Friendly Advice Needed

29 Replies

Hi BP Community, 

I don't post often in the forums but do actively read through them. I know there is a lot of knowledge and wisdom to be gained by such a great community, so I was hoping to get some advice on a current deal I'm in contract with. Sort of conflicted on what direction I should go.

Overview:

The purchase price of the house is $170K in which I negotiated down from $190K. This is a triplex with an option to also rent out the garage for storage. So multiple streams of income. 


This is a rental town, hence I'll have an easy time getting tenants and it comes with 2/3 units already occupied. 

With 25% down and fully rented out at maximum rent, should cash flow $1,000+ per month after taxes, principal and interest. 

Dilemma:

Even though I was able to get the purchase price down to $170K, based on the comps in the area, I'm paying a fair competitive price, not a low price. 

The house is about 100 years old. After the inspection report came back, the house will need the following work (and this comes directly from the inspector):

  • 1-The two oil-fired boilers must be professionally evaluated and serviced by a licensed HVAC technician to determine the life expectancy and the evaluation of the firebox as well as its efficiency.
  • 2-The asbestos in the basement must be professionally encapsulated or removed.
  • 3-Need to have a licensed plumber REPLACE the corroding electric water heater for the rear unit.
  • 4-All items listed in #8 that are asked to be replaced, should be professionally replaced or given appropriate credit for replacing by new owners.
  • 5-Need to have a licensed electrician examine, address and replace all wiring throughout the house and garage. Due to the extended list of improper and outdated wiring mentioned in #10, we need an exact quote on how much it will cost to repair all electrical issues throughout the premises.
  • 6-Must install all appropriate carbon monoxide/smoke detectors as needed all throughout the living area space; including basement, stairwells and other living areas. 


Based on this report, I have asked the seller for an additional $10K at closing to make up for some of the costs I'll be incurring from the start. The seller is willing to give me only $5K right now and I'm trying to get them to come up to a minimum of $7,500. 

Even if they agree to give me an additional $7,500 at closing, do you think this is a good deal to get involved with?

Please also not that I already spent $1,200 on the inspection and appraisal.

Any advice is greatly appreciated. 


Thank you very much and have a great day! 

Hi, Terry, it sounds like a good deal if you're cashflowing that well and have a strong tenant pool. 

Since the seller and you seem to be at a stand-still I would try and push the important things on the list and leave out the less important. #6 is an easy fix and isn't costly so I'd forget about that one, as well as #3 (the water heater - especially if it's still working - the seller will probably not want to credit you for it - plus it's not a very costly replacement). 

Is the wiring knob and tube? If so, I can understand why you would want it all replaced. In one of my units I had it and I couldn't get the property insured until it was removed and replaced. 

The old boilers are concerning. I would push that the seller pays to have them evaluated so you know what potential lifespan/costs you're looking at. If there are major concerns you can go from there. 

As far as the asbestos, I'd tell the seller you'll split the labor cost of having it made safe. The seller would no doubt be more willing to do this.

When the seller sees you're willing to bend some he/she will likely be willing to as well and hopefully you will get closer to making the deal. 

If the cashflow wasn't that good I'd urge you to be unbending but with good cash-flow it's best to try and work with the seller.

@Terry Madden

All right, you're buying a 100-year-old property. You've cut and pasted six points from an inspection report that references items numbered 8 and 10. Then you're asking for a cost estimate of the six items, and an evaluation of the deal based on the work that needs to get done.

I can't answer your question in full, but I am able to give you some more information that I hope you'll find helpful.

1. You've referenced two oil-fired boilers. How big are they? How old are they? What kind of pumps are running the hot water or steam up to the apartments? With 100-year-old properties, it's quite likely we're talking about converted hot water gravity systems and in a place like Jersey City, converted coal burning systems. This is all obviously not your wheelhouse, and that's not good.

The good news is that your primary worry here, wondering about the life expectancy of the boilers, is probably ungrounded. When you have a hot-water system fired by a boiler, typically the boiler can last practically forever with regular maintenance. The pump that is used to circulate the hot water through the system is the component that typically needs the most regular maintenance. Get multiple quotes.

2. Where is the asbestos in the basement? How much is there? Is it pipe insulation, boiler insulation, some kind of blanket insulation? Again, this is clearly way out of your comfort zone. The good news is, once again,is that this is quite typical of older properties like the one you're describing.

3. How big is the water heater? Why is it an electrical system in Jersey City? Usually, something of that age would be natural gas in western PA. But even so, replacing a regular water heater, electric or gas, isn't a dealbreaking expense.

