Help me validate my first rental property(ies) analysis

24 Replies

I am ready to pull the trigger on my first rental property, and you could say I'm jumping in with both feet. I've been lurking on Bigger Pockets, reading, and listening to podcast for about 6 months. I am still learning a lot everyday, but I getting comfortable enough to take action and bring learning to the next level.

I found an off market 4 plex in Central Louisiana, and while viewing the property, the seller stated that he would also like to sell the 4 plex next door! The units are low income, but not the worst area of town. Each of the units need some exterior work, but the inside seems to be rent ready. There are some key observations that could work in my favor, or could be red flags that I'm too naive to avoid. The seller was originally asking $150K each, but within 15 minutes had already knocked $60K-$80K off of his own asking price for an "as-is package deal". He said he'd take $240K for both, maybe $220K if owner financed. I don't think I want to go with owner financing for my first deal.

Conventional Financing and Property Management are lined up, but the estimate for insurance should be on the high side.


Structure Details:

Unit 1

  • 4 - 2 bedroom 1 bath
  • 2 stories, built in the early 80s, brick and wood siding
  • 3 of 4 units currently rented month-to-month
  • Rent ranges from $625 - $550 (tenant pays utilities)
  • Mixture of tile/carpet
  • Some units come with washer/dryer, but all have hookups
  • Metal staircase needs to be repaired or replaced $$$
  • Roof is in bad shape, needs to be patched or replaced $$$
  • Fascia and soffit  on 2nd story needs significant work as it is hanging with visible rot
  • Outside AC units are a mixture of old and older
  • Comps for nearby 4 plexes average about $165K on MLS (realtor friend pulled them)
  • Tax Assessor Value $159,000
  • Roof, fascia, and stair repair estimate $19,000 

Unit 2

  • 4 - 1 bedroom 1 bath
  • 2 stories, built in the early 80s, brick and vinyl siding
  • 0 of 4 units currently rented, and seller said that he hasn't put any effort into finding tenants (red flag?)
  • 1 bedrooms are rare in that area, but should go for $400-$450 (tenant pays utilities)
  • Power and water was turned off so I couldn't really test appliances or AC/Heat
  • Mixture of tile/carpet
  • Some units come with washer/dryer, but all have hookups
  • Roof is in bad shape, needs to be patched or replaced $$$
  • Outside AC units are a mixture of old and older
  • No comps available for 1 bedroom 4 plexes in the last year
  • Tax Assessor Value $112,000
  • Roof repair estimate $8,000

Analysis Details:

Unit 1

  • Tax Assessor Value $159,000
  • Roof, fascia, and stair repair estimate $19,000
  • Planned offer $110,000
  • Current rent ranges from $625 - $550, but rents in the area are listed at $500-$550 according to PM
  • Average rent $550 = $2,200 monthly
  • PITI $790
    • P&I $424 (25% down, 30 yr fixed at 4.625%)
    • Taxes approx. $200/mth (from tax assessor page)
    • Insurance approx. $166/mth (lender says this should be lower)
  • Initial Cash Flow $1,410 (= $2,200 - $790)
  • Other monthly cost $1.070
    • 15% Maintenance $330
    • 10% Vacancy $220
    • 10% Cap Ex Savings $220
    • 10% Property Management $220
    • $80 average monthly lawn care
  • Total Monthly Cost $ 1,860 ($790 + $1,070)
  • Final Monthly Cash Flow $340 ($2,200-$1,860)
  • 3% for closing ($2,200)
  • 8.3% IRR w/ $19K repairs (13.6% ROI if initial repairs are paid for as cash flow comes in)

