Hello, I am a new investor. I’m currently house hacking my residence but I don’t have my first actual rental yet. I’m looking at a triplex right now.
It is for sale for $80,000. And I’m told the owner is getting $2,000 monthly in rent. I’ve run all the numbers through the calc and it seems to make sense even with the work I’ll have to do. She told me up front that it needs a good cleaning, paint, flooring, and bathrooms need to be updated. After looking at the pictures, EVERYTHING is going to need a general “update”. Nothing is crazy out of date but there’s definitely some forced appreciation here to unlock. And I’m going to try and suggest seller financing as I know she’s has done it with someone else before. So I have a potentially great deal here. My question is...
Even with the remodel, my numbers work, but why would someone making $2000/month-gross(on only two units btw, because she lives in one) be selling for $80,000. I mean that’s a great return even with bills considered. It almost seems like too good of deal. I think my fear is warranted but maybe I’m overthinking- as this would be my first deal and I’m fearful and a bit overwhelmed. Any advice would be greatly appreciated. Thank you so much.
Address is “19 N Michigan Ave. Shelby MI 49445”
@Sean McGinn someone might get rid of a property cash flowing like you mentioned because either:
-they are tired of being a landlord
-they would like to help out a newer investor
-they have enough cash flow to where 2k/month is nothing to them
-vacancies are hard to fill
-maybe they don’t want to do the work to update it
-maybe they need the cash for a better deal or to get out of a financial hole
There are other reasons but here are a few. I would try talking to her and ask some different questions that can answer this question for you. Could be too good to be true but I wouldn’t over think it either. Due dillgence in this case would be crucial. Hope this helps!
"...someone might get rid of a property cash flowing like you mentioned because either:.."
or in our case when we got a great deal on a recent property the landlords WIFE told him to sell or else. She was fed up with the years of time consuming tenant drama.
If she's living there, she may want to move elsewhere, she's tired of being a landlord and dealing with the drama that you sometimes get. There could be many reasons. Do your due diligence and decide if that's what you want to do. Looking at the photos from the address, there is a bit of work needed on some of the rooms. She may not want to put out that kind of money.
all of the above, and depreciation schedule is probably almost complete if she has held it for a long time. And she knows it needs updating and doesn't want to deal with that. She might be thinking either I spend 80K to bring up to new standards in order to keep the income flowing, or I get 80 from the sale now.
So thats 160K difference in return which would be offset by 24K in rent this year less vacancy while fixing, say a total of 20K if she is lucky with rehab. Leaving aside both rental expenses and tax issues which are pretty individual, it would take her 8 years of rent to break even with selling to you. How old is she?
This is why you want to develop relationships with investors late in their cycle. Their ramping down gives you a chance to ramp up.
Not knowing anything about the area I would research how easy/tough it is to fill a vacancy. Then I would research the city and its future forecast - population rising or falling? I would also research crime in the area and city rental laws.
If all looked good I would get that puppy under contract and have a thorough inspection performed.
If she is getting $2000 per month, demand her to show you her signed lease agreement. IF SHE DOESN'T, then she's lying. There's no way that she'd sell a property that rents for $2000 for $80,000.
Also, don't worry about the major repairs now, get it under contract, get an inspection on it, and if you see something that you can't afford to fix. Ask the seller to accommodate for it or back out.
Thank you everyone for your input!! I greatly appreciate it. I am meeting with her when I get home and hopefully I can get it under contract until I can find out how I’m going to fund this thing. Thanks again.
People sell for a variety of reasons.. sold a property cash flowing 600$/month because I wanted a new primary residence. People retire, people do 1031 exchanges, liquidate, switch to different asset class, medical bills, loans..list goes on and on
@Stephen Brown You should be familiar enough with the rents in the area to know if that’s even realistic or not. Because if you couldn’t replicate that, it doesn’t matter what the present person is paying anyway.
@Sean McGinn who’s paying utilities?
We don't recommend sharing the address of a property you don't have under control with a purchase contract.
Someone could easily go around you and steal your deal.
@Sean McGinn I’m familiar with that area as I work as a realtor around there. Is the house listed or is this a direct conversation you are having with owner? If you’re talking to the seller directly, how long has she owned the unit? Looks like it sold in 2016. $80k is about $11k more than the last time it sold, and if she sells direct to you vs listing it she saves a lot of money on fees. She may just want to get out of the responsibility of managing a rental, something which is not for everyone.
Why? She wants to move somewhere else and needs to sell to move....maybe a retirement community, maybe somewhere with better weather.
Why? She has held the property for a while and the depreciation has been used up, so it is not as profitable.
Why? The $2000 a month is gross, and with other expenses the net is much less--sewer, water, etc.
Why? The $2000 a month is what she is supposed to get, but in realty the tenants only pay when they want, or never, or she is getting the money from COVID rent funds which will eventually run out.
Why? The tenants are a pain to live next to and she is fed up.
Why? There is some major deferred maintenance she does not want to deal with, maybe sewer lines leaking/collapsing or the water supply lines.
Why? There is some major CAPEX items she did not plan/save for, maybe new roof, new HVAC.
Why? There are some developing issues, maybe foundation?
Why? Maybe she just set the price low, not knowing how to price the triplex. Maybe someone else did the business part of the real estate. She may have just set the price based on what she 'thought' was good, based on what she paid decades ago, instead of looking at current market value.
Why? Maybe she knows the area is getting bad.
Why? Maybe she fears when the tenants leave she will have to deal with the upgrades to rerent the units at the same amount or to get good tenants. Often if tenants stay in a house for a while, they are used to the outdated look, but when they leave the unit needs to be updated to get decent tenants.
And maybe she just wants to live closer to someone she loves, and does not want to be an out of state landlord. You never know, so ask her why she is selling, and how she came up with the price.
@Sean McGinn don't even worry about why they are selling. It makes no difference. The asking price is also irrelevant. If you were unsure about their character, would you expect them to say something horrible about the property? That is up to you during due diligence. Same with asking price. Maybe it is a deal, maybe it is 80k too high. The why of anything on the sellers side is irrelevant.
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