Opinions/Advice on my first real estate offer

9 Replies

Hello All, 

I've been reading a ton lately about real estate and I have been asking questions to everyone that I know that own property, but I still have a ton to learn. I have been eager to invest, but haven't quite found the right property. I recently found a property that I think I am going to put an offer on this week. I was hoping that I can give you all the information I have at this time, and get your opinions. I really want to see how far I can grow this real estate thing, but I want to make sure I have a solid first property. 

I came across a 4 unit building near a state college south of Pittsburgh, PA. As far as the building goes, Its a wood frame/sided building with 2 units upstairs and 2 downstairs. Each unit is 2b/2ba. The bottom 2 units were in good shape and the top 2 were in good shape but slightly outdated. The roof is nearing its life expectancy and will need replaced in a few years. It has 2 furnaces, one of which is from 1975. Finally it has fuse boxes instead of breakers. The roof estimate is ($9,500). I can have a furnace installed at cost (3k). And the electric should run about the same (2-3k). Nothing is urgent, but these are the expenses i see on the horizon. 

The location of the building is about 4-5 blocks from the entrance to the college campus. The seller says he always has 100% occupancy. When I scouted the property out, I was a little surprised noticing more for sale/rent signs than I had expected. Because of this, I pulled the enrollment numbers for the college. I went to school there from 2001-2004 and it seemed less populated. I found the the school had roughly 9,500 students in 2001 when I began school there. The enrollment has declined 20% since 2010 and is currently around 5,500 students. Enrollment in 2017 is up 3%. It seems a lot of the state schools had declining enrollment, and some rumors began of mergers. This particular college was founded in 1852 and recently had tens if not hundreds of millions of dollars in renovations the last 10 years. I am not overly concerned about the college going anywhere, but food for thought.  

The financial particluars: The 4 units rent for 750,750,850,850 currently. The realtor seems to think they are low relative to market, but for now those are the numbers I am using. The landlord also currently uses 11 month leases, not 12. 

The yearly expenses according to the seller are (I will ask for verification pending my offer):

Homeowners $2509

Flood $1325

County Tax $224

Boro Tax $308

School Tax: Waiting to hear but looked at millage and estimate $950ish

Utilities, trash, etc: $6,000 

mortgage: between 400-450 (depending on sales price) 

Using these numbers:

   $35,200 income

   $ 16,750ish expenses

   $ 18,450 profit (minus 5% vacancy?, 5% maintenance, 8% cap ex?)

It seems I would be left with $15,129 in cash flow or $1260 per month. 

The house is currently listed at 130,000. The seller purchased the house in 2004 and paid $65,000. It has been on the market for 165 days. It was off market but a prior deal fell through. I found that the seller is moving to Florida for retirement and is eager to sell the investment properties he owns. For tax purposes, the house was appraised at $97,500, but that is usually not necessarily in line with the sales price. The realtor seemed to hint to that would probably take at least 15k off his ask price; however, Im not ruling out a lower possible offer. 

Ive tried to list everything I know about the property. Id would GREATLY APPRECIATE anyone who is willing to take time out of their day to offer any thoughts, not only on the my calculations for the cash flow aspect of the property, but also some thoughts on making an offer, location near the college. The sellers agent, said she will do her best to find some comps, but that there aren't a ton of comparable properties that have recently sold. 

Thanks in advance!!, 

Brian Whitney

@Brian Whitney

1) You should factor in 10% property management fee.(even if you plan to self manage)
2) I don't have student rentals but I hear that properties can get quite dinged up. Security Deposit should cover the expenses...but I would up the Capex to 10%

Pittsburgh lost a lot of population since the 1960's(White flight + loss of steel jobs). I hear rumors that some back office jobs are coming in.
It is scary reading the student enrollment decline by that much over such a short period.

Your real estate agent is there to act on your behalf in a real estate transaction.
While he/she may have experience/knowledge about real estate; do not let them dictate how much you should offer on the property.

Did she just throw out the $15K decrease in offer price or was there some thought behind it? Did he/she provide you comps or similar properties sold within the past couple of months?

If your gut is indicating to offer lower...offer lower; at the very worst - they will come back at a counter offer.

