At the outset, one major setback was the fact that the full renovation was only paint, a newish AC unit, affordable blinds, and a new kitchen counter top. Essentially what would qualify as lipstick on a pig. All of the units have the main entrance going in through a side door through the patio, so it doesn’t have a great curb appeal. That’s not very marketable for the area. But I thought “its a recent build 2002, and it looks nice”.
After the showing, we ran the numbers on the Bigger Pockets calculator https://www.biggerpockets.com/rental-property-calculator , with a reported monthly income of $2,925, which averages $731.25 per unit. Now, one unit is vacant, so that tells us that there´s a loss due to vacancy. According to our market research, rents for 2 bedrooms/ 2baths in that area are around $750 to $825. This being an older unit, a 2002 built, we figure we could get around $750 to $800 just because of the location, the state they’re in and because of the new paint and light rehab that they’ve been through. On the expense side, the seller reported a monthly expense of $983.33, plus an unexpected Home Owners Association $75 monthly fee.
Now remember, this is not including capex and this bill being an older unit. We need to account for things like, HVAC systems, water heaters, and the roof. The owner did give us a seller’s disclosure notice, telling us of all the items that the property includes. But one thing that could be misleading is this patio decking that was listed. Patio decking is really the main access to the property, so that tells us that this deal needs a deep due diligence review.
We underwrote for an 80% LTV loan with a 4.5% fixed rate and a 30 year amortization. After analyzing the performance of the property and running the numbers, we found that this property has a monthly cash flow of $103; this is roughly $26 per unit of monthly cash flow. Cash-on-cash return would be 1.72%. This tells us that either we could offer $251,000 or just, you know, move on. This doesn’t seem to be a property that would meet our financial metrics. Under the asking price and current conditions it seems like a risky deal for us. Again, the cash-on-cash return is very low. If you’re looking for cash flow and appreciation, this is not a property that you should purchase. Ok, there you have it; this is why you should always analyze a deal in depth and then follow up with a thorough due diligence review. In our view, it doesn’t seem to make any sense to even move further with making an offer. So we didn’t. 1.72% CoCROI on a property that is subject to a homeowners association doesn’t seem to be within our metrics. For us that’s a deal breaker. That’s it for now. Take care. Best wishes on your real estate journey and God bless!