Unit 2

  • Tax Assessor Value $112,000
  • Roof repair estimate $8,000
  • Planned offer $90,000
  • Rents for 1 bedrooms in the area are $400-$450 according to PM
  • Average rent $450 = $1,800 monthly
  • PITI $660
    • P&I $350 (25% down, 30 yr fixed at 4.625%)
    • Taxes approx. $140/mth (from tax assessor page)
    • Insurance approx. $166/mth (lender says this should be lower)
  • Initial Cash Flow $1,140 (= $1,800 - $660)
  • Other monthly cost $980
    • 15% Maintenance $300
    • 10% Vancancy $200
    • 10% Cap Ex Savings $200
    • 10% Property Management $200
    • $80 average monthly lawn care
  • Total Monthly Cost $ 1,640 ($660 + $980)
  • Final Monthly Cash Flow $260 ($1,800-$1,640)
  • 3% for closing ($2,025)
  • 9.5% IRR w/ $8K repairs (12.5% ROI if initial repairs are paid for as cash flow comes in)

The big question... Would you take this deal?

As a bench mark, @Brandon Turner shoots for 12% and $100 per door (wants $200/door)

If I factor in maintenance, vacancy, and capex; cash flow and ROI seems low by comparison, but if I extract those cost, I am cash flowing $1,100 & $880 at 27% and 32% ROI. If I wait to do the repairs with cash flow, the ROI is around 44% for each.

Does 5 of 8 vacant units (and currently no power/water in the 4- 1bds) throw out a red flag, or is that insignificant? I plan to write the purchase agreement pending inspection.

If you made it this far, thanks for reading the wall of text. I would appreciate any input. Thanks

So here are my thoughts. But keep in mind I only do single family.
1) re: Price not a red flag.
He's not really giving you a deal at 220k. Not if the first one is worth 160k and the second 110k and the second one is completely vacant. There's no way he's getting 150k for the second one if it only has 1 bdrm units and its completely vacant. 

2) re: Assessor value.
Don't even bother looking at the assessor value. That has no bearing on the actual property value. That being said, it sounds like other properties like bldg 1 would be worth about 160k so then you're fine. But you need to comp out the second building some way because you don't want to take the assessor's value - unless you think the assessor's value is actually below market value, then use it in your negotiations. :-)

3) re: Seller financing.
Why are you against seller financing?  Seller financing is a great way to preserve your own capital/cash and to increase your returns.

It looks like you're planning on offering 200k for the pkg. And that would mean coming out of pocket 25 to 30% on the purchase (50k to 60k) plus the rehab of roughly 27k.

Why not ask the seller to give you 15 or 20% in seller financing. You need to ok that with your bank but their risk would be the same. You'd still have 10 to 15% skin in the game and you could tell the bank you would then use the additional savings to do some more updates.

4) re: Rehab of second bldg
Thats a bit of a concern that you have no water or electricity in the second building. How do you know what other repairs might be needed? Does the water heater even work? Electric problems? Water leaks?

You might have some hidden repairs in there - which again is another reason to get seller financing on a portion of the deal so you can keep more of your capital/cash in your pocket.

5) re: Is it a deal.
If you can get 8 units for 200k, then you're paying 25k plus an additional 4k to 5k in rheab. So you're basically all in around 30k a door including rehab. But the issue there is your rent estimates. You need to narrow that range down a bit to know whether this is a deal. Are the bldg 1 units going to rent for 550 or 625.

And why are the units rented month to month? Is the area bad? Can he not get any decent tenants in there at all because the units simply are not that nice?

Month to month tenants tend to equate to more sketchy areas and that might be an issue over the long haul.

But lets say your rents on bldg 1 are 600 and 400 for bldg 2. Thats an average of 500 a unit per month while you're paying 30k a door. Taxes look pretty good.  I would think you would do ok numbers wise on that deal.

But I would add a couple of things there.
1) Gotta know your rents. 
2) Are you fairly assessing the condition of the properties? If so, why is it he's only been able to get month to month tenants in there.
3) How long has bldg 2 been vacant? And why? 
4) Do you have some hidden rehab in building 2 that might get real expensive given you don't have power or water on?

