Investor · Brooklyn, NY · Member since 2013 · 7 posts · 6 votes
Hi,
We are in the process of looking for our first deal in the CT area, and I came across this property on craigs list:
asking price: $229,000 7 unit victorian built in 1880, in broad bank, CT (small town near hartford)
some seller finance: 60,000 @6% 15 or 20 years (which would be great since we do not have a lot of capital to start with)
Gross rents: 59,700
Here is where this does not appear to be a good deal:
electric: $6,390
oil:11,167.31
water: 1,825
trash: 2,562
snow 510
sewer 2940
taxes 6497
insurance 4000
and i would also add in property management: $450
and repairs: $450
the tenants are month to month and rents are somewhat below market
and there is laundry in basement for extra income.
So basically the owner pays ALL utilities on this property.
Question is though, how difficult would it be to change the electricity and oil to separate meters and how difficult would it be to start passing that on to the tennants? This seems like it could be a good deal for the person that can lower these expenses. Or should we pass since this may be tricky for a first investment? any input would be greatly appreciated!
I love converted Victorians, but they need to be either done properly or be priced very, very cheap so we can undertake the needed improvements.
Looking at the numbers, when you allow 10% for vacancy you have an effective gross revenue of $53,730.00. The listed expenses are just shy of $35,900.00 (66.8% of gross) before making allocations for maintenance and PM. By the time you add realistic maintenance (10%) and property management (8-10%) allowances, your operating costs are pushing 80% of gross revenue .... there is no room for debt service.
Unless you are paying cash, there is not a hope of keeping your head above water.
Now to your specific questions about utilities:
Electricity:
If we are to take the worst case scenario: The entire property is on a single entrance and that entrance is not to modern service levels. Furthermore, unless the electrical has been upgraded in the past, say, 30 years, there is a high probability you will be looking at 1-3 ungrounded circuits per unit with older cloth wiring or even knob-n-tube wiring.
A complete rewire with seven separate entrances, each at 100amp, could cost you as little as 25K or as much as 40K depending on how big the building is and how challenging it will be to run the new entrances to panels in each unit and pull wires throughout the unit.
Heating:
The 11K/yr oil bill is a strong indication there is no insulation in this building (just your standard, for the day, two layers of lath-n-plaster ... if it is a wooden building).
Do you know if it is an oil fired boiler or forced air furnace? I suspect it is a boiler (probably with period cast iron radiators). If the boiler is more than 20years old, your cheapest upgrade would be to replace it with a modern high efficiency oil (80-85%) or natural gas (95%) fired unit {if gas is an affordable options, I'd go with gas}.
In either case, to separate the fuel costs would require installing a separate boiler or furnace for each unit, each with their own oil tank or gas line. If you were making this big of a change, you might also consider installing a ductless heat pump in each unit (with electric baseboard as auxiliary heat) if the layout of the units support such an approach. A heat pump would have the added bonus of doubling as an air conditioner in the summer {vitally important in a big old Vicky with no insulation}.
Plumbing the existing hydronic system such that each unit has its own direct run to its corresponding boiler in the basement won't be cheap {you want to hope someone has already done this}.
If the current heating system is a forced air furnace, give-up all hope separating the ductwork for seven furnaces ... it would be cost prohibitive, even if you went with the small ducted high velocity furnaces.
Of course, installation of proper insulation into the building envelope could cut those utility bills in half. Unfortunately, our experience with Victorians (wood or brick) is that it is very difficult to properly insulate w/o a back to the studs rehab. Trying to inject closed cell foam, or blow in cellulose into the wall cavities is problematic due to the common, but not systematic, use of cross members. In the case of a wooden building with a windbreak layer of lath-n-plaster in the wall cavity, there is little room for insulation. On a brick Vicky you have the option of loosing the brick - actually you would be turning it into a thermal mass on the conditioned side of the wall which has benefits - by covering the external wall with 2-4" of hardboard insulation and re-cladding. As you may have guessed, neither of these approaches are cheap.
My take is you would need to acquire this property in the range of 140 - 180K to give you a fighting chance of being able to upgrade it to be a modern, efficient, and healthy home for your tenants.
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
12y
The only really accurate way to estimate the cost to separate utilities is to actually look at what it takes to do it by looking at the building. My guess is that it is going to be difficult to get each unit separately metered given the age of the building. Is each unit already wired separately but not metered seperately? You need to also look at what kind of electric you have now, is it updated at all ? is it on fuses or breakers? I am focusing on electric because I think that may be the most reasonable direction for separate heat if you want to lose the oil bill but again depends on the building.
You need to look at deferred maintenance don't underestimate it. We took on an older building in June and there are some things that we should have looked at more closely in terms of cost.
You will need a commercial loan to finance a 7 unit for anything the owner won't finance. Those are judged on the property income.
Hope that helps, you probably need a real construction person to jump in with more on the electric.
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
12y
You say the rents are below market. What you don't say is whether you are comparing to rents with utilities included or without utilities included. Shifting the cost of utilities to the tenant when you competition has utilities included may not help you much.
If you competition does not include utilities, then raise the rent to compensate. This is a cheaper easier solution. Certainly separate meters are a better way to go, but you need to do this analysis first- how do your rents rate given the included utilities. Good luck - Ned
I love converted Victorians, but they need to be either done properly or be priced very, very cheap so we can undertake the needed improvements.
