Would you take this deal? If so, how? - Boston, MA
Many of you probably know that meeting 1% rule in good parts of Boston is all but impossible (0.5% seems the norm). One of the areas I've started researching more here is Chelsea/Everett/East Boston/Revere, since the property values are still depressed compared to the rest of Boston and the rents are not. They're also relatively close to downtown in terms of transportation.
Just this weekend an interesting deal came on the market in an area that I've researched to be improving. The price was already 20% lower (100k) than comparables so I was immediately suspicious of the condition. This was a triplex, and it actually meets 1% rule (at least if the rents are raised to match the current market). What makes this deal even more attractive is that it's attached to another triplex, also being sold by the same owner for the same price.
I visited the houses and while the common area seemed like it needed a bit of maintenance, the units themselves were a completely different story. All of the units have newly renovated kitchens with steel appliances and granite countertops, each triplex has 2 3-bedroom units and 1 2-bedroom (bedrooms are not awkwardly small, which seems common in that area). One of the triplexes has all new bathrooms as well, also with granite countertops. Both buildings got a new roof last year, the basements are spacious and one of them (building with older bathrooms) has coin-operated washer and dryer. All units have separate utilities and meters, including a separate boiler (4th boiler) for the washer and dryer. Owner pays water, tenants pay all other utilities. The owner clearly didn't skimp out on maintenance and repairs.
All units are currently rented (TAW), and based on my research via craigslist/rentometer they're about $100-200 below market rents. Current market rents for the area are about $1500, and tend to be in worse condition. I'm also speculating that the rents will go up over the next few years based on city's plans to add more transportation and other nearby developments to the area (but that's a bonus). Additionally, these buildings are 2 blocks from the waterfront (on a hill), and the city is discussing plans for improving the waterfront, although no plans have been made yet so I'm not expecting anything in the next few years, but this is a buy and hold.
The reason these two properties are priced so well is because the owner wants to sell all his real estate as soon as possible (these are not the only properties he's selling). There is also another interested buyer and from what I hear they're struggling with financing as well.
Here are the numbers (these are my own calculations, not pro-forma):
Asking price for both: $800k
Actual rent total: $7,700/mo
Actual taxes: $5,585/yr
Estimated CAP (10% vacancy, 5% repairs): 8.16%
Now here is the current situation with financing:
- Asking price for each triplex is $400k, seller is very motivated
- If I was to buy this, I would want to buy both buildings for several reasons, but the main being that they're attached, so it gives me a lot more control in the future regarding updating the property, or even improving these lots (which may be an attractive option if the city improves the waterfront nearby), or even selling them to a developer later.
- Conventional financing requires 25% downpayment on a triplex, regardless if it's investment or primary residence
- My savings are barely enough for the 25% downpayment for both, and I won't have funds left for closing + 6 month reserves
- I do not currently own a primary residence, but with rents added on would not qualify for MassHousing
- All units are occupied, all tenants are TAW, so in theory I could tell one to move and occupy a unit for half-a-year to qualify for primary residence benefits (I spend 90% of my time at work anyway) (is FHA a good option for one? It seems like PMI is now for the life of the loan)
- I inquired about seller financing for one of them from seller's agent, he said the answer would most-likely be a "no", although I have no idea whether he actually plans to ask the owner
- Another option I've considered is borrowing from my 401k, 50% of which would be just enough to cover the extra requirements due to 6 month reserves + closing
One of my worries with the financing I mentioned is stretching myself thin, I originally wanted to buy a property in Boston and then a few more in remote areas.