Potential duplex rehab worth it?

[Jacob Northfield]

Hey folks, 

I'm new here and researching SMF homes in Rochester (Edgerton) and I found something that might work for me, but I'm not sure if I'm thinking about this correctly. 

The asking price is $80k and I'm securing a conventional loan with an assistance loan for the down payment and closing costs. There is a tenant in one apartment paying well below market rate. The realtor suggests that I could rent it in current condition for $1,000 in this neighborhood and this checks out with the rents I'm seeing. Unfortunately, the existing tenant is in the process of being evicted for non-payment since June, though I can afford the expenses on a monthly basis without tenants, including mortgage, insurance, and utilities, etc, as well as savings for vacancies etc, so I feel relatively confident that I can manage if the eviction takes time or if I can't find a new tenant for that apartment immediately. 

The other apartment will be mine and I will be renovating slowly with cash to hopefully bring that rent up to $1,200 or so, however, I will be responsible for approx $650/mo if I only have one tenant while I fix up the other apartment. That being said, expenses at $650/mo will save me $500/mo on rent.

Any thoughts on this deal? I know it isn't perfect, but if I can renovate both apartments and raise the rent to market value then I estimate I will bring in at least $100/mo/door after all expenses. Should I take a loss for the time period it takes me to do my own renovations or do I ditch this deal? The renovations appear to be cosmetic.

Thanks!

[Khari F.]

Quote from @Jacob Northfield:

Hey folks, 

I'm new here and researching SMF homes in Rochester (Edgerton) and I found something that might work for me, but I'm not sure if I'm thinking about this correctly. 

The asking price is $80k and I'm securing a conventional loan with an assistance loan for the down payment and closing costs. There is a tenant in one apartment paying well below market rate. The realtor suggests that I could rent it in current condition for $1,000 in this neighborhood and this checks out with the rents I'm seeing. Unfortunately, the existing tenant is in the process of being evicted for non-payment since June, though I can afford the expenses on a monthly basis without tenants, including mortgage, insurance, and utilities, etc, as well as savings for vacancies etc, so I feel relatively confident that I can manage if the eviction takes time or if I can't find a new tenant for that apartment immediately. 

The other apartment will be mine and I will be renovating slowly with cash to hopefully bring that rent up to $1,200 or so, however, I will be responsible for approx $650/mo if I only have one tenant while I fix up the other apartment. That being said, expenses at $650/mo will save me $500/mo on rent.

Any thoughts on this deal? I know it isn't perfect, but if I can renovate both apartments and raise the rent to market value then I estimate I will bring in at least $100/mo/door after all expenses. Should I take a loss for the time period it takes me to do my own renovations or do I ditch this deal? The renovations appear to be cosmetic.

Thanks!

What did your own research on rent comps tell you? What kind of reno is planned? We're you able to view the occupied unit? Evicted tenants can cause damage

[Jacob Northfield]

Thank you for the additional questions, that's helpful.

According to apartments.com the average rent for this neighborhood for a similar 3 bedroom with a similar lack of remodeling is $1,052. This is consistent with what I am finding in my research on Zillow as well. As far as sales comps, the average price appears to be approx $114,000, but I'm less confident in that number, which is ok because I do hope to rent long term.

The reno is cosmetic and I will be doing much of it myself with help from family, and I will be able to save while I'm doing it in case I mess something up and need professional help. This will be a rental grade reno with middle grade new cabinets, hardware, and backsplashes in the kitchen. I'll need to pull up some carpet and refinish hardwood floors. The walls need to be painted and the bathroom needs love as well. The roof seems solid, the mechanicals are newer, and no glaring defaults with the property, but I do need to have it inspected and appraised still.

I cannot view the occupied unit and have only seen photos. But the plan is to add a contingency to the offer based on the second apartment. I'm also considering asking that we not close until the other apartment is vacant (this was recommended by my realtor). 

[Nate Monson]

@Jacob Northfield to me it seems like you got a pretty good deal. 80k with 2 units that could rent for $1000 minimum will cash flow nicely. I think your strategy of living there and fixing it up is good. If the other unit is rented and paying your most likely going to be paying less to live there than anywhere else. 

I would agree with your realtor that having a non paying tenant in the eviction process handed over to you isn't the best scenario. So I would probably make the offer contingent on that as well. But other than that based on your numbers I can't see why this isn't a good deal for you.