5) The fact that 5 of the 8 units are vacant should be looked at as a buying opportunity. If you really want these, I would come in lower (say 160k) and let him know your concerns as to why - vacancies, month to month tenants, unknown rehab needed, etc.  And I would also ask for 10 to 20% seller financing so you can preserve as much of your own cash/capital as possible.

Thanks for your input @Mike H. See my responses below.

Originally posted by @Mike H.:

So here are my thoughts. But keep in mind I only do single family.
1) re: Price not a red flag.
He's not really giving you a deal at 220k. Not if the first one is worth 160k and the second 110k and the second one is completely vacant. There's no way he's getting 150k for the second one if it only has 1 bdrm units and its completely vacant. 

I do think he was quite delusional with his initial evaluation. I think I will start with $190K and see where it goes from there.

2) re: Assessor value.
Don't even bother looking at the assessor value. That has no bearing on the actual property value. That being said, it sounds like other properties like bldg 1 would be worth about 160k so then you're fine. But you need to comp out the second building some way because you don't want to take the assessor's value - unless you think the assessor's value is actually below market value, then use it in your negotiations. :-)

I mentioned assessor value because that is all I have to reference without comps. I was trying to build a correlation between the comps for the 2 bd and the assessed value for the 1 bed. The tax assessed value seems to be on par with comps +/- a few $K.

3) re: Seller financing.
Why are you against seller financing?  Seller financing is a great way to preserve your own capital/cash and to increase your returns.

It looks like you're planning on offering 200k for the pkg. And that would mean coming out of pocket 25 to 30% on the purchase (50k to 60k) plus the rehab of roughly 27k.

Why not ask the seller to give you 15 or 20% in seller financing. You need to ok that with your bank but their risk would be the same. You'd still have 10 to 15% skin in the game and you could tell the bank you would then use the additional savings to do some more updates.

I agree that seller financing has benefits, but since this rental space is new to me, I was trying to stick with at least one area that I know. I am researching more on owner financing, but I am still naive on the subject and how to structure the deal so that it works in my favor. I can get a 30 yr fixed @ 4.625% with conventional financing which is pretty tough to beat right now. The owner is old and won't structure a deal like that.

4) re: Rehab of second bldg
Thats a bit of a concern that you have no water or electricity in the second building. How do you know what other repairs might be needed? Does the water heater even work? Electric problems? Water leaks?

You might have some hidden repairs in there - which again is another reason to get seller financing on a portion of the deal so you can keep more of your capital/cash in your pocket.

Thanks for confirming my thoughts that the entire building vacancy could be a red flag. My plan is to have him turn the utilities on for a full inspection.

5) re: Is it a deal.
If you can get 8 units for 200k, then you're paying 25k plus an additional 4k to 5k in rheab. So you're basically all in around 30k a door including rehab. But the issue there is your rent estimates. You need to narrow that range down a bit to know whether this is a deal. Are the bldg 1 units going to rent for 550 or 625.

And why are the units rented month to month? Is the area bad? Can he not get any decent tenants in there at all because the units simply are not that nice?

Month to month tenants tend to equate to more sketchy areas and that might be an issue over the long haul.

Current rents are $625 Unit A, $600 Unit B, and $550 Unit C. Current tenant pays $625, but that is above market since the rates have dropped in that area over the past couple years. According to my property manager in this area, he thinks he can get $550 for the vacant 2 bd and $450-$500 for the 4 vacant 1 bds.

I think the current tenants are month-to-month after their one year lease was up. The units are not nice by my standard, but seem on par with that price point. It's a  "C" to "C minus" neighborhood.


But lets say your rents on bldg 1 are 600 and 400 for bldg 2. Thats an average of 500 a unit per month while you're paying 30k a door. Taxes look pretty good.  I would think you would do ok numbers wise on that deal.

But I would add a couple of things there.
1) Gotta know your rents. 

I am defaulting to the property managers experience, and its confirmed by my market research for various apartments in this area on CL, etc.


