Am I getting in over my head?!?

4 Replies

Help!

I am a newb when it comes to real estate investing. A family member came to me recently, knowing that I am looking to get into REI. He is selling a property in a rural area about an hour and a half northwest of Detroit. This property is on 10 acres and has two duplexes on it. His original plan was to develop the other 8 or so acres, but is getting older now and doesn't want to put in the effort of developing the properties. Here are some numbers on it,

Revenues:

Two upper units rent: $710/month

Two lower units rent: $660/month

Each unit has an external garage that rent: $50/month

Total - $2940/month

Expenses:

Taxes: $6140/year

Insurance: $1200/year

Utilities:

Well and septic.

Electric, propane gas and cable (available @ tenant's expense)

It was completely renovated in 2001. New roofs, new windows, new 90% efficiency propane forced air furnaces, new sinks and counter-tops and new carpet throughout.

Sale price: $275,000

Land contract available, with appx. 40% down

Is this something I should look into? Are there other figures that I should know about?

Thanks,

Steve 

A couple things to keep in mind is sometimes there are hidden expenses with septic systems that can cost 10's of thousands of dollars.  You definitely want to make sure that gets inspected before you even consider it.  

Growing up in my neighborhood we had well and septic as well.  The next door neighbor put their house on the market.  Because the septic system was out of date they had to completely update the septic system for the tune of 40k!  Now I'm not saying they are bad at all.  But you will need to see what the city regulations are.  My dad has to get his septic pumped every year per the city ordinance.  That runs about 400-500.  Every city and state is different though.

Do you know what year the property was built?

This is a rough estimate but it looks like it should cash flow.

2900- rent

1300 mortgage

232- Vacancy

232- maintenance

232- property management

511- property taxes

100- insurance

=2607- expenses

Cashflow +333 a month

If you do plan on developing the property further you will need to check with city zoning department.  Some cities do place limits on size of buildings as well as number of units you can have per acre.  Keep in mind getting plans approved to develop the lot further can take years.   Again every state and city will be a little different, but if you are seriously considering purchasing this property you should talk to the zoning before purchasing the property.    I was looking at buying some land in a suburb about 30 minutes from me.  It was 3 acres of land that was mostly trees.  However the city posed a limit of 30 units on the land with a maximum of 10 units per building.  Again that will vary by city and state.

Well, ok. Let's look at your numbers...

Monthly Gross income: $2940

Monthly Expenses:
Taxes: $6140 / 12 = $512
Insurance: $1200 / 12 = $100

So, my first question is:

Electric - does each unit have its own meter plus one for each building?
If so, do you have detail on electrical expenses for the building?
Does that detail include the well pump(s)?

What about maintenance expenses for the septic system and well pump(s)?

You'll want each building broken out separately, then look at the finances of the land purchase for the rest of the property.

There will be more work to do from there, but that at least presents some idea about the compexities of what you're considering.

Find someone locally who can mentor you with this.

I have a saying, also: Learn how to do real estate before you try to do real estate.

Lots of possibilities and factors to consider in your due diligence as mentioned above.  If that property passes a rigorous due diligence process and you choose to pursue it, I think, as a new investor, your best strategy is to figure out if it would be possible to buy the 2 acres with the duplexes and sell the other 8 acres.

You can get up to speed on handling those or hire a PM a whole lot faster than you can figure out how to develop raw land.  Depending on land values and demand for buildable lots/land, you may be able structure the deal in a way that you create your down payment with the sale of the land and set yourself up with a favorable financing position?

My biggest concern is when you say the property is in a rural area.  Property values and land development tend to be low and slow in most rural areas.  If population growth and new construction is happening in the area, it may be doable?  Just some food for thought.

I don't know - I don't like it, especially for a new investor. Septic tanks work great when you control what goes into them, not so well when you have no idea what your tenants are flushing down the drains and toilets - grease, wipes, etc. And wells are great until the pump or pressure tank goes bad, or the well goes dry and needs to be refracked, or all of a sudden develops a bad iron or sulfur problem. All of these issues then end up being your issue, instead of a municipal issue. It sounds like a self-contained gas system as well (propane). 

Without knowing your family member, and realizing I am going to probably sound cynical and paranoid, I suspect it is more likely that he found that there wasn't any market to develop that additional property in a rural area and that's why he didn't do it, or he couldn't find a bank or investor willing to fund such an endeavor. 

Unless you live right next to this place, I think your hunch that you are getting in over your head with this property is dead-on (your title for this thread). Multi-family is trickier and more involved than SFH units anyway, and then you have the added stress of it being very far away and not connected to public utilities. It is a lot of risk and work for pretty low cash flow. I would walk away from this.