Sycamore, IL · Member since 2016 · 48 posts · 14 votes
4 - 1BR property up for sale. Very old bldng and dated. Seen this property on and off market since 2015. Tenants are long term been there 4yrs and up (and get along), and one is less than a yr. If I do 15yr mortgage, its around $1600. Tax $650. Total rent $2100. My worst fear is the age of the bldng and possible big repair. It’ll be my very first RE investment so I am unfortunately in the stupid, new, naive, and excited category. Any tips from experts and experienced investors out there? Im planning to offer with contingency to home inspection, if we move forward. Should i bite this one?
@Red Peterson My first property was a 4 unit, older property. Just make sure you factor into your figures your CAPEX, Vacancy, and Management if there will be any. For an older building should probably be about 7% for CapEx, 5% for Vacancy in the current market, and if you're hiring management about 9%.
I’d also recommend a 30 year mortgage because the tenants are paying it off with their rent and you’ll make a better return reinvesting the cash flow that’s left over in another property or in a mutual fund at 8% or something else than paying it down quickly on a 15 year mortgage where your interest rate is only 2.99%. It’s cheap money and unless you refinance it out later your fixed mortgage rate will never change.
@Red Peterson My first property was a 4 unit, older property. Just make sure you factor into your figures your CAPEX, Vacancy, and Management if there will be any. For an older building should probably be about 7% for CapEx, 5% for Vacancy in the current market, and if you're hiring management about 9%.
I’d also recommend a 30 year mortgage because the tenants are paying it off with their rent and you’ll make a better return reinvesting the cash flow that’s left over in another property or in a mutual fund at 8% or something else than paying it down quickly on a 15 year mortgage where your interest rate is only 2.99%. It’s cheap money and unless you refinance it out later your fixed mortgage rate will never change.
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
4y
@Red Peterson not sure why you would want the 15 year mortgage as opposed to the more flexible and safer 25-30 year? You can always add extra payments
that said the capex and tenant turnover are going to be your major issues
Is this a repositioning to something higher end or refreshed? If not, you have awfully low rents ($500 a unit ???) and an old building. Low rents, high turnover (the two are related), lots of maintenance. Sounds iffy.
@Red Peterson not sure why you would want the 15 year mortgage as opposed to the more flexible and safer 25-30 year? You can always add extra payments
that said the capex and tenant turnover are going to be your major issues
Is this a repositioning to something higher end or refreshed? If not, you have awfully low rents ($500 a unit ???) and an old building. Low rents, high turnover (the two are related), lots of maintenance. Sounds iffy.
what do you like about it?
Yeah, youre right. If I do 30yr, mortgate is $1200. it is a bit difficult to remember this is business and it scares me a bit to owe again. I will run numbers again.
But anyways, I will look up capex bec i dont know what that is. So, the tenants in this property have been there 10yrs, 8yrs, 5yrs, and less than a yr. The 3 will probably live there til they die and im not exagerrating. The property sits in a really good location. We are a small rural area and this property sits in the middle of town. I anticipate our town getting bigger in the next 5-10yrs as people have been moving in town recently. I like the location of the property and fact that 3tenants are long term. Vacancy will be in one unit maybe every 2years or so, and this unit is the only one that has been updated.
The building is $165k. (They put this up in 2015 for $190k; on and off over the years and the lowest price they came down to was $150k in 2018) Ive watched the market in my area it I think its fair(?) for the location but, I am scared there are hidden repairs that will blow up in my face. Each unit has one person living in it so the wear and tear is slower compared to more people living in a property. With the price I can start RE and learn and have moderate issue with tenants. I plan to slowly update the building and possibly even make it higher end in later years bec of its location. If I tackle a major reno 2 units can be two bedroom, they have the space. The rent right now, is just a littler under the going rate in my area for 1BR bec theyre dated. I can probably raise it a little. I asked for copy of current lease so I can review it and see when I can make changes. The current property management charges $1577 a year. The monthly mortgage will include tax whether i go $1600 or $1200 (15 yrs, 30yrs loan). Tax is $7800 last year, its been slowly creeping up.
Real Estate Agent · Addison, IL · Member since 2015 · 185 posts · 88 votes
4y
@Red Peterson the numbers seem tight for a 15 year so if you’re looking at just cash flow the 30 year makes sense as others have said. If you’re happy with the cash flow with where it is now and know that you’ll need a lot of capital when it comes to renovating it then it’s a personal preference at that point.
If you have the money, it’s cash flow positive and in an area you like then I wouldn’t be afraid to move forward so you can get the experience at least.
@Red Peterson My first property was a 4 unit, older property. Just make sure you factor into your figures your CAPEX, Vacancy, and Management if there will be any. For an older building should probably be about 7% for CapEx, 5% for Vacancy in the current market, and if you're hiring management about 9%.