2) Are you fairly assessing the condition of the properties? If so, why is it he's only been able to get month to month tenants in there.
3) How long has bldg 2 been vacant? And why? 

I think the Bldg 2 was recently vacated. When I asked why he hadn't placed a tenant, he said "Its the holidays and I'm married, figure the rest out". I just don't think he has the drive/time/desire to place a tenant and just wants to sell the properties. 


4) Do you have some hidden rehab in building 2 that might get real expensive given you don't have power or water on?

I'm sure there is some issue hiding in the vacant building, but besides age, nothing jumped out during the whole walk through. I will leave myself an out or bargaining chip pending the inspection.

5) The fact that 5 of the 8 units are vacant should be looked at as a buying opportunity. If you really want these, I would come in lower (say 160k) and let him know your concerns as to why - vacancies, month to month tenants, unknown rehab needed, etc.  And I would also ask for 10 to 20% seller financing so you can preserve as much of your own cash/capital as possible.

The seller did offer 10% down and 6% interest rate, but over a very short time frame of 5 years (He is 69 years old and just wants out). The property just would not cash flow under those terms.

I will fix up the vacant that can be regtagged by the City. Put it up for sale to get source for roofing repair. I am not even sure you tear the roof and find what kind of condition is on underlayment.  Often it interferes tenant life. Repair rarely lasts a couple of years. The barrier under the roof will last just so long. It sound like you need to reroof all buildings. 

It sounds like a FT job to upkeep and keep tenants happy for the first year.

What's your opinion on the ROI when accounting for Maintenance, Vacancy, and Capital Expenditures savings? Is 12%-20% the target before or after account for these expenses?

"If I factor in maintenance, vacancy, and capex; cash flow and ROI seems low by comparison, but if I extract those cost, I am cash flowing $1,100 & $880 at 27% and 32% ROI."

Which is to say, if math is not a thing, then you'd make tons of money! How can you expect to just "extract" maintenance, vacancy and capex costs? That's not even a thing. 

One more comment on the seller financing as I'm not sure my example clicked based on the response. 

The key is that you don't need to do all or nothing with seller financing. You can get a bank loan AND get seller financing as well. 

i.e. If you have a bank willing to give you those terms, then grab them. But where seller financing can help is in using it to lower your down payment.

So lets say you end up agreeing to pay 200k for the 2 bldgs.
The bank is willing to finance 70% of the 200k (140k). That means you would have to come up with the other 60k.

Here is where you ask the seller to seller finance 10% or 15% of the purchase price. That seller financing basically lessens the amount you have to put down on the property.

Lets say he agrees to seller finance 15% or 30k.
When you go to close:
1) Bank puts up 140k that goes to seller.
2) You put up 30k that goes to seller.
3) You sign a promissory note and mortgage with the seller for a second mortgage on the property of 30k over the 5 year term. 

The advantage is that you only have to come out of pocket 30k at the closing as opposed to 60k and now you have 5 years to pay off the other 30k. And if the property cash flows like it should, maybe the rental profits are used to pay that down.

Ultimately, the intent is to keep as much money in your pocket as you can so you can use that money should something unforeseen arise.

Originally posted by @Samuel Bavido :

"If I factor in maintenance, vacancy, and capex; cash flow and ROI seems low by comparison, but if I extract those cost, I am cash flowing $1,100 & $880 at 27% and 32% ROI."

Which is to say, if math is not a thing, then you'd make tons of money! How can you expect to just "extract" maintenance, vacancy and capex costs? That's not even a thing. 

I guess I could have phrased that questions better. I didn't mean for it to sound like I won't have to account for M, V, and C, and would pocket everything instead. The intent of my question is how to truly evaluate ROI.

I was thinking that the revenue coming in could pay for the planned repairs every 3-4 months, requiring less spend up front.

Ok, that's a much different idea. It means you have 0 return on investment for a certain period of time, and then cashflow afterwards. If you are ok with that, it can be a good strategy. It's harder to snowball, but it's often the best solution for a beginner. 

