Buying my First Duplex and Need Some Help

12 Replies

I am closing on my first duplex this week and it's my first investment that has tenants. The previous owner didn't keep up with a lot of maintenance items and both tenants have been there 15+ years. The problem I'm having a hard time wrapping my mind around is: 1) Renters are hoarders, stuff everywhere. 2) I need to refi it soon (from Hard Money loan) and so I need to paint inside and out, maybe new flooring, etc.  3) Current rents from both sides total $1350/mo and current market value is $1800/mo. 

So, How do I do fix it up with all their Stuff? Should I just fix a few of the safety items and just raise their rates to $900 each side and see what happens? I'm buying for $195k and current market value is $235k. I think anyway I do it on a refi I'll probably have MI anyways. I also use a property manager for my rentals.

I hope my concerns make sense?

This doesn't seem like a good hard money/refi deal. When you refi, you're probably going to be looking at a max LTV of 80%, which is less than you're paying. So, you're going to have to put cash in when you do the refi. Plus interest on the hard money, and you're going to spend a lot to get the same loan you're getting when you refi. I assume your HML is not lending you 100% of the purchase price because you're at 82% of market value.

This plan (buy w/ hard money, rehab, rent, refi) only works if you're doing work on the property.   If you buy and don't do any work, the "value" on the refi is likely to be about what you paid.

I'd guess if you raise rents from $675 to $900 you won't have to worry about the tenants being in the way.  That's a 33% bump.

@Jon Holdman I want to fix it up and add value but I'm not sure how to get the tenants including all their stuff that's blocking doors, walls, etc.,out long enough to work on it? Any suggestions?

I am financing the entire $195k loan because we're using another property to cross collateralize it. I believe that I can refi up to 90% LTV?

I assume you've received that 90% LTV from a lender or broker you trust. According to this Fannie Mae eligibility matrix you're limited to 75% LTV on an investment property "limited cash out refi".

If you're wanting to do any significant fixup you need to get the tenants out.   You have to honor any existing lease and applicable laws.   If they're locked in, cash for keys might get them to move out.  Do you have some other place you could relocate them to temporarily?  But with the cost of that plus moving them twice you're looking at some significant costs.  I think it will be challenging to just move their stuff around while you work.

Originally posted by @Darren McGillvrey :

I am closing on my first duplex this week and it's my first investment that has tenants. The previous owner didn't keep up with a lot of maintenance items and both tenants have been there 15+ years. The problem I'm having a hard time wrapping my mind around is: 1) Renters are hoarders, stuff everywhere. 2) I need to refi it soon (from Hard Money loan) and so I need to paint inside and out, maybe new flooring, etc.  3) Current rents from both sides total $1350/mo and current market value is $1800/mo. 

So, How do I do fix it up with all their Stuff? Should I just fix a few of the safety items and just raise their rates to $900 each side and see what happens? I'm buying for $195k and current market value is $235k. I think anyway I do it on a refi I'll probably have MI anyways. I also use a property manager for my rentals.

I hope my concerns make sense?

 I wouldn't fix up the interior unless you are removing the tenants. I wouldn't remove the tenants unless you are able to drastically increase the rent.

@Darren McGillvrey You should confirm in writing the 90%LTV on any investment multifamily. Unless you are getting some sweetheart commercial term because you have loads of other banking with the lender, its going to be 75%LTV for 2-4 investment property. If you cash out (walk with a check) its going to be 70%LTV.

You have two options. Give notice to non renew at the end of their lease, hopefully they are on month to month, or raise their rents to market and see what happens. If they stay at full market win/win. If they leave you can do the planned work and find better quality tenants.

You do not want to keep these tenants after you fix the places up.

In Oregon, the property changing hands is one legal opportunity to evict. When I bought my first (& only) duplex in 2002 (in Oregon), it was pretty run down. Deadbeat landlord, deadbeat tenants. One unit was vacant, one was occupied by an extended family of ne'er-do-wells. I considered evicting them at the time, but I wanted to give them the benefit of the doubt. I moved in to the empty unit, and learned over time from my other new neighbors that my tenants were the neighborhood thieves/drug dealers. I kept giving them the benefit of the doubt, until I went away for a week and came back to discover my unit broken in to. Eventually I evicted them, but it cost me a lot in legal fees, sheriff's fees, locksmith, etc. In hindsight I would have been better off evicting them Day One. So my advice would be: 

  1. Make sure you get their all their paperwork (lease, etc.) and their deposit money from your seller. I didn't and I had to eat it. If there's no paperwork, no deposit, that's a red flag. Consider evicting now if you can.
  2. Take a good look at their lease. If it's hand written, non-existent, altered, or just questionable in any way, consider evicting now if you can.
  3. Talk to your other new neighbors. Professional deadbeats make a name for themselves in their community. When I finally evicted my tenants, the folks across the street had me over for salmon and champagne. If I'd bothered to ask, they would have told me the truth Day One.
  4. Trust your gut. If you're not sure, evict. Get your own tenants using your own background check and your own paperwork on your own terms. With the caveat that it depends on your state's laws. In my state it's a kind of a once-in-a-lifetime opportunity to evict without cause.
  5. Bad landlords attract bad tenants. If the property is in serious disrepair, there's a good chance the landlord had to draw from the bottom of the tenant pool. 

@Darren McGillvrey I would also only repairs the needed inside any anything you want on the outside. The only true way to renovate the inside is for it to be empty, in my opinion.  

I would guess that raising the rent 33% is going to cause you to loose both tenants, its just too much of an increase.  You might want to consider the payback period of a major interior reno, vs keep the rents where they are with reasonable increases (5-10%).

@Jim Sims Painful story but so true on so many different points. Great learning lesson that hopefully others can learn from!

@Darren McGillvrey Why not just refi
now with an 80/20 loan and then when you refinish now refi again. You could also
do an LOC on the other property you are cross collateralizing to make up for anything you own above.

@Jon Holdman @Mike Wood 20 years of Marriage has taught me very well to admit when I'm wrong! You both are correct on the 75% on 2-4 units. (Which you already knew!)  I believe I do have an opportunity to fix it up enough to increase the value but not with them in there! 

Thanks @Thomas S. @Jim Sims  I agree!!! I think my best bet is get the renters out! It would allow me to quickly rehab both sides and get higher rents with better tenants!

@Charles Kao 75% is highest I can refi, not sure I can get a 25% 2nd?

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