First investment, two major repairs needed

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First investment, two major repairs needed

Bauclair Mbouadeu
Member since 2021 · 5 posts · 7 votes

Hi all,

This is my first time writing on this forum, and I'm also a first-time investor. I'm looking to purchase a 3-unit property in Massachusetts. The purchase price is $626k, with one unit delivered vacant, unit two currently paying $800 a month, and unit three paying $700 a month.

My question pertains to the inspection report I have received, which states that the roof has around 5 years left, and I need to replace the drain iron plumbing to the street, which is estimated to be a $10k job. I wasn’t prepared to invest this amount of money in the first few years, so I'm unsure how to proceed.

Due to the high interest rates at the moment, mine being at 7%, and with two tenants paying below-market rents, I currently have no cash flow. My plan was to gradually raise rents to market rate over a two-year period, which would generate a cash flow of $200 in two years with a 7 percent interest rate.

The seller is firm on the purchase price and has cash offers as backups if our agreement falls through, but we are currently under contract.

Pls let me any additional info needed, as this is my first post. 

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Ko KashiwagiPro Member
Lender · Los Angeles, CA · Member since 2022 · 967 posts · 445 votes
2y

Hi Bauclair,

I'm assuming you have an inspection contingency clause that allows you to back out of the contract? If you feel that the offer is not worth $626k, there is no reason you need to force through the purchase. If you think it's a bad deal, it's a bad deal no matter how many other offers exist. Given the inspection findings, you have a basis to renegotiate the purchase price or request seller concessions, such as a price reduction or credits at closing to cover repair costs as well.

To do a proper analysis on whether the purchase is worth it, you'd need to calculate the expected rent after repairs and the ARV. If $626k still makes sense given these inspection reports, then you could perhaps do a BRRRR.

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  • Ko KashiwagiPro Member
    Lender · Los Angeles, CA · Member since 2022 · 967 posts · 445 votes
    2y

    Hi Bauclair,

    I'm assuming you have an inspection contingency clause that allows you to back out of the contract? If you feel that the offer is not worth $626k, there is no reason you need to force through the purchase. If you think it's a bad deal, it's a bad deal no matter how many other offers exist. Given the inspection findings, you have a basis to renegotiate the purchase price or request seller concessions, such as a price reduction or credits at closing to cover repair costs as well.

    To do a proper analysis on whether the purchase is worth it, you'd need to calculate the expected rent after repairs and the ARV. If $626k still makes sense given these inspection reports, then you could perhaps do a BRRRR.

    310-848-9776
    4Reply
  • Lien VuongBusiness Member
    Real Estate Agent · Boston, MA · Member since 2018 · 2k+ posts · 1k+ votes
    2y

    Those rents are definitely going to make you bleed as they're low for anywhere in the state. Make sure you have a good plan on raising rents when you enter at Day 1. With the inspection - you can negotiate for a seller credit so that you can take care of that at closing. In my experience, seller repairs are half done because they're just trying to check the box before giving you the keys so having those funds are going to be more valuable for you. Otherwise, its a no go given the large repair (were not talking about small light switches here). 

    Overall if you found a good property for 626k thats a 3 fam, I would say that's a pretty good price given the Boston metro market. 

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    2Reply
  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    2y

    @Bauclair Mbouadeu "Buying" tenants with a property is a hurdle you need to except right now or pass on this deal. If the price is worth the challenge tackle it! It appears the tenants are well below market for Boston and they won't be happy about the increase but this is business. If tenants made the rules they would be homeowners. 

    Who provided the estimate for the plumbing and roof? EACH of the projects can be $10K+ easy, but don't let problems scare you away. Don't let "cash offers as backups if our agreement falls through" deter you either. They could be bluffing regardless of what there agent says. "We have multiple offers"... then the property sits for another month before going pending. It's a numbers game so don't take personal. 

    If you're cash-flowing in Boston with market rate rents in 2-3 years that's fantastic. That market is crazy. Cheers. 