I bought a duplex last month that's 50% occupied, and it's currently earning 0 return as I work my butt off rehabing the upstairs unit. A savy, experienced investor might have passed on the deal, but I'm young and poor, and I only have a part-time job. It's a perfect set up for me, and it will cashflow well within a few months when I get both side occupied. 

Point being, the amount of effort you put in, and the amount you expect back (both now and later) can vary from person to person, and situation to situation. 

Sorry if I came across too harsh. 

Have you been able to see his books on the property? Rent collected? Former repairs that have been done? I think that kind of information would be of great value in your decision. I know that those numbers have to be taken with a grain of salt but might help you determine over time what has gone on with the property. I'm a bit new at all this so sorry if this is a dumb question :)

Originally posted by @James Dickens :

Have you been able to see his books on the property? Rent collected? Former repairs that have been done? I think that kind of information would be of great value in your decision. I know that those numbers have to be taken with a grain of salt but might help you determine over time what has gone on with the property. I'm a bit new at all this so sorry if this is a dumb question :)

 No, I haven't been able to review the books on this property. I'm sure this Old Dog keeps track of everything on a napkin.  

@Ross Kerne LOL it sounds like that may be the case. If his books are not well kept that may give you some leverage on bringing your offer down. If he can't prove a steady income from the property due to shoty bookkeeping or if he has been collecting cash and not reporting then you could potentially use that as a pressure point. 

Anyway, good luck on this deal. Hope it works out for you and would love to hear an update after all is said and done!

@Brandon Turner , what do you think?

I've listened to you and Josh so much I feel like I know you, but this is my first time posting on BP.

@Ross Kerne if you listen to @Brandon Turner all time the time you'd know he hates questions that ask "is this a good deal"... he states he doesn't know everyones market and what the rents/returns/etc. are in someone elses market. Only his own.

Originally posted by @Charles Kennedy :

@Ross Kerne if you listen to @Brandon Turner all time the time you'd know he hates questions that ask "is this a good deal"... he states he doesn't know everyones market and what the rents/returns/etc. are in someone elses market. Only his own.

I didn't simply ask if this was a deal. I laid out the analysis of comps, rents, financing, taxes, returns, etc for this market with research to back it up. Why wouldn't Brandon want to see someone implementing what he's teaching? 

I'm not asking for a fish. I'm showing that I'm learning to fish.

I've asked the forum to help validating the analysis, looking for holes in my approach, and whether or not they'd take this deal.

Perhaps compare the numbers to a multi family in a nicer area? Of course the price will be more, but so should the rent, and have a lower vacancy rate. Just curious. Even after a dozen deals, I still shy away from lower rent neighborhoods, I like tenants who will respect the property and have the ability to pay market rent in a decent area. Units don't turn over as much and when they do, usually can re rent immediately. Just curious if you could buy a nicer 2 or 3 unit in a better area, (it sounds like you have some $ to put down), how would the numbers on that deal look in comparison?   

Originally posted by @David Boroughes :

Perhaps compare the numbers to a multi family in a nicer area? Of course the price will be more, but so should the rent, and have a lower vacancy rate. Just curious. Even after a dozen deals, I still shy away from lower rent neighborhoods, I like tenants who will respect the property and have the ability to pay market rent in a decent area. Units don't turn over as much and when they do, usually can re rent immediately. Just curious if you could buy a nicer 2 or 3 unit in a better area, (it sounds like you have some $ to put down), how would the numbers on that deal look in comparison?   

 Thanks for the suggestion @David Boroughes. Everything I have been looking at is in this price point so I'll find a multifamily at a higher income bracket and go through the same exercise.

The intent of going with a lower income property for my first MFR is so that the mistakes I make on the first deal ( I know there will be some) shouldn't cost me as much. I see it as a lower cost of admission to the School of Hard Knocks. I've read good and bad things about lower income rentals (there is a whole thread dedicated to that topic right now) and that barrier to entry fits my current risk tolerance. I could go spend my entire investing fund on an expensive multifamily rental, but I didn't think that'd be wise right out the gate.

