Deal or No Deal?

6 Replies

I came across an owner who recently evicted a tenant. He informed me that him and his wife are getting a divorce and his wife would like to sell her 8 plea and 3 plex. He showed me the properties and they are in a B- neighborhood. However the condition of his wife's properties amount to a C-. The 8 plex needs a new roof and both properties need the foundation fixed. My plan is to give some cash up front and then have have the owner carry the note. Properties are paid off. So here's the combined numbers for both props on a monthly basis.

Purchase Price For both Properties: $120,000

Gross Income (both properties): $5,965

Gross Effective Income (10% Vacancy rate): $5,368.50

Net Operating Expenses: $2741.31

- Cable - $50 (it's gerry rigged)

- Water - $435

- Electricity - $450 (3 months during the summer its $800 a month)

- Dumpster Fee - $185

- Fire Insurance - $41

- Property Mngmt - 7% (I will use professional management)

- Taxes: $363.34

- Maintenance: $800

Net Operating Income: $2,627.19

Capital Improvements: $25,000 (roof, foundation, paint, flooring)

The owner combines all expenses for both properties because they are side by side. For the 8 plex I estimate the net operating income is $22,706.19 for the year. Purchase price for 8 plex will be $63,000 which amounts to a 36% Cap Rate.

Thoughts?

I'd factor in a slightly higher vacancy for that type of property. 

What are you calculating for depreciation expense and  financing costs?

Depends on what type of "foundation" problems we're talking about..

@Brandon Siewert  @Watson Smith Thanks for the responses.  I did some additional research and found that these two properties are zoned single family homes according to Bexar County Appraisal District.  So they are not supposed to be multifamily units according to the county/city.  So I assume this would not be a wise purchase because it would limit my resale opportunity?  Thoughts?

It would probably affect you right away--the local authorities may require you to correct the situation as soon as you take possession (so you can't even continue renting). You're not very likely to be grandfathered. Some jurisdictions allow a owner-occupier to rent part of their own home, but it doesn't sound like that's your situation.

You might inquire whether the property could be rezoned (if it's, say, adjacent to other MFRs). That would be a long-term speculative move.

I do find it hard to believe that an 8-unit property isn't zoned properly. That's a pretty big project to complete under the radar.

Originally posted by @Bruce Olsen :

You might inquire whether the property could be rezoned (if it's, say, adjacent to other MFRs). That would be a long-term speculative move.

I do find it hard to believe that an 8-unit property isn't zoned properly. That's a pretty big project to complete under the radar.

Especially since it is next to SFH used as a 3 unit. I would think someone would notice 11 units in 2 houses.

I think the only safe offer strategy would be based on restoring to SFHs and selling on the retail market.  I doubt that comes anywhere close to the asking price.

Re-zoning would be a nice swing for the fences exit strategy, but there is a huge amount of speculation.

Rezoning is definitely a long shot. 

I agree about reverting to SFRs. You have a great opportunity to make all the bedrooms master BRs. This is very popular in CA because it allows the HO to accommodate elderly parents, grown children, even roommates. Some even have secondary en suite "morning kitchens." 

Is the 8-unit a large SFR that was illegally converted? Or a structure expressly for multi use?

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