How I analyze & make offers on multi-family houses
Just like when looking at a single-family house, I have a system for analyzing and offering on homes with 2-4 units. Basically, working my way backwards from what the home will be worth when renovated and rented.
You can download and use a copy of the spreadsheet with all my formulas in it HERE.
Let me walk you through how it works...
Step 1: Basic Info
Start by filling out the address, list price and date. You can also add a basic photo.
I recommend saving each completed spreadsheet in an 'Offers' folder. I organize them by address so I can keep our offers straight. We make so many offers that sometimes I forget I've seen and offered on a house already!
I like being able to refer back to my sheet when a house comes back on market or when there is a price reduction.
Step 2: Monthly Rental Income
In any blank row within in each box you can list comparable rentals. The medians and the total monthly income will automatically be calculated for you
In this example, I listed several 3-bedroom comps for units 1 and 2.
There is no 3rd or 4th unit or other income from this house, so I left those boxes blank.
Other income would include renting a garage bay for an extra $50 per month, quarters collected from the laundry machine in the basement, etc.
Step 3: What will this house be worth once it's all fixed up?
This is very important because even though you won't be selling this property right away, if you are financing your renovation costs you can refinance once repairs are made and get all your money back plus possibly your down payment!
This is our expectation for every buy-and-hold renovation. We pull all our money out at the end of construction and then we have a fully rented, fully repaired house with none of our money in it.
If you do this correctly, it's kind of like getting a house for free!
Plus you're making a spread every month on the rents. Which is Step 5.
So, estimated repair value is very important.
Fill in any blank line in the box with comparable sold properties.
I look for homes that are:
- fully renovated
- with the same bedroom/bathroom count,
- within 0.25 miles from my property,
- and sold within the last year.
The ARV or the median of all your comparables will be automatically calculated for you.
Step 4: What's this house going to cost you every month?
This is the busiest box on the sheet! But don't be intimidated.
All you have to do is fill out is whats in the dotted-boxes. Everything else will be automatically calculated for you.
If you are unsure what to put for an interest rate, you can call up any mortgage professional (100's listed on Zillow) and they will happily let you know what today's rate is for the type of property you are considering.
You can also simply Google it. But be sure to include the type of property in your search (ie. single-family, two-family, four-family).
Multi-family homes typically carry interest rates that are a tiny bit higher than single-family homes.
Next, fill out your annual taxes, insurance, etc. Taxes are listed on Zillow and most MLS listings.
I guesstimate my insurance and any utility costs based on what we pay at our other houses.
Step 5: How much money could this house make you and what should your offer be?
Forget what the list price says, run your own numbers. (You'll notice the list on this home was $270,000.)
At this stage, everything in this box will have been automatically calculated for you, except what's in the dotted box.
You'll need to estimate your holding , renovation and closing costs.
Holding costs are how much you'll pay monthly to keep the house while it's under construction, with no rent checks coming in!
We use hard money to finance our projects during renovations. I will do another post soon on how that all works and how I estimate this cost.
For renovations, you'll see I have a healthy budget in this example of $100,000. (I haven't seen the house yet.) I want to add 2 bedrooms to this home, which may mean a layout change.
My closing costs are also a little high because hard-money carries points.
Scroll down to the bottom of this page and leave your e-mail address if you'd like to get my post on hard money when it comes out!