I have an offer accepted on a three family in downtown Plymouth, MA. There are two three bed units and one two bed. We are currently negotiating P&S and have some fairly big issues to work through:
Three existing long term TAW that are all paying well below market. We initially thought we would "work with them" to keep them in there, but now we think the best policy would be to deliver vacant. At their current rent it is nearly flat ($250/mo) for COC return (after reserves). If we brought the property to market (for current condition) it would be 5 - 7% COC returns ($600 - $800/mo). If we upgraded the units we could get it closer to 10% COC but we would rather wait a few years to do that. Is there any reason to keep these tenants in place? It will be a big sticking point with seller because it will push out closing date but based on everything at BP it seems like a no brainer.
It's also a very old house with a few "classic" problems (asbestos, lead paint, etc.).
Lastly, our lawyer is pushing us to use a bank loan so that we can purchase in an LLC, rather than buying it in our own name to get a 30 year fixed and transferring to LLC later. Has anyone ever had a bank call a loan on them for being in an LLC?
@Bob D. I probably know the property. If you want to know what market rents are, let me know.
As to the loan type, I'd listen to your lawyer, but if you buy in one name and transfer to an LLC, I've heard others say that this can trigger the due-on-sale clause. I also remember hearing on a BP podcast that this virtually never happens, so I don't know what to make of that whole thing. It does seem like a risk I wouldn't want to take.
I'm sure you will, but be careful to use insured and licensed remediators for lead and asbestos, if for no other reason than liability. You'll also need that de-leading certificate for when the time eventually comes to sell. Your insurance carrier may also want it.
If it were me, and I could afford to carry the property vacant, I'd move the tenants out and rehab the whole place at once. You should be able to keep the reno crews busy with all 3 units, rather than dragging it out and renovating one unit, renting it out and moving on to the next. My thinking is that rescheduling the crews for 3 separate projects will cost you time vs making it one big, continuous project.
Hi @Bob D.
Congratulations on getting the process started.
In theory, purchasing in an LLC is a good idea if you can get a non-recourse loan. On the other hand, if it's recourse, the LLC won't do much for you. In my experience, if this is your first deal with the bank, even if you purchase in the LLC, the bank will make you personally sign for the loan. If that's the case, I'd go with the 30-year fixes and shield yourself with proper management and insurance.
As for the "classic" problems -- asbestos, lead paint, etc., that's what you get in the northeast. Asbestos is fine so long as you're not disturbing it. If you plan on a major HVAC upgrade you might need to deal with the asbestos. Likewise, lead paint isn't a big worry unless (a) it's peeling, or (b) you have a family with children move in. Do you suspect the lead pain or has it been professionally tested?
As for existing tenants, I would maximize the rent as soon as possible, whether that is receiving the property vacant or increasing current rents. If you are going to receive the property vacant, I would start the renovation process ASAP. You might as well rent 2 of the units out and work on the third. It will be a good test for you on figuring out what works and what doesn't. Of course you'll need to be careful about over renovating.
Additionally, you might want to talk to local realtors about the rental cycle -- maybe @Charlie MacPherson . Obviously in Boston you want to rent out in the summer or by Sept. 1. If you receive a vacant property in October or November you're going to take a major hit on rents (at least in the Boston area).
Thanks everyone! We had the inspection today and all the utilities (plumbing, heat, electric) are in need of a full replacement. I knew there were heat issues, but assumed the others were in better shape. We're likely out.
@Bob D. I saw that the property is back on market as of yesterday.
In the future though, you can use the inspection results to negotiate the price down, particularly if the defects were hidden.
I think this one was way over-priced anyway. It doesn't even pass the 1% rule, which is unusual for Plymouth. There's still a pretty profound shortage of MFRs here too - but the same holds true for most of the south shore.
We considered negotiating it down, but it wasn't going to be worth it.
I can't find anything in Plymouth that meets the 1% rule.
All the utilities need replacement? Really? If they were that bad you should have identified the issues while you were inspecting the property. Always do your own initial inspection first so you don’t waste money on the professional inspection if there are glaring issues.
@Bob D. I found one for another BPer not too long ago, but prices (like the rest of eastern MA) have been climbing pretty quickly. There are others on the South Shore if you know where to look.
@Dick Stevens you’re probably right. We knew the heating system had issues and were planning to negotiate but the electric and plumbing problems were a surprise. Lesson learned.
Plymouth has become a very hot market in the past few years, and especially so in the past year. Some single families in need of some repair, combined with the premium rents for SF's ( especially if you allow dogs) might be an interesting alternative. Sound advice from @Charlie MacPherson and @Dan K. above as well.