Am I analyzing this property correctly? Worth half of ask price?

19 Replies

I'm new-ish to REI, with just one SFR so far. I'm now looking to expand into multifamily (with BRRR!). Bear with me, this will take some length for explanation.

I went driving for dollars and sent out four letters. About a week later, I got a call back! It was an older gentleman who said he was actually going to probably list the property in about a month or so. He said I could take a look first! He did give me the caveat that he's a RE broker, but not really doing anything with it, just for family and friends. He is thinking of selling because his wife has some health problems and they are just wanting to consolidate.

The house is in a pretty stagnant area of Washington State, very much similar to Brandon Turner's Aberdeen. I'm looking to buy for cashflow more so than appreciation. It is an 1895 built beautiful Victorian-era home built by one of the original founders of the town. It was turned into a fourplex in the 1970s. It was once a very nice place, but it has fallen on some rough times and has a LOT of deferred maintenance. It's been “professionally” managed, but you wouldn't know it.

He's a very, very nice man. I spent about 2 hours with him talking about the house and investments. He had this place on the market (himself as the agent) in 2015 for $179,500 and when I asked what happened with it then, he said he just didn't really market it, as he wasn't extremely motivated at the time.

Total sq ft is 2,692. At the very minimum on the exterior, the house needs all new windows (I think they are original. Yikes.), quite a bit of siding repair, and paint. It is in rough shape. Roof was done 10-12 years ago. He had only the power meters redone a few years ago, so electrical is likely knob and tube throughout. The pipes have not been redone at all as far as I can tell. At a minimum, I think this place needs at least $50k in work to stay standing, and I think that's me being very conservative.

All of the interior hallways and units have not been updated since probably the the 70s. It is as close to a D class property as you can get in a smaller town, but is surrounded by some good homes in a nicer neighborhood. It's very likely the worst place on the block. The fixtures, floors, walls, etc. are all very worn, beat up, and in a state of neglect. Would need to be all replaced to command any higher rent. Old couches on the front porch, no pride in the state of the place whatsoever. I definitely wouldn't live there!

Here's further details (market rents are according to the management company):

All units are 1bd/1bth

Unit1 rent: $480 (market $575)

Unit 2 rent: $410 (market $410

Unit 3 rent: $425 (market $575)

Unit 4 rent: $465 (market $465)

Total rents of $1,780

No tenant has been there longer than 3 years and one of them has been late on rent 25 times.

Owner pays W/S/G, some electrical, some gas, and “gas leases” for a total of about $4,900/year for utilities (I am unsure if it would be possible to submeter or bill back to the tenants, water and sewer is the biggest expense in there at about $345/month).

Here's what I got running it with the BP Rental Calculator (as self-managed):

-Purchase price of $160,000 (I did $200k as an ARV price, but it might be higher with a LOT of work)

-20% down: $32,000

-Amount financed: $128,000

-4.5% interest: P&I of $648.56

-Capex: 7%: $125/mo

-Maintenance/repairs: 7%: $125/mo

-Vacancy 5%: $89/mo

-Property taxes: $167/mo

-Utilities: about $400 mo

-Insurance: $80/mo


Total monthly expenses: $984.87

Income: $1,780 (income) - $648.56 (mortgage) - $984.87 (expenses) = $146.57/mo cashflow and 5.17% COC

These numbers are all without doing any of the major work that will be required to keep this place standing. The owner is in his 80's, and because he's owned it for almost 40 years, he has no mortgage on it and sees his roughly $800/mo cashflow on it without remembering that someone who buys it will be paying a mortgage.

He offered to carry the contract on it for 5 years, but even then, I don't think I can make the numbers work. He was very kind and said to make him an offer and he's “in a selling mood,” but even at $100k (which I think he would feel insulted), I don't think the numbers work. Even with rents at market value, it doesn't add much to the bottom line.

I'm anxious to get started on my REI adventures, but I don't want try to put a square peg in a round hole (my bank account).

Any thoughts would be appreciated! I don't think this property will work for anyone if the purchase price isn't much, much lower.


If you happen to still be reading after all of that blabber, THANK YOU! I wanted to make sure I got all the details in. 

big money pit  ..  the fix up work is just what you can see wait until you open up the walls.

rents far to low to sustain this over time.. 

CAUTION

Thank you, @Jay Hinrichs , I appreciate it. I just wanted to make sure I wasn’t crazy in thinking the owner doesn’t really have a grasp on the actual financials and worth.