[Nate Sanow]

I would do the deal, personally, if I was closer to the property. It doesn’t scream red flags. I do live in a more landlord friendly state where eviction processes tend to be faster, and only for that reason I’m not interested in what you have to deal with… I do wonder if you charge a little less than market rent, like only 10-20% discount, if you can attract tenants who will actually appreciate it. In conjunction with a solid screening and marketing strategy. Hopefully it’s a one time vacancy issue, and you can verify that this area doesn’t have constant vacancy issues. Many extremely high cash flow markets tend to have issues with people paying rent… if every other investor passed on this, and you are getting it without competition, why? I’d just research that aspect further but that doesn’t mean I wouldn’t get it 

let us know on a deal diary if you do pull a trigger and best wishes to you either way!

[Jacob Northfield]

Thanks everyone for the feedback. 

After conducting some more research I may have a better understanding of why the property is priced so low. The duplex is literally on a neighborhood line (the street is the line) between an "up and coming" neighborhood (according to all of the real estate agents) and Rochester's neighborhood with the lowest income (the average being approximately $20k). Just one street north and it's a whole new atmosphere and the property values show it. 

I'm hesitant to waltz in and raise the rent, but the numbers don't work at the current rate. It seems like Section 8 might be a good solution here, where I can house hack to provide a good home to tenants I screen thoroughly, but who might not be able to afford a well kept property without assistance. The fair market rent is $1,400+ for this many bedrooms, so I am thinking that a $1,100 monthly rate might work if I can clean the property up well. I'm not particularly worried about crime, based on the city historical crime maps, but more about folks either not wanting to live in a low income neighborhood (even though it has good proximity to the city and other points of interest), or the property value never improving. 

Mortgage calculators suggest that even after all of my personal expenses and the housing expenses, I will still be within my housing budget should I not find tenants, which is reassuring. And I wouldn't feel uncomfortable living in the house, it doesn't seem like a bad spot other than being a little worn out. Still seems like it might be high risk, though. 

Is investing in a C house in a C neighborhood wise for a first investment or should I wait (a year or two) to build capital for a B property? How do I determine how much risk to take on? Thanks in advance!

[Billy Daniel]

Can you cover all expenses with the unit vacant and for how long?  It seems like a good deal to me.  I wouldn't put too much stock in the property being "on the line" between an up and coming and a not so up and coming neighborhood.  Who's to say the good part won't spread your way?

If you can foot the bill with both units being vacant, this could be a great learning opportunity with a nice profit at the other end.  You'll be able to learn about getting into a property, renovating a property, leasing a property, and being a landlord with a single purchase.  When its all said and done, you move out and rent both sides for amazing cash flow (since they are now renovated and nice).  Don't get into something that costs an exuberant amount of money, but this seems like a good househacking opportunity.

[Dennis Callaghan]

@Jacob Northfield where is it in Edgerton? I am here in Rochester as well and some of that area is definitely not up and coming, its been depressed for as long as I remember but around Jones Park is decent. The good thing is picking up a 80k duplex anywhere in Rochester is a deal especially now that rents are up. I think you are on the right track with house hacking to keep your money out of pocket low.

[Rob Gifford]

I'm not an expert in Rochester, but this sounds like a pretty good deal. If you could get $1000 per month for the first unit currently with the tenant that's $2000 for the whole property when / if you decide to move out. That seem like an amazing rent to value ratio (2.5%), typical ratios I'm see in the Capital Area around 1-1.5%. 

[Martin Grizzanti]

I invest in Rochester full-time--That area can have high turnover and it's going to be full contact management. 

[Jasmine Edwards]

@Dennis Callaghan I am looking at a property in Edgerton on co star street, what are your thoughts?? I am a new investor in Rochester Ny and I am not too sure about the area… property is 27 co str street listed for 95k the property is turnkey ready to rent duplex , 3 bed and 2 bed the other unit.. your thoughts much appreciated

[Preston Garcia]

@Jasmine Edwards Hey Jasmine, I am the listing agent for that (offers due tomorrow at noon). Overall, the area isn’t the best, but definitely not the worst. Shouldn’t be too hard to rent, only thing is that it’ll end up needed a new c of o soon!

[Jasmine Edwards]

Yeah I had some interest but somewhat concerned with the quality of renters , if it will be chasing them down every month as well as if the area is improving. Also what are thoughts on 19th ward?

[Preston Garcia]

@Jasmine Edwards I totally understand. I like most parts of the 19th Ward, as there are some areas there that are rougher than others. Overall, I like the 19th Ward though.