I’d also recommend a 30 year mortgage because the tenants are paying it off with their rent and you’ll make a better return reinvesting the cash flow that’s left over in another property or in a mutual fund at 8% or something else than paying it down quickly on a 15 year mortgage where your interest rate is only 2.99%. It’s cheap money and unless you refinance it out later your fixed mortgage rate will never change.
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
Just get a good Home Inspector! And follow up on his report with a bid from a good licensed GC. Whether something needs fixing right now, or down the road, it is still coming out of your pocket. Other than that, if the numbers work, go for it. Everything on an old house can be upgraded....the hardest thing to do frankly is the insulation in the walls, which needs all the drywall/plaster ripped off to install. And the structure/foundation will be inadequate by today's standards, but unless you're in an earthquake zone, that ain't a big deal either.....
Investor · Worcester, MA · Member since 2020 · 1k+ posts · 1k+ votes
4y
@Red Peterson - The taxes seem very high on a $165K valued asset. $7,800 per year? I currently pay $5,400 in my county on a triple decker 3 times the market value. I would look into the process of having your properties tax reassessed with the town. At $7,800, any cut to this cost would help your cash on cash return dramatically. Just a thought, but run the numbers to ensure you are at least getting a 10% cash on cash return. This doesn't sound like a class A or B area at that price hence you're playing the cash flow card and not the appreciation play so ensure the cash flow is worth it.
Real Estate Agent · Chandler, AZ · Member since 2021 · 28 posts · 9 votes
4y
First Of all, I don't think you are "stupid" like you said in the original post. The fact that you asked the question showed that You are very smart. 🙂
Secondly, if the number makes senses for you do it. And yes, hire an inspector or even a contractor to determine the cost of the repair, if the number still makes sense, do it. If not, walk away. The worst is you loose couple hundred dollars for inspector, but gain lots of experience through talking to Realtor, inspector and contractors.
Residential Real Estate Broker · Sacramento, CA · Member since 2014 · 54 posts · 23 votes
4y
@Red Peterson one other item I would pay close attention to is the owner paid utilities (ie. Water, garage, sewer, electricity,etc). I had an older building similar to what you are describing and the electric from the common area, gas, water, and lawn care, quickly ate up a significant portion of my cash flow. It was my first rental and I definitely under estimated the cost. During your due diligence period you should be able to request that the seller provide a trailing 12 month breakdown of the expenses
Also, 30yr fixed is a great product as many mentioned... my thought is, take the lower payment, then if you want to pay it off faster you have the option.
Sycamore, IL · Member since 2016 · 48 posts · 14 votes
4y
BP has wonderful folks living here! Thank you everyone. I feel the property has prob been undermanaged. I did ask if there are known issues, current lease, & current home insurance cost. Expenses: Janitor $720, water $2094, repairs decor $907, and mngment $1577. Andrew, thank you for pointing out the tax being high (I think Im unaware ignoring that bec i like the property a little too much). My realtor sd she hasnt heard from RE agent, so i have a feeling theres an offer for it. Tempted to offer above list price contingent to home inspection but I dont have a lot of info about the current lease terms im afraid I might get stuck with terms. Im not sure if I’ll be aggressive or find out more. Things are going fast so… ugh.
Insurance Agent · Norwalk, CT · Member since 2016 · 2k+ posts · 1k+ votes
4y
Red,
From an insurance standpoint, with older buildings there are questions that come up:
1. Is there Knob & Tube or Aluminum Wiring?
2. When were the systems (roof, electric, Plumbing, heating) last updated and were they fully updated or just partially?
3. Is the electrical fully on circuit breakers or are there fuses?
4. Has the property been inspected for Lead paint?
5. Is it up to fire code (may require hard wired smoke alarms, exit lighting, etc.)?
6. Any Underground tanks (active or inactive)?
7. Asbestos Siding present?
8. Galvanized or PEX plumbing?
Other questions that come up regardless of the building age:
1. Any Pets (if dogs, what breed)?
2. Loss history (see if you can find out if they had any claims in the past 5 years)
3. Is there a flat roof?
4. any secondary heating (space heaters, wood stoves, ....)?
5. are there railing on all interior and exterior stairs?
6. Are the driveway and walkways in good condition?
7. Any overhanging trees?
The presence of any of these conditions does not automatically mean you can not get coverage but depending on what it is, your cost may increase. Knob & Tube wiring for example, will likely, severely limit the standard markets that will insure the property. Comparatively, a flat roof will be a problem with some companies but not others.
I suggest reviewing the insurance with your agent. if that agent only represents one or few markets, also discuss it with an independent agent that represents multiple markets. If you can get recommendations from owners of similar properties on who insures them that may help as well.