A Friend who Wants Out...

10 Replies

Hi everyone at BP,

(this is a re-post from late last night with some updates)

I am extremely new to all of this so don't eat me alive. I have been involved with this forum for a solid week and I have been inspired by and learned more from all of you than any other source, so thank you all.

In a casual discussion with a friend today, who owns a duplex in a fairly prime location, he mentioned wanting to give it up. He is tired of being a landlord (they moved out of the city...) and he wished someone would take it off his hands.

Here is the little bit I know of the place (I have done some work for him there in the past):

1800 sq. feet. 4br 2 bath (2br 1 bath per upper and lower unit)

Purchased in '09 for $197,000

Current City Assessment at $169,000 (it needs some love. They haven't put anything into it.)

Both units are rented and current tenants bringing in $1,800/ month ($500/mo under average for the area)

All other similar duplexes (based on current recent sales and recent city assessments) in the neighborhood are assessed above $250,000.

Simply based on where this property is located I would like to take it off his hands. I have a meeting with him tomorrow to discuss numbers and to feel out what he wants out of some sort of deal.

I am looking for what sort of questions I should ask, numbers I need to find out about, strategies that I could work with to help him not lose (horribly) on a deal with me in which it seems like the house isn't worth what they paid for it...

Again, I'm very new to this and as of now my knowledge only extends so far as the many books I havd read and everything I have come across in these ever helpful forums. Maybe I'm looking at this deal all wrong and it is complete crap from the get-go! In which case, oh well. I can't learn if I don't try! I appreciate everyone's responses in advance! 

Before you get into any numbers, analysis, etc., I would recommend getting to the bottom of exactly why he wants out. Dig and then dig deeper. Consider carefully if you want to actually pay money to buy into his problems and whether or not you have the skills and resources to not become another "him".

Originally posted by @Jason A. :

Before you get into any numbers, analysis, etc., I would recommend getting to the bottom of exactly why he wants out. Dig and then dig deeper. Consider carefully if you want to actually pay money to buy into his problems and whether or not you have the skills and resources to not become another "him".

 Thanks Jason, that is a great recommendation.  I have know this guy for about 5 years now and I have a meeting with him tonight specifically about the property and I will for sure be paying attention to what issues he is having holding the property.  I think one big thing that is pushing him to get out of it is the fact that they moved about an hour away from the property in the last 9 months and just had a kid... who knows.  Thanks for your comment!

The numbers are:

1.  Purchase price

2.  Amount down

3.  Financing opportunities

4.  current rents

5.  Potential rents

6.  expected expenses

7.  Deferred maintenance

Now, some random thoughts.  The cost of acquisition is primarily the purchase price and deferred maintenance.  You will want to determine the ratio of net operating income to the acquisition cost at some point.  Net operating income is rents less expenses.

I like the above ratio to be 8% or above.  I don't like to pay full price for potential rents.  I think 50% of value is about right.

By the way, assessed value usually means nothing.  It is just a number that the county uses to determine the tax amount.  I value properties based on rents and net operating income.  Those other properties that sold could have been bringing in more rent than yours.

If you need financing, ask if owner would carry contract.  You also may be able to assume the owner's mortgage or buy subject to(take over owner's mortgage).

I am sure that this isn't complete but I hope it helps you thinking in the right direction.

The best to you.

Bill

At first glance, the price looks a bit high.  Here I need to get in at 100x monthly rent.  Our taxes are low, but owners here pay w/s/g.  Unless the terms are particularly sweet, I would need gross rents to be closer to $2500.  Rents of $1800 would put my target purchase price closer to $180k.  Please keep us updated as to how the meeting went, @Scott Warhol  !

@Bill Jacobsen, Great list and great thoughts!  I am definitely considering assuming the mortgage (if that is even possible) or a subject to transaction.  He is very willing to work with me as I learn the process and figure out financing.  I'm also trying to learn how to assess value in a property... I'm just trying to find a baseline to work with for other properties in the area.  Thanks for the great value in your comment, I appreciate it! 

@Steve Vaughan: I'm not sure what the purchase price will be yet or how much is left on the mortgage.  It sounds like he wants to see if I can take over the property (which would be great if a Sub to would work).  I like your "100x rent" figure.  that makes sense.  The other very similar properties in the area are renting for $1,000-$1,300 per unit.  The current tenants have been in the property for years (the upper for 4 years and lower for 2 years) and have seemingly been model tenants from talking with this guy over the years.  I will for sure post again tonight with an update! Thanks for your comment! 