4. You see my point. Who could say anything useful about this with no access to No. 8?

5. So with many of the circumstances you describe, it's probably all knob-and-tube or, at best, rag wire. This is a big ticket item, on the order of $20,000 and up for the sort of full-on replacement you see listed here. Normally, you wouldn't replace everything. But Terry, you can't be buying places like this knowing squat about old electrical work and not being about to communicate effectively about it. What's No. 10?

6. This is cheap with battery-powered materials, if your local code allows it, significantly more expensive with hard-wired models if your local code doesn't allow them. The fact that you don't already know what your local code does or doesn't allow limits you here.

So finally, this place is going to cash flow $1000/month for three doors if you get this place dialed in. You mention taxes, principal, and interest. You say nothing about estimated reserves or property management. This post is clearly part of figuring that out.

Your profile mentions that you are in sales and lists nothing of any sort of experience in renovation. I am a self-managing, fixer landlord specializing in older dilapidated properties. This place is right up my alley and I'm pretty sure even with the gaps in what you've mentioned that I could make it work. It would not be up your alley at all. I don't know what your contractor network looks like, but given what's likely, you're probably going to get soaked renovating this place from where you're at. Even from the sharply limited amount of information given here, it sounds way, way, way out a hands-off investor's comfort zone. This is a grand opportunity to drive the price down with the seller if you're buying with the right fixit-man skill set -- you're not.

If you do this, you're making a major commitment, the kind of thing so far out of a typical hands-off investor's comfort zone that it will take her/him into a danger zone. I'm not saying you can't renovate and operate a place like this, but learning how will probably change your life and you will have to deal with many of the building's problems, and not from a sky-high perspective. Are you willing to make that commitment? Do you WANT to be the kind of investor who knows all sorts of stuff about hot water heating and replacing knob-and-tube wiring? This isn't the sexy part of investing in real estate, running numbers and leveraging debt and automating rent collection, not by a long shot. Ain't no turnkey here. This is a blood, sweat, tears, and toil kind of thing to learn how to profitably renovate an old MF building with tons of deferred maintenance issues and turn it into a tight little ship that puts a lot of money in your pocket.

You need to contact local contractors about professionally removing the asbestos and possibly dealing with a leaking oil tank. Those are big businesses in the NJ area and they're not cheap

Hi @Jim K.

Thanks so much for the detailed reply. I apologize for cutting a few of the main points out of the inspection report. Below is the full review of the report. 

THE FOLLOWING ISSUES WERE NOTED DURING THE INSPECTION:

1. We suggest that the two oil fired boilers be professionally evaluated and serviced by a licensed HVAC technician now and annually. Due to the old age of both boilers (>50 years), an evaluation of the firebox, efficiency and estimated remaining life expectancy should be determined when serviced. It is likely that the both boilers are nearing the end of their useful lives and may need replacing soon.

2. The front and back porches have settled and still have the old brick and cinder block columns along with some makeshift added supports. Also, front porch floorboards are weathered, lifted, rotted and warped in most areas. The rear porches have plywood installed over the original rotted floorboards. The railing height is outdated and should be addressed too (instead of latticework added on top of the existing railings). We suggest that a licensed contractor further evaluate, address and repair/reinforce both porches as needed for safety purposes, including addressing the back left exterior steps that are not installed correctly.

3. Carbon monoxide/smoke detectors need to be installed and always in good working order in the basement, stairwells and living areas.

4. The asbestos wrapped heating pipes as well as the asbestos wrapped discontinued ductwork in the basement should be professionally encapsulated or removed.

5. The various areas of the cedar siding that are weathered and/or peeling need to be scraped and painted. The rotted areas of the garage siding need repair and all overgrown vegetation needs to be trimmed back.

6. The electric water heater for the rear unit is corroding along the base and needs replacing by a licensed plumber.

7. The chimney bricks need to be repaired and re-pointed where the mortar is missing or deteriorated. The chimney flues need to be professionally cleaned and liner evaluated now and periodically.

8. The broken second floor back left bedroom windowpane needs replacing. The first floor front living room right wood window has a cracked windowpane that needs replacing. There are two broken basement windowpanes that should be replaced. It should be noted that the attic windows are in poor condition and ideally should be replaced. All remaining wood windows need to be scraped, re-glazed, primed and painted. The torn and missing window screens should be replaced.

9. The garage roof has reached the end of its useful life and needs to be stripped off and replaced by a licensed roofing contractor.

