First Triplex Investment - Is this a good deal for me?

Question

Hello Everyone.  Hoping I can get some feedback on this deal.   List price was $132,900.  The seller accepted my offer of $123,000.   I'm required to put 25% down.  It's fully rented and tenants pay all utilities.

Rents per month:  $600, $650 and $675

Taxes are: $225/month and insurance is $200/month

Inspection just completed and there is a bit of work that needs done.   New roof, gutters, downspouts at $18K, chimney work $1100, large tree removed $4,000, 3 furnaces are old that will cost $2225 per unit, two water heaters need replaced at $750 each, electrical work $1500, and some asbestos remediation.   Grand total is approx $30-35K.

All of the work doesn't need done as soon as we purchase but roof, gutter and chimney work will.

It's time to talk to seller about the inspection.  Looking to negotiate with seller and hope to get 6% seller assist to give us $7K and then lower price to $115.  And for him to remediate the asbestos (it's in two fireplaces and a tile floor in basement).   Not sure if he will accept.

The ROI looks good to me on this property.  However, now that we have a house that has been neglected and is in need of some repair cash, is it still a good deal?

Look forward to hearing feedback!   thanks

Les Crow · Answer

Hi Daniel, thanks for your comments.  I've ran the numbers on a lot of multi units and the ROI is not coming close to this one.   And the other buildings are $150K and higher.   The value after putting our $30K into it would be about $150K.   And we are looking to get the price down to $115.    This is also going to be a building that we hold onto for many years.   Once it's paid off, we should collect $1500 or so each month.   I'm not worried about the furnaces.  We are getting a home warranty.  And I agree about the tree.  He will not do that item.  Well the tenant was there during inspection when the inspector said this fireplace has the asbestos.

Daniel O. · Answer

@Les Crow there is a key piece of information that you have not provided. What will the place be worth after you put all this money into it?  If you are in essence putting 70K into a place to purchase it and make it worth 7K more than you are paying for it, then it may not make a lot of sense. The question is, can you get a better ROI with your 60-70K elsewhere?

I agree, requiring the owner to abate the asbestos is a good idea. That will be expensive, and will also be disruptive for the tenants. You might consider having some sort of indemnification concerning the asbestos so that nobody can come after you if there is a problem down the road.

Armed with this repair list, I think it is time to go back to the owner and explain that the deal just doesn't make financial sense when buying it for 123K.  You can run the numbers yourself and play with different purchase prices to see what gets you to an acceptable ROI based on your market and your own comfort level.  I would not expect the owner to agree to replace furnaces that might need to be replaced in a couple of years. But the roof and chimney are no-brainers. If they need to be replaced, the owner will have to do it if nobody buys the place anyway. The tree is somewhere in between, with the owner probably thinking "it hasn't been a problem so far" and you recognizing that it is a problem waiting to happen and wanting to take care of it.

Keep in mind that part of what you are offering is to reduce the pain in the butt factor. Assuming this makes the numbers work better, ask the owner to drop the price 20K so you can do the roof and chimney as soon as you close. Ask him to take care of the tree or provide the funds for you to do so. My guess is he won't agree to everything you ask, so treat the tree as the throw-away item in your ask.

I am not certain, but I believe that once the owner has been notified that he has asbestos, he is required to disclose it. Ask your agent about this. But hold firm on him doing the asbestos before you close, and make sure it is done by a licensed asbestos abatement firm. If the owner won't do the asbestos, walk away.