@Brian Whitney Sounds like you have a good head on your shoulders. Your on the right track here. You need more than 10% capEx though. The reason being you need to fix both big expenses the roof and the furnace. You didn't say how old it is but older buildings need more repair and things like lead base paint, fuse boxes,etc add to repair cost big time. It's bad enough to open a wall up to fix electrical but that's worse if you have to do lead abatement to put the wall back. There is an upside here. Your seller wants out. There is a chance he might take enough down payment to cover sales cost and depreciation recapture and then do a seller carry to spread out his Capitol gains tax. The other poster is correct. The realtor represents you but it's your money. Do not offer more than you are comfortable with. It's also poor practice to buy properties that won't support a PM. If it won't carry a PM than you will be managing it for less than a PM makes. Why would you do that? Also you limit your growth size and location by self managing. Both hamper you in the long run. RR

Good stuff!  I'm about 8 Months into a lot of self education and networking and now just struggling with what I want to focus in on.  I am leaning towards multi's for brrrr.  Anyway,not my show here.  I will ask my questions when the time comes.  I just wanted to wish you (Brian) the best of luck.  You got this!!  and thank you guys for sharing your experience.

@Brian Whitney

These numbers look OK, but consider property management at 8-12%. Might be on the higher end of that spectrum if you keep it as a student rental. 

I'd say minimum 7% on maintenance and 7% on capex. Obviously your actuals will be higher the first few years on Capex, but what to budget comes down to how long you plan to keep the property.

The situations sounds like you could offer lower. What did it last sell for and what do you think the seller stands to make? That impacts how low you can go. Also, you need to know if there is a mortgage on the house. You can look into that in public records somewhat. Tax assessed value isn't incredibly meaningful here. That's not an appraisal. Just the basis for how they charge taxes based on the millage rate. Ask the realtor to do a CMA (with multifamily not a lot will show up) and then look at the income and see what your income will be. Average will probably turn up somewhere in the 6-10% range. You can work backwards to get what an appraiser might value based on income approach. Your realtor can probably help you with some of this. Since I don't know where this is, but I'm assuming Washington PA or somewhere nearby I'm not familiar enough with what the caps/gross rent multiplier is there to know how the appraiser would apply the income approach.

Initially, I did factor in property management, but for some reason I forgot to put it into my original post. Assuming, a 10% property management cost and maybe increasing the CapEx to 15% that would adjust my cash flow to around $6130/year or $510/month. Depending on my purchase price that puts my cash on cash between 15%-18%. Any thoughts on that rate of return?

I've considered seeing if the seller would pay for the roof or at least receive cash back at closing to cover the cost of the roof, being that is the biggest expense I see coming down the road. 

I agree with everyone's thoughts on forecasting the property management costs, because in the long run I can see myself having mangers run the properties. In the short or mid-term, I plan on doing it myself because I need to learn what the heck I'm doing. So, at least in the short term, I will cash flow more like $800+ per month. 

@Brian Whitney I'd probably bump up the maintenance a bit on account of it being a college rental and put PM in there. Idk if I would be a huge fan of being at the mercy of college students paying their gas in the winter, which I am assuming the landlord is responsible for since there are 4 units and only 2 furnaces. I've seen plenty of college students in that situation with the windows open and furnace blasting in the middle of the winter. I say this from experience because I was one not too long ago. 

The numbers look solid though so it could be a good deal if you can get the seller to come down which you may be able to. It sounds like you are working with the sellers agent. This can be good because they will more than likely do their best to get the seller to accept an offer knowing that they'll get double commish. Be careful what information they give you though because they will be super motivated to tell you anything to get the sale done. 

As far as lining myself up for the financing, I am hoping to find a lender that will allow for 20% down. I've been told 25% down is pretty standard, but one of my banks said for multi's it would be 30% down. Its gonna be tight on the down payment, but I will be able to make it work. Should I just start calling various banks and ask about their terms or is there a broker of some sort I should be looking for that will be able to help me find the best financing terms ?

Anthony, 

The property is in the area of California University. The seller paid $65,000 in 2004. Based on the condition of the property, I wouldn't think he has had to repair anything major. He installed a furnace in 2007 that I know of. Electric, 1 furnace, and the roof definitely was not updated since he owned the property. 

When you say look at the income, that it will be in the 6-10% range. What are you referring to? Do you mean a monthly cash flow on the building?

Anthony, 

The property is in the area of California University. The seller paid $65,000 in 2004. Based on the condition of the property, I wouldn't think he has had to repair anything major. He installed a furnace in 2007 that I know of. Electric, 1 furnace, and the roof definitely was not updated since he owned the property. 

When you say look at the income, that it will be in the 6-10% range. What are you referring to? Do you mean a monthly cash flow on the building?

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