About to put our first MFP deal under contract...what comes next?
Martinsville, IN · Member since 2023 · 18 posts · 8 votes
Hi all! Our LLC is about to purchase a pair of adjacent duplexes that we plan to manage ourselves as part of our learning, as we are new to the industry. The would be our first "dedicated" investment purchase.
Listed for $189 each
Offering $315k for both, but 2 loans
- Coc Return is 15% (HOME RUN BABY!!)
- 3/4 of units "updated" but don't get to see until contract signed. The one unit viewed needs probably <$10k to turnover.
- One building with new roof this week
- 3 units currently rented, 2 of which are currently section 8
Planning on using self directed IRA for 20% down, and a DSCR loan estimating 7%. I sought seller financing, but they declined (don't think they're fully informed on benefits)
Validating taxes, insurance, seeking pre approval letter this week.
Plan on raising rent $50-100 but wondering the challenges that might arise since both are section 8.
During due diligence/inspection - what the primary information I should be seeking from the seller in terms of financials?
Should we wait to purchase under LLC until any and all updates are complete?
@Lindsey Kocher, how are you "validating" taxes? In my county (Hamilton County in Ohio), I can get on the auditor site at anytime, type in the address, put in my purchase price and see what my taxes will be. I assume you mean you are confirming what your tax bill will be when you buy the properties and not just confirming what the seller is paying.
For your section 8 tenants, you will want to know what the reinspection timeline is. In Cincinnati, it used to be annual, then went to biannual. When I first bought these properties, my annuals were about $500/yr (and I felt I was getting above market rent, so netted out fine). At the end, these were $1,500-$2,000 costs per inspection and I was getting "average" rents.
Financials will likely tell you little to nothing. Honestly, when I bought properties, I never asked, and as Justin noted, you likely won't get anything at all, let alone of value. In a small deal like this, if they have annual repairs for section 8, that might be somewhat helpful, but if they did all the work themselves and you plan on hiring, their costs are irrelevant. The main thing I would ask for is list of improvements they have done.
Not sure what the whole wait for purchase under LLC is all about. Why would you do that? Is it going to be owned by your LLC or not? And how is your SD IRA involved with this LLC? If you purchase with SD IRA money, I assume the LLC is owned by the SD IRA, and you could potentially run into taxable withdraw issues if things are not handled correctly.
@Lindsey Kocher a couple of ideas for you.
Due diligence - obviously you need to get in all the properties at this point. Take video or pictures so you can analyze for rehab numbers later. Get the T12's for at least the last year, but several years if available.
Get a hold of your local HUD and see what the current rates are for that bedroom count. If they have appliances you can charge rent for those. The HUD rep can help you get an idea of how far your can take the rents.
Purchasing under LLC depends. Some banks don't want to finance it in the LLC's name. You can always deed if back and forth between you and the LLC depending on the need.
For due diligence:
physical inspection of all units + get a professional property inspector scheduled. The bank will usually have this requirement as well.
You need to get into all units before completing your inspection contingency. No exceptions.
Financials might be tough, as duplex owners tend to not keep as detailed financials as larger commercial unit operators. But I'd request their p&l for the past 12 months (often called a T12 - or trailing 12 month statement).
You need to see the lease agreements for all units. Especially the non section 8 one. Again, usually the smaller duplex owners have leases that aren't as secure as larger operators.
For the 2 units that are section 8 I feel good about that money coming in, but for the 3rd tenant (and future DD steps for you to take) I like to verify bank statements to make sure their rent is actually going into a bank account and the tenant is actually paying.
@Lindsey Kocher, how are you "validating" taxes? In my county (Hamilton County in Ohio), I can get on the auditor site at anytime, type in the address, put in my purchase price and see what my taxes will be. I assume you mean you are confirming what your tax bill will be when you buy the properties and not just confirming what the seller is paying.
For your section 8 tenants, you will want to know what the reinspection timeline is. In Cincinnati, it used to be annual, then went to biannual. When I first bought these properties, my annuals were about $500/yr (and I felt I was getting above market rent, so netted out fine). At the end, these were $1,500-$2,000 costs per inspection and I was getting "average" rents.
Financials will likely tell you little to nothing. Honestly, when I bought properties, I never asked, and as Justin noted, you likely won't get anything at all, let alone of value. In a small deal like this, if they have annual repairs for section 8, that might be somewhat helpful, but if they did all the work themselves and you plan on hiring, their costs are irrelevant. The main thing I would ask for is list of improvements they have done.
Not sure what the whole wait for purchase under LLC is all about. Why would you do that? Is it going to be owned by your LLC or not? And how is your SD IRA involved with this LLC? If you purchase with SD IRA money, I assume the LLC is owned by the SD IRA, and you could potentially run into taxable withdraw issues if things are not handled correctly.