RE: Deal Analysis - 3 Unit - Cash Offer ROC NY

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RE: Deal Analysis - 3 Unit - Cash Offer ROC NY

Lamart Gomillion
Real Estate Investor · Augusta, GA · Member since 2013 · 19 posts · 5 votes

Hello BP,

I am in contract now to purchase my first property in Rochester NY. All initial paperwork has been completed. I am just a little nervous as I am just starting out and the first deal seems like it is the hardest thing I have had to do.

This is what the deal looks like.

Year Built 1900:

War Zone Area:

Fully Occupied:

DSS Tenants:

Unit 1 - 500

Unit 2 - 390

Unit 3 - 375

1265 Total

Initial purchase price 25,900.

Offer - 18,000

Seller Counter Offer 20,000 - I accepted.

Inspection yielded good results, roof is 4 years old. No structure damage.

Only issues were the appliances in the home, owner apparently never upgraded. Water Heaters are all ancient, but still operational, heating systems are ancient, but all still operational, when I say ancient, I mean 20 years old. There are some other small problems in the home, but not costly. The appliances I estimate will be around 10,000 total to replace, but I am counting on them not dying soon. But I will purchase 1 per year and pray the others do not die.

Financial Break Down.

Purchase Price 20,000.

Gross Rents 1,265.

Remax Property Management 151.00 - 12 Percent, I know it's high.

Repairs - 80.00 Monthly.

Property Taxes - 400 Monthly.

Did not factor in turnover cost vacancy repairs and Landlord insurance.

Monthly cash flow is estimated around 634.00.

Does this look doable, or have I made a grave newbie mistake. Your input on this is much appreciated.

Oh yeah, sorry almost forgot to mention if anyone ask. The reason I am paying all cash, Banks said I have no credit beacon, even though I see high 700's when I run the report myself, but I understand totally, I don't owe anyone any money. It is weird how America seems like it wants you to be in debt. Anyway, I got a secured credit card which I will be cutting up in a few months after I put a few things on them, I am really cheap, so I think that helps. I have allot of cash saved up, so I will repeat the same process 4 more times this year. Next year I will do cash out refinances on 2 of the 4 that I plan on purchasing.

Please, don't hold back, take me to school, I have thick skin.

Your help is appreciated, thanks.

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  • Adam Johnson
    Rental Property Investor · Holley, NY · Member since 2011 · 507 posts · 347 votes
    13y

    I operate in the Rochester area on a regular basis, so might be able to help with some more specific questions for the future. I also have a great place to buy used appliances that will save you a ton of money. I can give you the name by PM, not sure if I can post it here or not. I don't have any affiliation with them, but go there frequently.

    One item sticks out like a sore thumb - you MUST factor in turnover vacancy repairs, especially in DSS/war zone areas. One of the biggest problems with DSS tenants is that when they get dropped for whatever reason, you only get 10-15 days notice. An eviction takes longer than that and you WILL have repairs to make. This absolutely has to be factored in.

    Property taxes seem pretty high for a $ 20,000 property.

    Repairs at $ 80/month seems extremely low, especially for a war zone property. Remember, the roof seems ok now, but will cost way more than $ 960 to replace down the road. One bad tenant leaving less than gracefully will eat that money up very quickly.

    Does your property manager charge for tenant placement? If so, factor that in, a minimum of one turnover per unit/year. Obviously you don't want turnover that high, but tougher areas have higher turnover. In my opinion, 12% for a war zone property is a deal for a manager. I think it is wise to use a licensed manager too, check references either way though. There are good ones and ones to run away from around here (I'm sure that is true everywhere).

    I also don't see a vacancy/rent loss factor. It is dangerous to assume that you will always get paid and that you will have a tenant move in the day after a tenant moves out.

    Our area attracts a lot of out of state and out of country investors due to high cash flow possibilities. These are possible, but not without effort. My comments are not intended to scare you away, but to point out a few things to plug in to your own projections to make sure they work.

    I assume that you live in Georgia based on your BP profile. Stay on top of your game and you can do very well here, I'm sure. Make informed decisions and verify all information you use to own/manage your investment!

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  • Eric M.
    Wholesaler · Rochester, NY · Member since 2013 · 100 posts · 23 votes
    13y

    I was going to say $4800 is super high for taxes in Rochester, as my personal house is only $2300. Are the increased taxes due to being a tri-plex? If so, $1600/unit makes more sense - especially in a war zone.

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  • Lamart Gomillion
    OP
    Real Estate Investor · Augusta, GA · Member since 2013 · 19 posts · 5 votes
    13y

    Adam/Eric,
    Thanks for the feedback. Yeah 4,800 is very high, and it is because of it being a tri-plex. An agent warned me of this before, but I will deal with it. I will make the property taxes as a one time payment to free up some cashflow and hopefully write it off at the end of the year. Adam, yes the PM charges a months rent for placement. You are right about the Rochester area Adam, I scouted places all over the states for the best prices and attractive rents, and Rochester is on fire. :) I would love for you to PM me in regards to the appliances. Thanks for your help guys, I am scared and excited.

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  • Adam Johnson
    Rental Property Investor · Holley, NY · Member since 2011 · 507 posts · 347 votes
    13y

    The tax number still bothers me. If this is truly a war zone property, 4,800 is a bad number. If you want to PM the address I can do a little snooping for you. Generally speaking, City of Rochester tends to be pretty close with their assessed values (I ALWAYS double check against my opinion of value though!!). So even if the assessed value is $ 30-40K, taxes should not be $ 4,800. Something isn't right here.