10. It should be noted that there is no owner’s meter and panel for the common circuits, which we recommend having addressed. All kitchen, bathroom, exterior and laundry areas need to have GFI outlets installed. All remaining two pronged and non-grounded outlets in the house are recommended to be repaired/grounded. There is an extension cord from the second floor back porch leading down into the garage structure for powering the automatic garage door opener, which needs to be discontinued/removed (or have electricity properly installed to the garage by a licensed electrician). There is still active knob and tube wiring that is recommended to be discontinued/replaced professionally. We suggest installing motion sensor lighting in the stairwells, exterior egresses and basement. The open spliced/exposed wires in the hatchway area need repair. The first floor kitchen area fan is broken and needs replacing. Some outlets need cover plates installed throughout the premises. Some of the wall sconces are damaged or have missing lens covers and need repair or replacing. It is suggested that a licensed electrician further investigate, address and repair all electrical issues throughout the premises.

11. The second floor kitchen has some upper cabinets that are loose or pulling away from the wall and need to be refastened.

12. The front and rear attic stairwells need railings installed. 

Hi @Karl B.

Thanks so much for the reply and advice. I updated the full report below in another thread.  

To answer your question, yes the wiring is knob and tube. Not sure what the cost would look like replacing everything but I know it won't be cheap. 

The problem I'm dealing with is this seller isn't willing to pay for all of these inspections, hence I'd have to pay more upfront money to get the answers I need to then not be 100% certain I even want to take the risk. 

If the winter wasn't approaching, I would feel a little better about the deal as I'd be able to make some moeny and reinvest it back in. Right now, based on this report, it feels like I'm sitting on a ticking time bomb with these issues. 

@Terry Madden With some of those big ticket items you listed and the fact that you said your price is in line with other stuff in the market I feel like you should be getting a bigger discount. @Jim K. You have some of the best posts on here. That last paragraph had me cracking up, sounds like my life the last 2 years. I thought I knew something about rehabbing then I started rehabbing 100 year old multi family buildings with tons of deferred maintenance lol.

@Terry Madden I had a duplex with knob and tube wiring. A lot of it was in the basement and easily accessible and it was simple for the electrician and his workers to remove and update the wiring. 

All the electrical work (including some added GFIs, adding outlets, relocating and adding some switches, and adding a few light fixtures) came out to under 2K. They worked roughly four days on the property (my electrician is a heck of a lot cheaper than most and he does good work). 

I don't know the ease of knob & tube removal at the triplex you're pending on but not all knob and tube situations cost a ton of money.

I'd call a boiler dude to see how much it'd cost for an inspection. According to Homeadvisor that should cost between $100-$200. 

@Matt P.

Thanks, Matt. It's rare to find people here who actually know the life.

Originally posted by @Terry Madden :

Hi @Jim K. , 

Thanks so much for the detailed reply. I apologize for cutting a few of the main points out of the inspection report. Below is the full review of the report. 

THE FOLLOWING ISSUES WERE NOTED DURING THE INSPECTION:

1. We suggest that the two oil fired boilers be professionally evaluated and serviced by a licensed HVAC technician now and annually. Due to the old age of both boilers (>50 years), an evaluation of the firebox, efficiency and estimated remaining life expectancy should be determined when serviced. It is likely that the both boilers are nearing the end of their useful lives and may need replacing soon.

2. The front and back porches have settled and still have the old brick and cinder block columns along with some makeshift added supports. Also, front porch floorboards are weathered, lifted, rotted and warped in most areas. The rear porches have plywood installed over the original rotted floorboards. The railing height is outdated and should be addressed too (instead of latticework added on top of the existing railings). We suggest that a licensed contractor further evaluate, address and repair/reinforce both porches as needed for safety purposes, including addressing the back left exterior steps that are not installed correctly.

3. Carbon monoxide/smoke detectors need to be installed and always in good working order in the basement, stairwells and living areas.

4. The asbestos wrapped heating pipes as well as the asbestos wrapped discontinued ductwork in the basement should be professionally encapsulated or removed.

5. The various areas of the cedar siding that are weathered and/or peeling need to be scraped and painted. The rotted areas of the garage siding need repair and all overgrown vegetation needs to be trimmed back.

6. The electric water heater for the rear unit is corroding along the base and needs replacing by a licensed plumber.

7. The chimney bricks need to be repaired and re-pointed where the mortar is missing or deteriorated. The chimney flues need to be professionally cleaned and liner evaluated now and periodically.

8. The broken second floor back left bedroom windowpane needs replacing. The first floor front living room right wood window has a cracked windowpane that needs replacing. There are two broken basement windowpanes that should be replaced. It should be noted that the attic windows are in poor condition and ideally should be replaced. All remaining wood windows need to be scraped, re-glazed, primed and painted. The torn and missing window screens should be replaced.

9. The garage roof has reached the end of its useful life and needs to be stripped off and replaced by a licensed roofing contractor.