I would agree with the above comments that this looks like an interesting opportunity, but not a great deal at any price over $100k for both combined. Depending on the amount of personal attention you can pay to the rehab, there's a lot of risk associated with the second building, with not a lot of upside. I agree with @Mike H. that you probably have quite a few unconsidered repair costs with that building.  It may cost you $100k to rehab after replacing both roofs, all HVACs, paint, face-lifts, and any other unforeseen problems.  

As far as your accounting, I would say anything you spend upfront for purchase and rehab goes against your COC return. That initial cost will offset some of your maintenance and CAPEX costs that you have generously allocated in the analysis.

I don't know your entire financial situation, but the conventional financing terms you listed sound good; and I wouldn't want to deal with that owner anymore.  I wouldn't worry too much about the owner's record-keeping since you're basically starting over from scratch again.  As mentioned above, you got to know your rent potential for the 1/1 units.  Will a lightly cleaned 1/1 rent quickly at $450/mo, or will it require significant rehab (new flooring, paint, appliances) to rent for that amount?  Need to do your research and see some comps.  

Bottom line, do I think its profitable with a decent return? Yes.  However, it's not anything I'd get really excited about.  

Ross, have you by chance analyzed 605 Cannon St.?

The current situation is 3 siblings taking over an estate looking to cash out by the end of the year. They had it pending for 165k. but whoever it was the finance fell through. BRAND new roof on since Harvey .

My family lives a few doors downon the street and I have spent much of my 27 years in the area. 

last rents were 1550. and is in vickers school district. 

a couple updates have been made. 

very sought after neighborhood. by academy and walmart and lowes!

Sorry for crossing over to new topic

Just wanted to get your thoughts

Originally posted by @Jack P. :

That initial cost will offset some of your maintenance and CAPEX costs that you have generously allocated in the analysis.

Thanks  @Jack Pinney, do you think 15% and 10% are too generous? I am pulling these values from various area of the forum.

Ross,

 I currently own 4-plexes in C class neighborhoods in Baton Rouge and have looked at your numbers.  Since I don't know your market or your risk tolerance, I will respond as If this building came up in my area and whether or not we would consider an offer on it.  

Building 1

If A/C units are old and older,  then you are going to replace the A/C's and that cost us roughly $2600 per unit.  They may last a few years, but keep track of the maintenance cost to keep them running.  this cost is just added to the purchase price of the new one.    Unless we see a newer unit, we budget for this.

What did you budget for getting the empty unit rent ready?  when buying a building, my assumption is that if it was rent ready, it would be rented.  

so my numbers would be

Offer at $110K

  • Cash Flow - $340 = $85/door  
  • cash on cash return is 7 years.

Offer at $80K starts to make sense, but still not good

  • Cash Flow - $477 =$119/door
  • cash on cash return is 4 years.

You mention paying for repairs with cash flow, only three unit are rented so cash flow is actually negative in the beginning, because the other unit will have expenses, turn over and maintenance cost.

Unless you have plan to lower operating cost or raise rents,  we would look for a deal with better numbers.  Thought process is the difficulty and owning in these neighborhoods should be offset with higher returns.

Building 2

Walkaway.  In these neighborhoods vacant buildings are vandalized buildings.  See comments on rent ready units above and consider the fact that at least in our area if power has been off for more than 90 days it requires an occupancy permit, unless these units are in good shape and systems have been well maintained or updated this will usually trigger a need for an electrical permit,  Pandoras box.  so unless you know that power can be turned on with no permit, budget for an electrician to go through the units and bring them up to code.  You may be able to slide by, but as you build your portfolio all the shortcuts taken add to the collective risk.  When we buy vacant, partially vacant, mismanaged or poorly maintained buildings we budget for what it would take get them to above market conditions.  This cost more at startup, but reduces cost over the life of the building, attracts the better tenants in the area ( even in the worse neighborhoods, there are good tenants), reduces turn over and vacancy.