Looking at the numbers, when you allow 10% for vacancy you have an effective gross revenue of $53,730.00. The listed expenses are just shy of $35,900.00 (66.8% of gross) before making allocations for maintenance and PM. By the time you add realistic maintenance (10%) and property management (8-10%) allowances, your operating costs are pushing 80% of gross revenue .... there is no room for debt service.
Unless you are paying cash, there is not a hope of keeping your head above water.
Now to your specific questions about utilities:
Electricity:
If we are to take the worst case scenario: The entire property is on a single entrance and that entrance is not to modern service levels. Furthermore, unless the electrical has been upgraded in the past, say, 30 years, there is a high probability you will be looking at 1-3 ungrounded circuits per unit with older cloth wiring or even knob-n-tube wiring.
A complete rewire with seven separate entrances, each at 100amp, could cost you as little as 25K or as much as 40K depending on how big the building is and how challenging it will be to run the new entrances to panels in each unit and pull wires throughout the unit.
Heating:
The 11K/yr oil bill is a strong indication there is no insulation in this building (just your standard, for the day, two layers of lath-n-plaster ... if it is a wooden building).
Do you know if it is an oil fired boiler or forced air furnace? I suspect it is a boiler (probably with period cast iron radiators). If the boiler is more than 20years old, your cheapest upgrade would be to replace it with a modern high efficiency oil (80-85%) or natural gas (95%) fired unit {if gas is an affordable options, I'd go with gas}.
In either case, to separate the fuel costs would require installing a separate boiler or furnace for each unit, each with their own oil tank or gas line. If you were making this big of a change, you might also consider installing a ductless heat pump in each unit (with electric baseboard as auxiliary heat) if the layout of the units support such an approach. A heat pump would have the added bonus of doubling as an air conditioner in the summer {vitally important in a big old Vicky with no insulation}.
Plumbing the existing hydronic system such that each unit has its own direct run to its corresponding boiler in the basement won't be cheap {you want to hope someone has already done this}.
If the current heating system is a forced air furnace, give-up all hope separating the ductwork for seven furnaces ... it would be cost prohibitive, even if you went with the small ducted high velocity furnaces.
Of course, installation of proper insulation into the building envelope could cut those utility bills in half. Unfortunately, our experience with Victorians (wood or brick) is that it is very difficult to properly insulate w/o a back to the studs rehab. Trying to inject closed cell foam, or blow in cellulose into the wall cavities is problematic due to the common, but not systematic, use of cross members. In the case of a wooden building with a windbreak layer of lath-n-plaster in the wall cavity, there is little room for insulation. On a brick Vicky you have the option of loosing the brick - actually you would be turning it into a thermal mass on the conditioned side of the wall which has benefits - by covering the external wall with 2-4" of hardboard insulation and re-cladding. As you may have guessed, neither of these approaches are cheap.
My take is you would need to acquire this property in the range of 140 - 180K to give you a fighting chance of being able to upgrade it to be a modern, efficient, and healthy home for your tenants.
Cheshire, CT · Member since 2013 · 13 posts · 0 votes
12y
@Noor B. Do you have any indication why the owner is selling the property? Might give you additional insight into the property knowing why they are looking to unload, if they give you an honest reason.
@Roy N. He is completely on point with his remarks. I would also be expecting a ton of lead paint and asbestos in the property which can significantly increase renovation costs due to proper abatement procedures needing to be followed.
Investor · Brooklyn, NY · Member since 2013 · 7 posts · 6 votes
12y
thanks so much for all the information!
@Ned Carey the rents are being compared to places that do not have utilities included, so raising rents might be an option, but to completely transfer all the utility costs back to the tenants, we would need to raise the rents on average $300 per unit or about 40%. Even if this is possible with the rental market, there would probably be a lot of immediate vacancies after we would close on the property.
In terms of paying what the property is worth currently, based on income and expenses, even if we paid $100,000 there would still not even be $100 per door in cash flow.
@Roy N. thanks so much for the very detailed response about splitting the utilities on such an old building. This seems like way to much to take on for a first property and is probably not a very good deal unless we make a very very low offer.
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
Yeah some properties are just losers almost at any price. They have went way past normal life expectancy for their intended use.
We get this in commercial when someone wants to keep reviving a property to it's former glory but the economical and fiscal answer is to tear it down and build new.
Does this building come with land (acres)?? If it sits on a very tiny lot then I would forget it. Older buildings sometimes were built on very large parcels. In that case if you can get a high density per acre a developer might come calling to buy out at a premium and level the place to put much more than the 7 units that are currently there.
Example:There was an old Mcdonalds in a good location. They wanted to reshell the inside and out to re-image for a new look. Everything was off center in there so the contractor told them it would be cheaper and faster to level the place and rebuild than constantly trying to fix problems where almost everything is wrong.
Lender · Dayton, OH · Member since 2008 · 1k+ posts · 705 votes
12y
@Noor B. This project would be a huge undertaking for a first time investor, and there are a LOT of things that could go wrong. @Joel Owens is right on target, this is not a project for a first investment.
As you originally posted, this one is tricky. Go look for something simpler to start.