Cagy old Dodger I bet knows exactly what he has.. you could spend 100k in the blink of an eye on that one.  and you know 400 to 500 dollar a month tenants in rural WA or Oregon are not the easiest to deal with..

Oh yes, I met a few of the tenants while there and they were....very colorful... haha

Also be sure your lender can do 20% down on a multi. Most require 25% down.

You should also still account for a minimum 7% management. You may be good self managing right now but if you grow in 5 years and want a property manager now you're in the red. I plan to self manage too but always add a conservative 8-10% management. I figure if anything I'm paying myself and that extra buffer makes me feel better.

And yes, I've noticed in my own analyses that there are times the numbers only work at half asking price. I think some people are unrealistic and emotionally attached. Unfortunately that's why some properties get into such disrepair and end up being bulldozed. I love old homes and hope someone can save that Victorian.

@Wendy C.

Sounds like this could turn into a gut job when you re-wire the house.  Remember there is lead paint and asbestos in this house, which will require abatement $$$.  This is a numbers game. If they don't work then walk away.  Would you be able to raise the rents enough after a remodel to make it work? Not sure about your construction cost in your area but lets say... $50 per sf to remodel (extensive work) at 2700 sf = $135k.   You are looking to paint and carpet only... $10 per sf = $27k. 

@Wendy C. Wow!! Well... I suppose that was to be expected ;) It does sound like a money pit. And an extreme amount of work to just get it to baseline... It sounds like you are leaning towards no, and I would be too! Flashback to your first SFH?

@Heather R. , It's definitely a no! I'm not looking to go broke...again....Hahahaah! As much as I wanted to die from the first one, it was a HUGE help in learning many lessons (don't tell my boyfriend that I just admitted that), and I know that I don't want a money pit...again....! 

He'll probably think I'm feeding him a line about the actual worth, but the numbers don't lie, sir! 

Back to obsessively checking the listings and sending you the north property listings!

@Wendy C. for a house of that age, I would be a bit more conservative and estimate 10% Capex as well as Maintenance/repairs which only further hurt your numbers... but it sounds like you've already made the right decision!

I would never consider that house for many reasons

So many better deals out there IMO

You’re right, @Kent Chrisman , oldies are made of old stuff and old stuff needs replacing!  ;) 

@Michael Plante , yes, it’s out of the running unless my newfound old man bestie wills it to me! 

What a bunch of hooieeeee

can you make a profit with a right off frontage

most are gurus and there advise will get you in t deep water

do you believe it will make a profut?

then do your dream

make it happen

you know as well as I do that it will break even and all them will be over whelmed 20%

enjoy

@Wendy C. With what you describe, a purchase price of 160k is too high.  I would go no higher than 140k with that much work that you know of, and probably, quite a bit more that you don't see yet.

If you can get him to go that low, you are doing well.  Otherwise, just pass.

@Timothy Smith , with the work needed and the low rents, I actually wouldn’t go higher than $80k on this place! 

I would not hesitate to take a rain check on this property. $158 a month collecting rent unlikely to be on time. No upside potential. Twisted people's arm 4X a month deal with a home that is problematic. Roof, plumbing, foundation, termite, rodent, pesticite, landscape. I will look in a better neighborhood in a large city. 

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I would agree with some of the others here that it's not a buy at that price, and also that he knows exactly what it's worth. I wouldn't be afraid to put in an offer though. I think there's two ways you could go with it. 

First tactic: contact him and thank him for his time. Decline to buy at his current offer and wish him luck in an open-market sale. I would also consider playing the 'new-investor' card and tell him what you came up with for your analysis. Tell him you don't think the property with needed repairs and at current rents is worth more than X, but "I'm new and I might not be analyzing the property correctly" - cater to his ego a bit. If he offers to go over the numbers with you, then you have an opportunity to bring a little reality to the conversation, and possibly see where he's getting his numbers. 

Second tactic: present your offer based on a realistic valuation and ask for terms. Having been in the business as long as he has, he knows the shape of the property. Be honest but fair with him - just outline the calculations above (I would build in a higher repair contingency for asbestos and lead - and make sure to mention those to him) and tell him you can make the deal work but only if he carries the paper at an attractive rate. If you can match, or exceed, what he's been taking home per month on the property - and do it with fewer headaches - he may not care about the details too much. No idea what his estate plan is, or if he has any heirs, but if he's 80 and you can make 5-7 solid years of low-stress payments to him that might be just what he's looking for. 

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