Well, good morning BP,

I have been gathering more information on this property and figured I would keep this discussion rolling.  I appreciate everyone who has commented so far.  Your wisdom is keeping me grounded. 

First, we had two separate listing agents (that we knew) run through the property so we could get an idea of what the market would handle price-wise for this property. The listing prices both came in around $195,000. This is due to a foundation problem that needs to get fixed. We have had 3 contractors come and bid on that job and it is around $15,000.  This fix alone would bump the value to in the $230,000 range (again this is from the listing agents so I'm taking it as a grain of salt). 

Finally, after reviewing the financials of the property over the last year it is cash-flowing at just over $100/mo. This includes PITI, vacancy over the last year (and on average for that area of the city which is currently at 4% so I used 8%) Maintenance costs have generally been pretty low but it is an old house and is obviously starting to have issues arise.

After working my own numbers on the property as it currently sits its yielding a Cap Rate of 5.2% generating an NOI of around $11,700/yr.

Now, here is where I see improvement and some of my concerns:

- After surveying rents in the area I have found that current rent of $1950 is $250 low and they haven't been raised because of the relationship of the tenants to the landlord (not a business decision).  

- Taxes haven't been reassessed on the property in 7 years and have only steadily increased even though the property, in its current condition, has decreased. 

- Insurance price was not shopped around for and hasn't been re-evaluated in 7 years. 

- Certain expense costs are being paid by the landlord and not passed to the tenants which is cutting into the cash flow.  

- no updates have been done to the property to increase value in the last 7 years. 

- mortgage is 7 years old and if refinanced would allow for a lower interest rate and lower payments. 

Now, if you are still hanging in there with me... I am obviously apprehensive about acquiring a property that needs a new foundation unless I'm getting a real great deal. He has mentioned selling the property for what he currently owes (about $175,000) on a Sub to with no money out of my pocket if am willing to take care of the repairs. 

At this point my next logical step will be to have an inspector go through and assess the rest of the property for other maintenance items. I can see the immediate value in the equity I could force and the improvements to cash flow potential. Downside is the maintenance stuff and can of worms I could potentially be opening. 

If anyone is still with me and has the time I would appreciate the feedback to my research so far.  Thank you all in advance! 

Another tired of being a landlord story :( Been there done that. Tell him to come to BP and learn about alternatives to being a landlord! :)

Originally posted by Account Closed:

Another tired of being a landlord story :( Been there done that. Tell him to come to BP and learn about alternatives to being a landlord! :)

 Yep... Tried that, he is a good friend of mine and explained how all of this could help them in the future but they are pretty focused in the now. I even explained what I intend to do with the property and how it will make me more money and launch my investing career... For now it's more of a burden to him. Oh well. I can't say I'm not trying. 

Originally posted by @Scott Warhol :

Well, good morning BP,


Finally, after reviewing the financials of the property over the last year it is cash-flowing at just over $100/mo.

- Taxes haven't been reassessed on the property in 7 years and have only steadily increased even though the property, in its current condition, has decreased. 

- Certain expense costs are being paid by the landlord and not passed to the tenants which is cutting into the cash flow.  

- no updates have been done to the property to increase value in the last 7 years. 


 $100 cash flow on a $180k property sounds a little thin to me. If you are putting 20% down and putting zero cash into the place, that's still only like a 3% cash return on the cash you are investing.

You just need to decide what your goals are and determine if this property meets your goals at the price you can get it for.

Also, not sure what is included in your $100/mo cash flow calculation for CAPEX, but you pointed out that the property will be in need of major work soon. That spells more cash requirements from you.

Buying from a friend can be a good way to get a scoop, but don't force the deal if it doesn't meet your goals.

Originally posted by @Frank B. :

 $100 cash flow on a $180k property sounds a little thin to me. If you are putting 20% down and putting zero cash into the place, that's still only like a 3% cash return on the cash you are investing.

You just need to decide what your goals are and determine if this property meets your goals at the price you can get it for.

Also, not sure what is included in your $100/mo cash flow calculation for CAPEX, but you pointed out that the property will be in need of major work soon. That spells more cash requirements from you.

Buying from a friend can be a good way to get a scoop, but don't force the deal if it doesn't meet your goals.

Thanks for the advice Frank. All good points and I'll have to think on some of that. I appreciate your input. 

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