Buying from a client I manage for, and my own rent roll argues against it

You price it on what it does today. 22,900 NOI is the fact. Everything else is a plan, and plans are the seller's argument, not yours. If a 6.5 cap on in-place is what you'd need, that's 352k and he will laugh, so the real question is how much of the gap you're willing to fund with your own labor for two years.

Naive question since I'm at the reading stage. Four units still gets a residential loan, which is why the shape of this is attractive at all, right? I thought once you had more than one unit it went commercial.

Your two caps are both correct, and the deal hangs on the third number you haven't written down: the cost and timing of getting from one to the other.

Rough version. Three units at market means roughly 850 a month of uncaptured rent plus the 450 on the long-term tenant, so about 15,600 a year of gap. Two kitchens, four paint-and-floor turns, and vacancy at your own observed turn speed is a real capital and downtime number, and you're the one person in the thread who can price it accurately because you've done turns in that building. Until that number is on paper, 545 and 585 are indistinguishable guesses.

On financing, 2-4 unit properties are underwritten as residential rather than commercial, which is the structural advantage of this whole category, and terms and reserve requirements vary by lender and change often, so get a written quote before you fix a price. Note that residential underwriting on a fourplex will often haircut market rent and lean on in-place, so your 585 pro forma story may not carry into the appraisal or the debt sizing.

At 20 percent down on 545, debt service will consume most of a 22,900 NOI in a higher-rate environment. That means year one is likely thin or negative on in-place rents, funded from reserves, not from the building. If your reserve can absorb two turns plus negative carry without touching your household money, the deal is a timing question. If it can't, the pro forma is decoration.

The thing that would move the needle fastest for me: an estoppel from all four tenants and a written lender quote. Everything else is refinement.

Also, you have a conflict here as the manager of record. Confirm your disclosure obligations with a professional in your state before you make an offer.

I did three turns in a row in a triplex last year thinking I'd stagger them. I didn't stagger them, because the first one ran long and the second tenant gave notice anyway. Two units empty in the same month on a building with one mortgage is a different feeling than the spreadsheet suggests. Assume the units turn in a clump, not in sequence, and see if it still works.

Get signed estoppel certificates from all four before you sign anything, and read what they say about deposits. You wrote your own statements so you probably know, but I've seen deposits that existed on the ledger and not in the bank. Security deposit handling and how it transfers at sale varies by state and some states have interest and separate-account rules, so check yours. Also ask him for the 2019 boiler invoice, not the year, the invoice.

Why spring? Ask him what happens if it takes until fall. A 78 year old who wants out by a date is telling you something about his flexibility on price, and you're the only buyer who doesn't need a diligence period to learn the building.

Contrary view. You know this building better than you will ever know another one. No sewer surprise, no roof surprise, no tenant surprise. That's worth real money and everyone here is telling you to underwrite it like a stranger's building. Buy it at a number where in-place rents cover debt and reserves, raise rents 50 a year on renewal, and never do a kitchen until a unit turns on its own.

@verity's version is closer to what I'd do, except I'd add the boring reason to say no: you lose 4,008 of fee income you currently get with zero capital at risk. That's part of your cost of buying and nobody has counted it.

One water meter for four units seems like a bad deal for the owner. Can you not split it?

@rigging splitting a meter in a 1970s brick building usually means opening walls, and the plumber's number will be worse than the water bill. Trellis, 4,110 on water for four two-beds is high-ish but not insane. I'd scope the sewer lateral anyway even though you know the building, because that's the one thing six years of managing does not tell you. And pull the tax record forward: does a sale reset assessment in your county? 6,880 could move.

Two kitchens on original cabinet boxes is where the budget goes sideways. You open a 90s kitchen on 70s plumbing and you find the shutoff doesn't shut off, then the floor under the sink is soft, then you're doing subfloor. My honest range for a two-bed kitchen refresh that stays a refresh is 6 to 9k, and it stops being a refresh about a third of the time.

Separate electric on a 1970s fourplex, what's the panel amperage per unit? If they're 60 amp with fuse boxes you'll find that out from the insurance carrier, not the inspector. And one boiler for four units means one point of failure and one heating bill you're paying, which I don't see in your expense list at all. Common electric 620 with no gas line item?

The part I'd slow down on is that you manage for him. You're a fiduciary to a 78 year old and you're also the buyer. Whatever the rules are where you are, and agency and licensing duties differ by state, I'd want the disclosure in writing and I'd want him to have his own representation before I made an offer. Not because anyone would accuse you. Because in two years his kids might.

What else would the 109k down payment do? If year one is negative carry on in-place rents, you're paying for optionality on rent growth. That can be fine. It should be a decision you made, not a thing that happened.

Something's off in the expense list. 5,940 repairs on a fourplex you manage is plausible for a year with no turns, but there's no capex reserve and no vacancy allowance in the 27,200. Add 5 percent vacancy on 50,100 and 250 per unit per year of reserve and your NOI drops to roughly 19,400, which is a 3.3 cap at 585. I don't think 545 fixes that. What am I getting wrong?

@thatch's point is the one I'd want answered first. Does buying a building you manage trigger anything on your license? I'd rather ask before than after.

Add up the actual cash out the door in year one. 20 percent of 545 is 109k, closing, two turns at say 8k plus vacancy, and whatever negative carry runs to. I get somewhere north of 140k before the building pays you a dollar. Is that the number you've been working with?

If you go to contract, make the diligence window run from delivery of the last document, not from signing. Sellers deliver leases on day 47 of a 60 day window all the time. Also get the lease assignment language right and make sure any tenant without a written lease is named in the contract, because month-to-month tenancies and how notice works differ by state.

Fourplexes are where I found my ceiling. The financing is genuinely better than commercial and the coverage still gets tight because the price per unit isn't cheap anymore. I've had two of these in the last eighteen months where the appraiser used in-place rents and the loan sized 40k below what my pro forma supported. Get the quote before you name a price, not after.

You'd be self-managing your own building while running everyone else's. Mine is the smaller building and it's the one that gets pushed to Friday, every time. Price your own time in at something above zero or you'll resent it by month eight.

Could you buy it and keep charging a management fee to yourself as an expense? Genuinely asking, I don't know if that's a thing or just moving money between pockets.

@quill asked the thing I was going to ask, so I'll ask the other half. Why does five units flip it to commercial? Is it a rule somewhere or just how lenders decided to draw the line?

@compass it's how residential lending is defined, 1-4 units sits in the residential box and five and up gets underwritten on the property's income instead. Which is exactly why fourplexes trade at a premium per unit. Trellis, is there any world where he carries paper on part of it? A 78 year old wanting out by spring and a buyer who already runs the building is the setup where seller financing actually gets discussed.

@kestrel that was my thought too, though I'm still learning how a second position behind a residential first even works, or whether a lender permits it at all. Trellis, if he carried 60k at a lower rate your cash-in drops a lot and the in-place numbers get less ugly. Worth asking him before you name 545.

Six years of statements is the diligence most buyers never get. I'd be more worried about the conflict than the boiler.

If you don't want to fund the turns yourself, that's the piece a partner is easiest to bring in on, a fixed amount for the capital plan with a defined payback. It also means documents and a lawyer, and probably a conversation about what you're actually offering someone, so it isn't a shortcut. But 140k of cash in year one is a lot to carry alone on a building where your own numbers say the first year is thin.