985-519-4136

@Frank Klein his deal is actually in our backyard!  It's in Central.

@Ross Kerne my offer would be $150k for both buildings and I would take the seller finance that was offered at 6% interest with 10% down if you can afford the down payment and repairs.  Since he wants a 5 year loan, then structure the financing based on a 30 year amortization if he will agree to it, 20 year if that's the best he will offer, and a 5 year balloon payment.  I would even try to negotiate the down payment lower to 5% or even to zero since your skin in the game is the deferred maintenance you have to invest in right out the gate.  You can always trade off an increase in offer price in exchange for more favorable terms like this as long as the numbers still work.  Seller financing is easy and very attractive to me, just make sure you use a good title attorney that has done many seller finance transactions.  PM me for a local recommendation if you need one.   

I would BRRR these buildings and within that 5 year time frame and once the units are nicely rehabbed, rented and performing well is when I would do a cash out refinance with a bank. At that point you should be able to cash out all of your initial cash input plus some additional cash to take to the next deal if that meets your objectives.

My offer would be subject to inspections and I like the idea of requiring the seller to get the power and water turned on first so you will know what you are up against on your first deal.  If you find many deficiencies or if he won't or can't get the power turned on then that would be my bargaining chip to get an even better deal on the 2nd building.  

Bottom line I would pursue this deal especially due to the seller financing offered.  In fact, if you pass on it, please reach out to me because I would be interested in purchasing it and would be willing to throw you a few bucks for a finders fee!

I think you should go for it if you feel good about your numbers and I think it sounds like you have done your homework and are prepared to take this on with both buildings out the gate.  Congratulations in advance!

See you at the top!

@Frank, thanks for your input. I appreciate it.


Originally posted by @Frank Klein :

Ross,

 I currently own 4-plexes in C class neighborhoods in Baton Rouge and have looked at your numbers.  Since I don't know your market or your risk tolerance, I will respond as If this building came up in my area and whether or not we would consider an offer on it.  

Building 1

If A/C units are old and older,  then you are going to replace the A/C's and that cost us roughly $2600 per unit.  They may last a few years, but keep track of the maintenance cost to keep them running.  this cost is just added to the purchase price of the new one.    Unless we see a newer unit, we budget for this.

What did you budget for getting the empty unit rent ready?  when buying a building, my assumption is that if it was rent ready, it would be rented.  

I walked through the 1 vacant 2 bedroom, and I think it would be ready to go. The owner seems like he has just checked out, is not even trying to place tenants, and just wants sell it (for too much IMO). I didn't think about allocating any money to get it ready to rent, but I will discuss that cost with the property manager. I'm sure there is something we could/should do, but I don't think it is much more than cleaning.

I thought an AC unit would cost more than that, so thanks for sharing those numbers.

so my numbers would be

Offer at $110K

  • Cash Flow - $340 = $85/door  
  • cash on cash return is 7 years.

Offer at $80K starts to make sense, but still not good

  • Cash Flow - $477 =$119/door
  • cash on cash return is 4 years.

You mention paying for repairs with cash flow, only three unit are rented so cash flow is actually negative in the beginning, because the other unit will have expenses, turn over and maintenance cost.

I can pay for the repairs upfront, but I was trying to have less cash tied up in this property. The repairs are cosmetic at this point, but a roof with missing shingles will start to leak eventually, and the falling fascia will just get worse. The steel stairs are starting to looks like swiss cheese, and they are structurally sound for now, but they'll have to be replace sooner rather than later. When I mentioned paying for repairs with cash flow, I was eluding saving all revenue that wasn't directly paid out (CapEx, Vacancy, Maint, and Cash Flow) and after a few months at full occupancy I'd have a enough to tackle the major items without coming out of pocket. I would eventually have to pay for these repairs from the Maintenance or CapEx budget, it would just be accelerated and those items wouldn't be on the radar for a couple decades. Not the best way to go about it, but I think it is an option.

