Questions about 4 unit now newly 5 unit

4 Replies

We have the opportunity to purchase a five plex built in the 1940’s for 230k. They pull $2450/month in rent but the landlord pays water and heat. Taxes are $300/month. Two units have new windows, two units need new windows (7k total). The basement needs an egress installed eventually. They put 30k into creating a basement unit with a storm exit just outside the room and a door with a path to the front door, there’s a brand new water heater and brand new single forced air furnace. Four units have brand new service panel and the fifth is tied in with the whole building. The new service panels wired in after the original boxes with wire that doesn’t have ground. Roof is about 15 years old. Attic fully insulated so heat is at most 400 a month during winter. Coin operated laundry in basement, some storage, and a front deck. Anything else I should look in to or evaluate? We’re going to pay cash for the deal and a lawyer will draw up the closing documents. Do I NEED to get an inspection? We had our friend who is a journeyman and electrician do a walk through with us. This is only my second deal ever. Anything else I should know/do also considering this is a 5 unit and considered commercial? Where do we ask about the added in fifth unit legality and new commercial status and implications? Also, what is the best way to fund the llc and what should I look out for with this type of entity.

@Austin Wood Have you checked with the city to ensure *they* say it’s a 5-unit? Sometimes the “we turned the basement into a 5th unit” is a little...well...unofficial.

@Austin Wood absolutely check the zoning, especially if it's in Minneapolis. The city is very strict when it comes to zoning and rental inspections and they will shut you down.

ALWAYS get an inspection. Check with an insurance broker as commercial insurance is generally more expensive than residential. Check the city for permits pulled when they added the fifth unit. It needs to be permitted and recognized by the city.

Check with a CPA and a lawyer on what entity you should use and how you should fund it.

Check all of his bills, rent rolls and verify everything. Many times you'll get an optimistic pro forma where you want actuals.

Austin,

A couple of things from an Insurance perspective:

As a 5 unit, it is not eligible for a Dwelling Fire Policy in most companies (they go up to 4 units) so you will need a commercial policy (could be a Package policy or BOP policy).

Here are some things to look for from an Insurance prospective:

  1. Any in-ground tanks (active or inactive)
  2. Any Knob & Tube or Aluminum Wiring (even if the service panel is new check for the in wall wiring)
  3. If built before 1978, does the building have Lead Safe certifications
  4. Any wood stoves or secondary heating units. If so, were permits pulled & were they installed by a professional
  5. Are any of the homes rented to students
  6. Is there a flat roof
  7. are there asbestos shingles - Heating systems- PlumbingSome companies will not write properties with systems that have not been updated
  8. There needs to be two means of egress from all the units.  If the basement unit only has one means of egress, you may have problems with the coverage.

The Year that the following were updated (either partially or fully) would be good to know:

- Heating systems

- Roof

- Plumbing

- electrical

Some companies will not write properties with systems that have not been updated.

What area is this place?  The price is low for a 5 unit but the rents are also very low....  I am assuming this place isn't in the metro area or it is in a very bad location.  If it is in the metro I would drive around it a bit and see what you think of the area.

I would look at the service panels to see if there are stickers from a recent inspection.  I would also second getting an inspection if this is only your 2nd deal and look into zoning.  

There aren't enough numbers to analyze this from an investment stand point but I would make sure you have solid numbers.  Off market deals can be good but there are also people who get a higher price selling off the market because someone thinks they are getting a deal.  

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