    I understand the scared and excited part. I get nervous with nearly every deal I do, though it does get easier as you get more under your belt. All of my properties are within a 30-minute drive, which helps a lot too.

    Stay in touch. If you ever make it to Rochester, check out Freedom First REIA. Lot's of opportunities to network with other investors.

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  • Lamart Gomillion
    OP
    Real Estate Investor · Augusta, GA · Member since 2013 · 19 posts · 5 votes
    13y

    Adam, I can't thank you enough for your help. My agent in ROC has been a blessing, he is my age and highly motivated and invest on the side also. I am stuck in Afghanistan at the moment as a civilian, but I was in ROC in June and did some house hunting while I was there for 2 weeks. I will stay in touch, I take leave in a few weeks, but trying not to cross the water if it is not necessary, but if I have to, I will be coming to ROC to check up on things or either to finish paper work. Yeah, that is a scary tax number, but that was what I seen on the MLS, I will know next time to have my agent double check to make sure it is accurate before we proceed any further.

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  • Adam Johnson
    Rental Property Investor · Holley, NY · Member since 2011 · 507 posts · 347 votes
    13y

    First I will say thank you for your service. Civilian or not, there are many of us back home that appreciate those that serve.

    I sent you a little more info. regarding the taxes. An important thing to remember is that if you don't like the assessment, try to get it changed! A good property manager can help with this or point you toward somebody that can. Basically, you will need to support your lower opinion of value. If they agree, then you can save a few $$.

    The best time to do this is after you close and before you refinance! The reason for this is that the tax assessor knows what you paid for the property. In this case mid-20's. I looked up your property and it doesn't indicate that it is a foreclosure, which the assessor will make an adjustment for. At first glance (and I don't know about this specific property so I am guessing) it appears to be an arms length transaction for a property that has been on the market long enough to find a ready willing and able buyer (you), who has indicated your opinion of the value is your purchase price. The 2012 assessed value is $ 33,200, I would try to get it lowered to your purchase price and be happy if they met me half way if I were in your shoes.

    The reason you do this BEFORE you refinance is that when you do so, the mortgage gets recorded and the assessor then knows what an appraisers opinion of value is. For refinancing purposes, you want the appraised value as high as possible to get as much cash back as you can. When this mortgage is recorded, the amount is public record and the tax assessor knows essentially what another professional's opinion of value is, which makes it extremely difficult to overcome. Eventually the tax man will catch up with you after you refi, but if you can lower your operating costs for a couple years, that's a good thing.

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  • Lamart Gomillion
    OP
    Real Estate Investor · Augusta, GA · Member since 2013 · 19 posts · 5 votes
    13y

    Adam,
    Very valuable advice. Everything you mentioned makes sense, especially since I will be refinancing sometime next year hopefully. Thanks for the appreciation, I can certainly appreciate our Military especially when I see what they do first hand.

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  • Paul Timmins
    Specialist · Rockland, MA · Member since 2010 · 7k+ posts · 2k+ votes
    13y

    Lamart

    The water heaters slowly fail and become highly inefficient with age. Check out the interest free energy loans to replace water heaters and heating system. Include heat as part of the rent to max your savings.

    Paul

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  • Adam Johnson
    Rental Property Investor · Holley, NY · Member since 2011 · 507 posts · 347 votes
    13y

    Paul Timmins - one concern with including the heat comes from bonehead tenants regulating the heat by opening windows. My preference is to have the tenants pay their own heat, especially if there are already separate utilities and/or furnaces.

    Another down side locally is if you rent to Dept. of Social Services tenants, the formula they use to calculate rent gets thrown off if heat is included in the rent. With HEAP (Home Energy Assistance Program I think is what it stands for), they can get help paying the heat bill if the heat is paid for by them and in their name. If it is in the landlord's name, guess who gets stuck paying the bill?

    These have been my experiences. There are ways to take advantage of energy reduction grants and still have separate utilities/heating. My preference is to have all utilities in the name of the tenant if at all possible. I do have one 5-unit building with only one heat plant and I have a very difficult time getting the higher rent approved due to that.

    I don't understand why they can't approve an extra $ 50/month for heat and water when it is included in the rent, but they will pay $ 75/month plus if it is in the tenants name. I guess logic doesn't come into play with government programs!

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  • Paul Timmins
    Specialist · Rockland, MA · Member since 2010 · 7k+ posts · 2k+ votes
    13y

    Adam

    Good points.

    My buddy got a 10 unit. Was paying 10K to heat. He got a 5 yr interest free loan to put in a high efficiency system. First year only 4,300 not 10K to heat. Because he was paying he had the incentive to save.

    Always check out Affordable Housing programs. If tenants qualify by income guidelines up here they get 500 in free energy. They can request an energy audit and it concludes they would benefit from more insulation, windows doors they will do it for free. If its a 3 family and 2 tenants qualify they will do the whole house for free.

    Paul

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  • Adam Johnson
    Rental Property Investor · Holley, NY · Member since 2011 · 507 posts · 347 votes
    13y

    Paul Timmins - good information indeed. I can now say that I learned something today!

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