10. It should be noted that there is no owner’s meter and panel for the common circuits, which we recommend having addressed. All kitchen, bathroom, exterior and laundry areas need to have GFI outlets installed. All remaining two pronged and non-grounded outlets in the house are recommended to be repaired/grounded. There is an extension cord from the second floor back porch leading down into the garage structure for powering the automatic garage door opener, which needs to be discontinued/removed (or have electricity properly installed to the garage by a licensed electrician). There is still active knob and tube wiring that is recommended to be discontinued/replaced professionally. We suggest installing motion sensor lighting in the stairwells, exterior egresses and basement. The open spliced/exposed wires in the hatchway area need repair. The first floor kitchen area fan is broken and needs replacing. Some outlets need cover plates installed throughout the premises. Some of the wall sconces are damaged or have missing lens covers and need repair or replacing. It is suggested that a licensed electrician further investigate, address and repair all electrical issues throughout the premises.

11. The second floor kitchen has some upper cabinets that are loose or pulling away from the wall and need to be refastened.

12. The front and rear attic stairwells need railings installed. 

All right Terry, thanks for posting, let's take 'em in turn.

1. Covering his a$$, you can probably get 20 more years out of them. Get your HVAC guy in to look at them.

2. This could turn into a $20,000 problem easily.

3. No biggie, check code with local municipal officials. If you can use battery-operated, and you probably can, this is a $200 maximum DIY fix.

4. This is the most important of the points. Let's explain what this means. The house was originally heated by what was called a gravity furnace. The gravity furnace was taken out and the multifamily was retrofitted with a hot water heating system. For this to have happened, the hot water heating system is PROBABLY not a REALLY old system, and is therefore PROBABLY is pretty good shape with a small, modern, powerful circulating motor that may or may not need to changed. It is probably possible, with the heating arrangement, to separate the three apartments into separately heated zones with their own thermostats -- it may even have been done already. This is good.

But there is probably an old octopus duct arrangement down there in that basement with asbestos wrapped ducts running throughout the building. This is a big-ticket asbestos remediation issue if, again, that octopus arrangement is down there and there are open ducts in the floors throughout the building. If the ducts have been closed off and the octopus has been cut out, as it should have been when the building was retrofitted for a hydronic heating system, the remediation damage won't be that bad.

5. Get your weedkiller concentrate and sprayer out! Once the weeds are dead you can start working on the building's siding. The garage siding is not as important. This will probably cost real money again, depending on the extent of the damage.

6. Yep, it's dead. Budget at least $900. I've never paid a plumber to replace a water heater, don't know NJ prices.

7. This is a summer-only rehab item. This late in the season, any decent chimney guys are going to be busy as hell out there. You will need to schedule this during the winter for the spring.

8. You've got at least $2000 in window damage and general maintenance here unless you're doing the repairing. My suggesting is to learn how to replace older windows with Home Depot replacement windows and use a caulk gun. The window companies are going to murder you on prices by arguing that fixing the windows will save you immense money in fuel costs and that if you do the windows with no insurance, you run incredible risks. Window company people are trained for high-pressure, fear-laden pitches.

9. You're screwed. Budget $12,000 minimum for roof of 2 car garage.

10. All the electricity is as screwed as I thought it might be. Yep, this is going to be $20K minimum.

11. Bit of handyman work with a screwdriver

12. More handyman work, very likely cheap.

This report did not include a sewer line inspection. For all of you out there reading this and thinking into getting into the old-place-fixing-business ALWAYS GET THAT DONE with a property this old. Water lines were similarly not noted in this report, verify that they're 3/4 and 1/2 in copper throughout the building, no galvanized water supply piping.

There isn't a word in this report about gutters. Are we talking box gutters, integrated construction? If we are, you'll need yet another pile of cash to remediate that sooner or later.

Based on your numbers and this report, the owner is desperate to get rid of an obsolete property. This is the kind of bottomless money pit a hands-off investor could never turn a profit on, that's why it's on the market right now. I know it looks like a great opportunity, but this is a laundry list of serious trouble.

If you're determined to do this, Terry, understand that it's going to run your life for a very long time. You will come out of it wil plenty of expertise in the details of renovating 100-year-old properties, but this is NOT passive investing by any stretch of the imagination, even if you somehow do manage to turn this place into a profitable investment while relying on the tender mercies of hired help. The community here can help, but you're still going to be on your own for most of it.

I wouldn't do it if I were you. I'd take a pass and go with a post WWII-built property without these serious problems, preferable a post 1975-built place. I don't know how many investments you have, but unless you've done this before, nothing I could say would really prepare you for renovating this place and running it effectively.