    3Reply
  • Bauclair Mbouadeu
    OP
    Member since 2021 · 5 posts · 7 votes
    2y
    Quote from @Ko Kashiwagi:

    Hi Bauclair,

    I'm assuming you have an inspection contingency clause that allows you to back out of the contract? If you feel that the offer is not worth $626k, there is no reason you need to force through the purchase. If you think it's a bad deal, it's a bad deal no matter how many other offers exist. Given the inspection findings, you have a basis to renegotiate the purchase price or request seller concessions, such as a price reduction or credits at closing to cover repair costs as well.

    To do a proper analysis on whether the purchase is worth it, you'd need to calculate the expected rent after repairs and the ARV. If $626k still makes sense given these inspection reports, then you could perhaps do a BRRRR.


     Thanks Ko, yes i plan to negotiate for cash back at closing due to the repairs.

    2Reply
  • Bauclair Mbouadeu
    OP
    Member since 2021 · 5 posts · 7 votes
    2y
    Quote from @Lien Vuong:

    Those rents are definitely going to make you bleed as they're low for anywhere in the state. Make sure you have a good plan on raising rents when you enter at Day 1. With the inspection - you can negotiate for a seller credit so that you can take care of that at closing. In my experience, seller repairs are half done because they're just trying to check the box before giving you the keys so having those funds are going to be more valuable for you. Otherwise, its a no go given the large repair (were not talking about small light switches here). 

    Overall if you found a good property for 626k thats a 3 fam, I would say that's a pretty good price given the Boston metro market. 


     Thanks Lien, its actually in New beford Ma, however, yes, the rents are very low as these are 3 bedroom units each.

    1Reply
  • Bauclair Mbouadeu
    OP
    Member since 2021 · 5 posts · 7 votes
    2y
    Quote from @Jaron Walling:

    @Bauclair Mbouadeu "Buying" tenants with a property is a hurdle you need to except right now or pass on this deal. If the price is worth the challenge tackle it! It appears the tenants are well below market for Boston and they won't be happy about the increase but this is business. If tenants made the rules they would be homeowners. 

    Who provided the estimate for the plumbing and roof? EACH of the projects can be $10K+ easy, but don't let problems scare you away. Don't let "cash offers as backups if our agreement falls through" deter you either. They could be bluffing regardless of what there agent says. "We have multiple offers"... then the property sits for another month before going pending. It's a numbers game so don't take personal. 

    If you're cash-flowing in Boston with market rate rents in 2-3 years that's fantastic. That market is crazy. Cheers. 


     Thanks Jaron, sorry i forgot to specify its actually new bedford Ma. However your point stands, once stabilized, this cashflows over $100 a unit with current Intrest rates and thats the biggest benefit. 

    2Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    2y

    I know each area is different, but you have a few things going on.  For the rents-$1500 a month total for the two units on a property over $600K is not a lot-even if all 3 were rented at $800.  What is market value for each of the units?  Often in areas where houses cost more, rent is higher.  Are there caps or can you bump the rent up to market value once their lease is up?

    For the property itself-how is it priced?  Was the old roof factored into the $626K price (ie is a similar unit with a new roof $10K more?

    Don't go through with the sale just because they claim they have back up offers.  Do it because it makes sense for you.  A roof with 5 years left can mean any number of things (it may last 3 years or it may last 8 years).

    2Reply
  • Bauclair Mbouadeu
    OP
    Member since 2021 · 5 posts · 7 votes
    2y

    Hi Theresa, there is no existing lease, all tenant at will. Market rent for a 3 bedroom 1 bath in similar shape is $1700. The roof was not factored into the sales price, i believe a similar property with a newer roof could be worth about the same.

    1Reply
  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    2y
    Quote from @Bauclair Mbouadeu:

    Hi Theresa, there is no existing lease, all tenant at will. Market rent for a 3 bedroom 1 bath in similar shape is $1700. The roof was not factored into the sales price, i believe a similar property with a newer roof could be worth about the same.

     If this property has big defects you should command a discounted price. You make money when you buy regardless of the strategy. Without knowing the market I'm passing on this deal if the condition doesn't reflect reality. 

    This doesn't seem like a cash-flow play. It's a location, appreciation, and long term growth strategy in my opinion. You'll be out-of-pocket for a few years but in the game. 

