I'm a first time investor, and I'm looking at a fourplex with the following numbers:
- Purchase Price - $175,000 (includes $15,000 in cash back referenced below)
- Monthly Rent - $2,125
- Monthly Cash Flow - $1,158
- Cash on Cash ROI - 28.5%
There are a few minor repairs (replace a water heater, fix flooring, etc.) that I'll need to take care of (~$5K).
The main issue with the house is the electricity is not up to code (includes replacing the fuse box, FPE brand electrical panel and rewiring). My realtor had an electrician come out and provide a quote on what it would cost to get up to code, and he estimated $30K, but he also said that it is working fine and "if it were up to him" he would not do anything until absolutely needed (which could be in 20 years if everything is still functioning properly). I'd like some cash back on the purchase to protect myself, but right now the owner only is willing to give $15K.
How would you handle this? Has anyone run into this issue before? Looking for advice because ROI is great!
@Kevin Barry If the panel is a Federal Pacific one (Not sure if that is the same as an FPE) you definitely need to swap out the panel. The wiring is aluminum and not copper. Thus, was more prone to house fires and were banned. I had this same issue on a rental. But I have an investor friendly electrician that told me the panel had to go. But rather than replace all the wiring swap out all the outlets and pigtail the ends of the aluminum wiring with copper wiring. This will meet the National Electric Code. So I would recommend you go out and find an investor friendly electrician and have them quote. Also, brush up on the NEC. Remember, your a generalist as a investor. Not an expert. But know enough to be dangerous.
That's steep. I just re-wried a complete 2 story for about $2500 in materials ($$AFCI breakers are the killer), completed & inspected to code in a week of half days. I had to replace the old fuse box, remove all 2 wire outlets & install all the required GFI's & the required separate circuits for all ancillary appliances, islands & all 3 bathrooms, laundry room etc etc.
BUT I used copper not GOLD wiring
@Kevin Barry Good day, I’m a licensed electrical contractor in the state of NJ. I would like to help shed some light on your situation. Yes, the price of $30k to upgrade your service and rewire your house is in the ball park of what a licensed electrical contractor would charge. Is the house wired in knob and tube? If the answer is no, then it does not need to be rewired. Will this home function as your primary residence? If the answer is no, you do not have the ability to pull your own permits. Therefore, it is illegal for you to perform unlicensed electric work on it. Will you ever get caught if you should proceed and do it yourself, probably not, however if something goes awry down the road, you will need to document who performed the upgrade(s) other wise your insurance company does not(read will not) cover your claim.
I am not here to scare you, so please do not think this is my goal. I am an expert in this field and will continue to explain to you your legal options. I own an out of state rental property, and hire electrical contractors when the need arises.
Now let’s get back to your property. Your potential house has a Federal Pacific panel, I have yet to find an insurance company that will cover a property with this brand of panel in it. At best, they will grant you a temporary policy stating that you have 90 days to remedy the situation. If I were in your situation, I would upgrade the service and call it a day. Since you are receiving a $15k credit, I see no reason why the cost should hold you back from profiting $1k+/month.
One thing I would look into during this process, check if you can get the units separately metered. It could be possible within your $15k credit and your tenants will end up paying their own electric bills. I also recommend you get 3 quotes from 3 licensed electrical contractors and between the 3 of them you will receive quality recommendations specific to your situation. Feel free to PM me if you have any specific questions. Best of luck.
From an insurance standpoint, Knob and Tube or Aluminum wiring in the building is a major issue. Most carriers have it in their written guidelines that the file with the state insurance depts. that state that they will not write a property with either of those types of wires. If you do not disclose that info and there is a loss, you've given the carrier an out to deny the claim. They can justly claim, that the would not have written the policy if you had disclosed it.
You can get policies from the specialty market (aka non-stantdard or excess market) that will cover the property but it is usually much more expensive and the coverage is not as good
The electrical issue definitely needs to be addressed.
Make sure your Lender is okay with the $15k cash back/credit issue. FHA or Conventional, how much down?
If you are financing this, your cash flow is Not $1,158/mo.....you must be leaving out a lot of “reality based” costs. Share how you came up with these numbers.