Unless you have plan to lower operating cost or raise rents,  we would look for a deal with better numbers.  Thought process is the difficulty and owning in these neighborhoods should be offset with higher returns.

I agree, the difficulty of this area should bring higher returns, but after looking at comps, there are quite a few people who are making something work in their favor. 2bd 4 plexes in this area are consistently selling about $150K.

Building 2

Walkaway.  In these neighborhoods vacant buildings are vandalized buildings.  See comments on rent ready units above and consider the fact that at least in our area if power has been off for more than 90 days it requires an occupancy permit, unless these units are in good shape and systems have been well maintained or updated this will usually trigger a need for an electrical permit,  Pandoras box.  so unless you know that power can be turned on with no permit, budget for an electrician to go through the units and bring them up to code.  You may be able to slide by, but as you build your portfolio all the shortcuts taken add to the collective risk.  When we buy vacant, partially vacant, mismanaged or poorly maintained buildings we budget for what it would take get them to above market conditions.  This cost more at startup, but reduces cost over the life of the building, attracts the better tenants in the area ( even in the worse neighborhoods, there are good tenants), reduces turn over and vacancy.

My comments and description of Building 2 must have made it sound much worse than it is. The building has only been completely vacant for about 2 months, and it sounds like each tenant had a special case, but that could all be BS from the seller. You do bring up an interesting point about permits, and thank you for that awareness. I walked through the four 1 bedrooms apartments, and they were all in the same condition as the vacant 2 bedroom. Building #2 is in better shape than Building #1. Not something I would want to live in, but decent for $500. The seller said that one of the carpets would need to be "re-stretched", but I didn't see it coming off the tack strips anywhere. Refer to my previous comments about the seller just not wanting to find tenants.

I would eventually like to do some updating in each of the units so that it is a little nicer, but I just don't think the value is there to increase rents. My property manager doesn't think we would have any problems getting these units rented out as in. 

Frank,
Thanks for bringing up seller financing and sharing your experience. I should explore this avenue more, as I think it could help me with this situation. 

Originally posted by @Brandon Johnson :

@Frank Klein his deal is actually in our backyard!  It's in Central.

@Ross Kerne my offer would be $150k for both buildings and I would take the seller finance that was offered at 6% interest with 10% down if you can afford the down payment and repairs.  Since he wants a 5 year loan, then structure the financing based on a 30 year amortization if he will agree to it, 20 year if that's the best he will offer, and a 5 year balloon payment.  I would even try to negotiate the down payment lower to 5% or even to zero since your skin in the game is the deferred maintenance you have to invest in right out the gate.  You can always trade off an increase in offer price in exchange for more favorable terms like this as long as the numbers still work.  Seller financing is easy and very attractive to me, just make sure you use a good title attorney that has done many seller finance transactions.  PM me for a local recommendation if you need one.   

I would BRRR these buildings and within that 5 year time frame and once the units are nicely rehabbed, rented and performing well is when I would do a cash out refinance with a bank. At that point you should be able to cash out all of your initial cash input plus some additional cash to take to the next deal if that meets your objectives.

My offer would be subject to inspections and I like the idea of requiring the seller to get the power and water turned on first so you will know what you are up against on your first deal.  If you find many deficiencies or if he won't or can't get the power turned on then that would be my bargaining chip to get an even better deal on the 2nd building.  

Bottom line I would pursue this deal especially due to the seller financing offered.  In fact, if you pass on it, please reach out to me because I would be interested in purchasing it and would be willing to throw you a few bucks for a finders fee!

I think you should go for it if you feel good about your numbers and I think it sounds like you have done your homework and are prepared to take this on with both buildings out the gate.  Congratulations in advance!

See you at the top!

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