8. ....All remaining wood windows need to be scraped, re-glazed, primed and painted. The torn and missing window screens should be replaced.

I own a company that restores and rebuilds wood windows so here is a ballpark on the costs associated with it. 

I would suggest a company that removes the windows to restore them at a facility off-site, unless this will be a completed gutted site or you are not on a strict timeline due to lead safety and RRP compliance. Also, check to see if they're a certified lead renovator. A good resource to look for local contractors will be to reach out to the Window Preservation Alliance. 

This will run anywhere from $600-1000/window based on the type plus install and removal, $150-300/window. Depending on the scope of work, there may be on-site options to restore in place. I would vet anyone doing the work because the windows make up such a large part of the exterior of a home and poor/cheap/unqualified work will make a major impact on the house. 

@Karl B.

Thanks for the advice. Really appreciate it!

I don't think I'll get the deal you got for 5 days of work, but at least I know can use it as a reference point.

Thanks again!

@Jim K.


Thank you for taking the time out of your day to give me such an elaborate answer. I truly appreciate the advice. 

Very nice of you to go into such depth with your time and answers to a total stranger. 

This helps out a lot and based on your experience and background, it gives me the right direction for next steps. 

Have a great day and speak soon. 


Terry

No one else seems to be concerned about your numbers so I guess I will ask the question….what is your total monthly rental income on the property. $1000 positive cash flow per month seems high.

The fact that the property is 100 years old may have a definite effect on your cash flow.

@Thomas S. , thanks for jumping in!

At max rent, the studio rents for $500, the 1 bedroom rents for $800, the three-bedroom rents for $1100, and the garage is rented for $300 per month. This would give me $2,700 per month. The mortgage loan officer hasn't given me a final firm number, but with taxes/principal/interest, it's roughly $1,100 - $1,200 per month with 25% down on $170K. This does not include the home owner's insurance which I usually pay up front for the who year (assuming this would be less than $1000).

Two of the three units are currently rented. 

Even if these numbers work in my favor, if all of these issues need replacement at once, this will be a negative cash flow investment for a minimum of 2 years. 

@Morgan Reinart


Thank you for your input and knowledge base. Very helpful when making this decision. 

@Terry Madden Knob and tube all through a big old house .. nope . I’d walk at that price point . As others have mentioned you got way too much deferred maintenance to be shelling out that kind of money . Find something else or you’ll hate life for the next 3-4 years trying to get that property up to snuff . Insurance company won’t ever cover a house like that when they look at the foundation and electrical nightmare you have in the walls

Great thread and some really thorough advise from experienced pro's here. For me all this money is being spent on essential repairs; not one penny will increase your rent. No kitchen remodel, no bathroom being redone, no stainless appliances-nothing being spent up front where it shows and impresses a new tenant. There are LL's in my market, with triplexes just like this one-same age and state of neglect, who believe that a penny spent is a penny wasted and just want to milk a property to the end. This thread has been a great reminder for me to ignore those places and continue look for value add opportunities that will fatten the rent roll and keep me from spending my retirement years working as a cashier at Walmart.

My experience from having bought a 1908 property, was it wasn't so much the knob and tube, and the 14 different DIY'ers who'd touched it in the meantime.  1  20Amp fuse, to cover kitchen and bath?  Not in this day and age of half a dozen small appliances. 

Sounsd like that price is $70k too high with all the work needed.

Or, maybe it needs a bulldozer.

I wouldn't touch this house unless I had a pile of money to burn, and a serious network of good tradesmen. The sky is the limit for what the electrical and asbestos removal alone could cost. And who knows what else there is that the inspection didn't catch?

Apparently, other investors aren't fighting to get this place. So knock the price down, way down, and say "Take it or leave it."

If you are feeling compelled to buy because the cash flow sounds great, be aware that a 100-yr-old house is going to need steady ongoing maintenance, which you don't seem to have factored in. That is especially important here, because it sounds like you are buying from a landlord who did minimal maintenance and upgrading over the years. Those houses are among the worst we see, with even the work that was done being done badly, and needing to be ripped out and redone. 

If it’s in JC it’s a great deal even if you will have to put in the 10k.

You're looking at a lot more then 10k in repairs, you'd probably still spend 50k on this place doing most of the work yourself. My first house was a gut rehab, and although I benefitted from it, It was really scary at times. It took me about 6 months to recover from the mental and physical exhaustion. I also spent about 3x more than what I anticipated, and I did most of the work myself. 

If this is your first investment you have to take everything into consideration. There is just too much to list. This is a big job, but its possible if youre willing to go down a tough road for a while. 

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here