    Strong possibly one or both of those tenants move out. Get mentally and financially prepared if you buy this property. Get prepared for the worse case (the dreaded E word). You got this man. 

    1Reply
  • Account Closed
    Realtor · Member since 2023 · 18 posts · 6 votes
    2y

    Hi @Bauclair Mbouadeu,

    I think the roof portion having 5+ years is probably far enough away for it to not be an urgent concern so that should hopefully alleviate that as an issue. Replacing the drain iron plumbing to the street is obviously a bigger concern. Did the inspection report say that this was an immediate need or just an upcoming need? 

    Your approach is probably best in using the inspection report to negotiate cash to fund that during the time of closing. Short of that, the deal seems to be solid once you're able to bring in current market rental income to each unit. The first one delivered vacant gets you 33% of the way there. It seems like a good deal to me and there are ways to fund a $10k project and defer payment. Credit cards often have this with a 12 month repayment.

    0Reply
  • Marcus R.
    Real Estate Agent · Denver CO · Member since 2019 · 209 posts · 332 votes
    2y

    You got this!  Focus on the plumbing before the roof.  

    If everything else is right with the property then don't let $10K stand in the way. Fix the plumbing and look into 0% APR credit cards for 12-15 months. Fire up the gig economy apps, work during peak demand, and aim to knock it out in half the time.

    2Reply
  • Levi Ortmann
    Minneapolis, MN · Member since 2023 · 4 posts · 3 votes
    2y

    Definitely an opportunity but if you don’t currently have much in reserves and won’t have positive cashflow early on, strongly encourage using your inspection contingency to address these items or provide funds for future corrections. Advise you to get a minimum of 3 bids for each item. $10k for a roof (at least here in my area) would be pretty low for most triplexes unless its a small area and no gables/valleys et) 

    A new sewer line to the street often based on total length. We had one done last year, 40’ in length, for $8800. 

    2Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    2y
    Quote from @Bauclair Mbouadeu:

    Hi Theresa, there is no existing lease, all tenant at will. Market rent for a 3 bedroom 1 bath in similar shape is $1700. The roof was not factored into the sales price, i believe a similar property with a newer roof could be worth about the same.

    At high LTV, this is huge negative cash flow even at market rent. Rent $1700*3=$5100.  

    purchase $626k plus $10k plumbing so $636k. this is 0.8% rent ratio.  In today’s high rate market, 1% ratios do not cash flow at high LTV in most markets.   

    50% expense ratio $2550. 
    80% financed at 7% (OP indicated and does not include the plumbing) P&i $3,332/minth. 

    $5100 - $2550 - $3332 = -$782/month after achieving market rent.  

    do you expect this area to appreciate significantly more than the national average?  Is there a good value add?  What is the goal here?

    the goal is not to own RE; the goal is to make money.  Seems like this may have the wrong goal.  

    good luck


    2Reply
  • Raji Hamideh
    Member since 2020 · 2 posts · 2 votes
    2y

    I say don't buy it. Your first investment should not have any Important issues just outdated. As you grow and get better you'll also get better at dealing with big problems. Move on. Make sure you start your investing career with the right foot. 

    1Reply
  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    2y

    "the goal is not to own RE; the goal is to make money. Seems like this may have the wrong goal." - @Dan H. with the mic drop. 

    1Reply
  • Alecia LovelessPro Member
    Member since 2019 · 3k+ posts · 2k+ votes
    2y

    @Bauclair Mbouadeu if you don’t have the money left for the repairs it’s not the right deal for you.

    If you’re not prepared to go into a property and make the hard decision not to lose money right out of the gate when you need to raise rents by approximately $1000 per unit per month, that’s going to cost you almost $24,000 the first year which is more than enough to make the sewer repair and by the end of the second year probably pay for the roof as well.

    I’m not trying to be mean but buying real estate isn’t about providing charity. You’re talking about a $600,000+ investment. You need to make money off of it. Not provide people with low rents because you feel sorry for raising their rents. By the time you get them up to current rents in 4 years you’ll be another $800 behind.

    2Reply
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