I came across an owner who recently evicted a tenant. He informed me that him and his wife are getting a divorce and his wife would like to sell her 8 plea and 3 plex. He showed me the properties and they are in a B- neighborhood. However the condition of his wife's properties amount to a C-. The 8 plex needs a new roof and both properties need the foundation fixed. My plan is to give some cash up front and then have have the owner carry the note. Properties are paid off. So here's the combined numbers for both props on a monthly basis.
Purchase Price For both Properties: $120,000
Gross Income (both properties): $5,965
Gross Effective Income (10% Vacancy rate): $5,368.50
Net Operating Expenses: $2741.31
- Cable - $50 (it's gerry rigged)
- Water - $435
- Electricity - $450 (3 months during the summer its $800 a month)
- Dumpster Fee - $185
- Fire Insurance - $41
- Property Mngmt - 7% (I will use professional management)
- Taxes: $363.34
- Maintenance: $800
Net Operating Income: $2,627.19
Capital Improvements: $25,000 (roof, foundation, paint, flooring)
The owner combines all expenses for both properties because they are side by side. For the 8 plex I estimate the net operating income is $22,706.19 for the year. Purchase price for 8 plex will be $63,000 which amounts to a 36% Cap Rate.
Have you priced out the foundation repairs? Might be worth paying someone to come in and give a quote/their opinion to what it would take to fix.
Foundation issues can get pricey in a hurry depending on what needs to be done to stabilize a property.
As to the class of property it would be something I would shy away from personally due to the likely quality of tenant, however I'd probably figure in a higher vacancy rate as I'd guess you'd have a higher turnover and also a capital expense reserve of some sort to keep money aside when repairs are necessary/repair damage from tenants, turn a unit etc.
Someone else might have some other thoughts, but those are mine thinking aloud.
Are the husband/wife reasonable enough to carry a note if they are in the midst of getting a divorce? (Maybe I read the post wrong however sounds like a dicey proposition to ask them to carry the note if they are in the midst of turmoil)
Hey Eric, I happen to spending the week working from Starbucks in the great city of San Antonio this week! This may or may not be a deal. First thing is $25,000 seems WAY too low for repairs. I cannot rehab one SFR with foundation issues for $25,000 (which most of our houses we flip do have foundation issues). If you couple foundation issues with a C- property that needs to be brought up to a B neighborhood I would not think $25,000 would scratch the surface. What is the quality of tenants? Might need to plan for financially to have significant turnover which will require rapid fire make readies (and sounds like upgrades).
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