Duplex Investment Question

13 Replies

My partner and I are looking to acquire our 2nd investment rental, and we have hit a bit of a snag.  

Our first deal was rather basic.  We purchased a single family foreclosure that was in decent/good shape.  Concrete Block Home, 30 years old, 8 year old roof, 3 Bed/2 Bath that had a 1.3% rent to purchase price.  It was simple, fit what we were looking for at the time, and it has turned out to be a really nice investment for us.

We recently put a duplex under contract in Vero Beach, FL and we have uncovered all sorts of issues, which gives us pause as to whether proceed.  We were projecting a 1.5% rent to purchase price ratio (with an absolute downside of 1.17% and a higher possibility of possibly 2.0% for seasonal rental rates).  So the cash returns would potentially be very healthy.  However, it is a bit of a fixer upper, needing minimum $5k-$10k in cosmetic repairs, its older (originally constructed in 1947), it is a wood frame house (which is terrible for insurance premiums being so close to the beach), and we just found out that the siding on the property contains asbestos (which would be probably set us back an additional $15k to remove and replace).

I'm reluctant to throw so much of our money, and be so exposed, into a house of this age. Does it make sense to try to wrap all of the repair costs into a 7/1 ARM? Or at this point, dealing with a property of this age (and having other exposures to lead based point, etc...), is it better to save the headache and walk?

Interested to hear from people that have dealt with in the past.

Thanks in advance.

How good is the deal compared to the comps? If after you put the 20k or so into it are you still below comps? Above? Right around?

Hi Brent,

One miss conception with asbestos siding is that it needs to be replaced.  Asbestos is really only hazardous when it is airborne.  If the siding is not chipping or breaking apart there is really no harm.  I am not an expert but what I learned  through home inspection process is that if its not in bad shape where it will b in the air it doesn't need to be replaced.  Please consult an expert but by not spending the 15k right now could make the deal a little better 

Pat

@James Wise   it brings me to within market.  Most duplexes are commercial block though.  I feel like I should be getting some sort of benefit for going through with the risk of replacement though

@Pat Danaher  the original idea was to leave the asbestos alone but it increased the insurance premium to $5000/yr.  

If its about even with comps id just buy one with less work. 

Less work and less out of pocket cash.

Wow, $5k eats a good bit of cash flow. Either way its going g to hurt. I would have to agree with James, find one needing less work, if possible.

@Pat Danaher  @James Wise   that is what I figured as well.  The cash flow return on the property would be very healthy, however you are opening yourself up to a litany of downside risk.

Thanks guys.  And apologize for the grammatical mistakes.  I was typing on my phone earlier, and just reread my earlier posts.... Wow.

Hey @Brent Thurn  ,

I think you've some great feedback from @James Wise  & @Pat Danaher  , my only thought would be bringing the repairs back to the seller and asking for a reduction.  

I'm in Florida as well, and block is definitely preferable.  Keep us updated!

*I think you've received some great feedback*  

Geez, and I wasn't even typing on my phone, time for another cup of coffee...

@Andrew Davis  , just did that exact thing yesterday.  Very much doubt that they will accept or negotiate much.  It's a Fannie Mae asset manager we are dealing with.  

In any event, having that much cash tied up in a property of that age was not something I was excited to entertain. Not to mention it killed the IRR.

Vero Beach, is in the middle of our "Season" right now, so all property prices and rents are skyrocketing right now.  It's prob better to revisit the property search during the summer, unless we can find something that is distressed, at a discount.

If its not peeling or flaking you could encapsulate it.  This does require an expert thought.  It should not be as much as replacing the siding.  

@Eddie Werner  the issue we are facing is that since the property contains asbestos, there are only two insurers that are willing to underwrite policies for us at that location.  The cheapest of the two is $5,000/yr.  An astronomical sum.

If we remove the asbestos, we were quoted $2,400/yr in insurance premiums.  Still high, but since its within 5-10 miles from the beach, because its older, and because its wood frame, that is the cheapest we could find.

Therefore, if you were to buy the property, it just makes a lot more sense in the long run to take care of it immediately. 

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