When to walk away from a deal (poor current condition of property exteriors)

2 Replies

Looking at a package deal of 5 properties (4 duplexes and a triplex) this week in Ohio. Had a family member do a drive by this morning and says exterior of the properties look rough and not well kept. 

Question I have for you is when looking at a new investment- how much attention do you pay to the properties current condition. If property looks poorly kept do you pass or estimate the cost of upgrades/ repairs/ improvements? Current owner has had properties for 15-20 years. 

I've only looked at the financials so far and they make all kinds of sense- about $25k per door to purchase and average of $188/ month net cash flow per door (after mortgage, insurance, taxes, etc).  Have also factored in 60k for improvements.

My thought process is that improvements could cover some of the big ticket items + improving curb appeal enabling me to raise rents 5-10% and exceed my 70% ARV target. Seems like a good deal to me, but I'm concerned that lack of upkeep could mean bigger issues below the surface.

What do you think?

Hi Jeff,

I have been in this situation before.

I like larger projects now. That many units does not have the numbers to pay for an onsite full time repair person.

You also do not own all the buildings for the area so are susceptible to other owner being slum lords or reducing rents instead of repairing etc.

I look at the crime map for percentage of violent and non-violent crimes versus the population levels.

So for example if you are looking at a cluster of small buildings and the crime is heavily around it for miles then it is not a good sign. Even if you make it ultra nice the quality tenants will not want to be in the area. I have even seen it where you own in a class A area on a bad street but because you do not own all the units potential quality tenants will not rent your units there because the others are junky.

If the crime stats looks good except for a building or two then you know pretty much it's the mismanagement of those buildings and not the area as a whole.

Being far away from you this doesn't sound like something to invest in. Even if you have local family and buy it to have them watch over it then when things get tough they might say forget it. Then it's your problem because you own it.

I like say 75 units or more where you own a project and can control the quality of tenants, look & feel there without outside forces affecting your investment.    

To better answer your question, it's critical to better understand what you are looking for.

Are you interested in dealing with deferred maintenance long distance?

If so, it becomes a numbers game as everything can be fixed at a price.  Can, factoring in all the expenses break this deal?

If your rough numbers, with maintenance makes sense, it's worth taking a further look at the true condition and expenses.

I don't ever shy away from maintenance, because that's where, clearly, the owner isn't interested in dealing with the headache. And if they are motivated enough, you can make things happen. 

But remember you have 5 different roofs, 5 different properties, 5 lawns to maintain, etc.

Good luck!

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