In negotiations on the following deal – appreciate thoughts

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In negotiations on the following deal – appreciate thoughts

Jason A.
Investor · NY · Member since 2014 · 67 posts · 24 votes

Hi all – would appreciate thoughts on the following deal:

  • Three family for sale in decent neighborhood
  • Siding, windows and roof all replaced in the last 8 years.
  • Some challenges:

    • Substantial deferred maintenance on the interior – needs two gut reno bathrooms in short order (would likely aim to do so at next vacancy). Rest is simple stuff: paint, rugs. Kitchens are OK.

    o Front yard looks like a war zone – needs new yard and flower beds.

    o Two of the three units share a water heater and oil heat… so landlord has done a “rent included” deal and covers nat gas and oil for these two units. This means I’d be exposed to the price fluctuations of these commodities and tenants with no incentive to conserve. Not ideal obviously. (All electric is individually metered).

  • Some of the positive considerations:

    • o I would do much of the renovations and improvements myself

    o The basement is a walkout and can be finished into additional living space – so additional bedrooms would work. Have spoken with municipality, the basement cannot be turned into a 4th unit unfortunately.

    o The biggest deferred maintenance are the bathrooms – so while a major cost, something I could absorb.

    o Depending on cost (which I have no experience estimating but am working on) I could segregate the nat gas an oil for the two units which, over time, could pay off with each tenant covering their respective usage.

  • Price: $250K
  • Gross rents are $3,300
  • Expenses are $1600/ month (very conservative, includes $420 in utilities which are covered for two of the three units as mentioned above).
  • Factor in another ~$300 per month for vacancy (9%) and NOI is ~$1400/ month $16,800/ year.
  • Cap rate is approx 6.5.

    • Appreciate any thoughts. All the properties I own thus far have been out of state or new construction – so this would be a hands on project / new thing for me. 

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    • Alex Deacon
      Investor · Pittsburgh, PA · Member since 2015 · 1k+ posts · 1k+ votes
      9y

      @Jason A. I think you can be patient and perhaps wait for another deal unless you think this property is under performing and by doing the repairs and upgrades you can get the rent up and significantly improve the resale value. It has a lot of negatives and not enough positives. But with that being said I dont know the area like I know my location. check out Pittsburgh if you are interested in buying out of state. You can reach out to me for any questions on this area.

      good luck with your decision.

      0Reply
    • Jason A.
      OP
      Investor · NY · Member since 2014 · 67 posts · 24 votes
      9y

      thanks @Alex Deacon - at what price would this be attractive to you (appreciate you don't know the geography and site unseen). I offered $235K and seller countered with $255K (which I will not pay). 

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    • Alex Deacon
      Investor · Pittsburgh, PA · Member since 2015 · 1k+ posts · 1k+ votes
      9y

      @Jason A. Its hard for me to say. Even if your cash flow may be low is the upside potential enough of a reason to pull the trigger. 6.5 % cap for me is decent if its an A or B plus area. I am just concerned that you may be underestimating for repairs and that can play havoc on your ROI. I buy 4-8 properties a month here in Pittsburgh and I know the areas very well so i can make quick decisions. I am not as much help to you because you know your market better than I.

      Make sure your estimating enough for current and future repairs.

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    • Jason A.
      OP
      Investor · NY · Member since 2014 · 67 posts · 24 votes
      9y

      Thanks, @Alex Deacon 

      0Reply
    • Joseph Sangimino
      Investor · Pittsburgh, PA · Member since 2015 · 42 posts · 13 votes
      9y

      Jason, 

      I agree with Alex. I think at first glance there's not a ton of meat on the bone unless theres a lot of upside potential I'm not seeing. It sounds like a good amount of rehab work on an expensive property so holding costs are going to be very high... By rehabbing a three family, your not going to see as big of a swing as if it were a 5+ unit and valued on the operating income rather than the ARV. I have been in your shoes and would come up with your number that you KNOW will make you money (which may be 235k) and stick to it! Even if they reject it you never know... if it sits for long enough they may give you a call back... Unless you have a ton of experience, you want to be 100% certain itll make you money.

      Another thing is if this is your first or one of your first properties, Id make sure you run your numbers with contractor rehab. In my mind, doing the work yourself is a bonus cause it saves you pocket money, but unless you can knock it out really quickly, its not worth the hassle from a time value of money perspective. 

      Hope that helps, 

      Joe

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