Currently under contract for a 3 bed upper/lower duplex. It was a FSBO listed around market rate, but I know if it went on MLS it would've gone for more. 3 bed duplexes are hard to find in my area to purchase and to rent, so demand is there.
During inspection the crack we were a little worried about in the foundation turned out to be a much bigger problem than anticipated. Entire basement leaks. Estimate to rebuild bowed wall, install interior drain tiles and sump pump, is $20k. It will also need a new driveway which is currently sloping towards the house, which is the reason for the bowed wall. 1950s home with original windows, but they work. Air conditioning units 30 years old, will need to be replaced soon. Roof will need to be replaced in the next couple years. Bathrooms are in rough condition, was planning on giving them a facelift.
All in, I’m estimating $30k right away, and probably another $20k in the coming years.
Here are the numbers.
- purchase price $151k
- rent: $2200 total
- property taxes $4500
- insurance $800
- initial repairs $30k
- additional repairs $20k
- will be hiring property management company for 10% of rents
- setting aside 10% for repairs
- setting aside 20% for capex (future roof)
- cash flow $530/month
- cash on cash return with initial $30k in renovations is 9%
To me, the numbers work from a cash flow perspective. Where I’m getting caught up is that the property will not be worth the $200k I will have put into it total. I’m planning on buying and holding, not selling, but I still don’t know if it’s a bad move.
This would be our first rental property. But I don’t know if I should back out because of the unexpected $20k that came up from the inspection....
Thoughts? Is it a bad deal to put in more to the property than it’ll be worth, even though the cash flow is good?
I should add that If we want to move forward we would counter the seller at $20k lower...because of the inspection / basement issue. However, this seller is extremely difficult to negotiate with, he sold one next door with the same issues last year for a few thousand dollars less (didn’t have AC). So I’m pretty confident he will not come down on the price. And quite honestly, if we don’t take it, it won’t be hard for him to find someone else who will deal with the basement issues at this price.
just B/C of the greater fool theory is no reason to reach for a deal.. cash flow is only one component of IRR
if value is less than what you have into it.. you have zero exit strategy when you tire of being a landlord.
A sellers asking price is irrelevant. The only thing that matters is whether the numbers work. If this were a BRRRR and the ARV was 200K that would be a big no and move on. If the ARV is at $250K and cash flows to meet your criteria then I would move ahead. Your going to be in at 90% LTV or more. In my view point, I would not do this deal unless the seller is negotiable.
It sounds like a good deal, not a great deal.
You will likely get it stabilized above an 8% cap rate but as per your note, you may get lots of equity stuck since it won't refi incredibly well.
I'd recommend not hiring a property manager as that is significant yield you are giving up and you want to at least learn about the properties "issues" in the first year. Also, most issues will come up then and you want to handle them cost effectively (a PM typically won't).
@Jay Hinrichs thank you for your comment. You validated my concerns. I have some other investor friends who have told me that if it cash flows well, and I buy and hold, not to worry. But I agree with your point.
@Kenneth Garrett great point. Thanks for your comment. We will likely counter much lower, and he will not accept. But I’m 100% okay walking away.
@Alexander Szikla thanks for your comment. I’m a full time working mom of 3 little kids. While I’d love to self manage. The property is 40 minutes from me and I just don’t have the time. However, I know this property manager very well, and a few of her clients, and they’ve actually experienced cheaper costs through the PM than when they would hire contractors themselves. I know it’s an added cost, but in my situation it’s a necessary one to be able to invest :-)
@Sarah McCluskey sounds like even just the things you know about now could end up costing well over $50k, and you still need to budget for the things you don't yet know about. Oftentimes FSBO sellers are completely unrealistic with their asking price based on the property condition, and this seems like it could be one of those cases. I'd write the inspection objection asking for a considerable discount (at least $50k, ideally more). I wouldn't be so sure this property would be worth any more on the MLS, as retail buyers tend to shy away from properties with tons of deferred maintenance, outdated bathrooms, original 1950's windows, old roof, old AC, foundation issues, etc. Most buyers are looking for move-in ready. I'd negotiate hard for the right price on this one, and be ready to walk if the seller is unreasonable as there are likely some additional issues hiding in the walls that you haven't uncovered yet. Like Jay said, from what you've told us this sounds like a money pit. I'd probably ask for the discount, explain the reasons why/share the inspection report, and if the seller declines say "thanks but no thanks" politely then circle back in a month or two if they haven't found a "greater fool", and make an even lower offer then.
@Sarah McCluskey To answer your primary question about it being worth going upside down for cash flow I would say almost certainly not. You are fighting to get back even and the cash flow isn't going to do it for a long time, even if it cash flows as you hope.
Honestly this sounds like a nightmare and I think your future capex numbers are way low. Do you have your own crew or great relationships established? If not you are at a lot of people's mercy.